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WIKI ANALYSIS
ConocoPhillips (NYSE: COP) is the third largest of the oil majors in the world. It operates in all sectors of the oil and natural gas industry: exploration and production, midstream, refining and marketing, and petrochemicals.[1]
ConocoPhillips was formed by the merger of Conoco Inc. (Conoco) and Phillips Petroleum (Phillips) in 2001. It is a vertically integrated petroleum company with operations in more than 30 countries.[2]
Business and Financials
Fiscal Year 2010 Summary
For the full year 2010, ConocoPhillips had net income of $11.4 billion, a 160% increase from the previous year, due to higher realized oil prices and higher refining margins, despite lower production volumes and higher costs. This included $4.6 billion in asset sales and reduction of its LUKOIL equity position.[3] WTI crude oil averaged $79.39 per barrel during the quarter, a 29% increase from 2009, while natural gas averaged $4.39 per million BTU, a 10% increase from 2009.[4] The E&P segment produced 1.75 million BOE per day, a 5% decrease from the previous year.[5]
Exploration and Production (81% of 2010 net income)[3]
The E&P segment is mainly involved in the exploration and production of oil and natural gas, as well as the marketing of natural gas and natural gas liquids.
Lukoil Investments (22% of 2010 net income)[3]
ConocoPhillips at the end of 2006 held a 20% share of Russian oil major, Lukoil. Its share of Lukoils's upstream production included 401 MBbl per day of oil, 256 MMcf of natural gas per day, and 214 MBbls of refined petroleum per day.[6] Despite Lukoil being hit hard by fluctuating fuel prices, with weak profits in 2009, Lukoil had net income of $2 billion in the first quarter of 2010, a 126.9% increase year-over-year.[7]
Despite the struggles that Lukoil faced, for years, ConocoPhillips maintained its beliefs that Lukoil may pay dividends in their restructuring process, as Lukoil Chief Executive, Vagit Alekpero, has been quoted as stating the he hopes Lukoil will be informed of any assets that ConocoPhillips brings to the markets such as pipelines, terminals, and natural gas pipelines in North America that it may be divesting[8].
However, by the end of 2008, ConocoPhillips changed its plans and decided to sell a portion of its stake to cover debts and buy back its own stocks. This continued onward--in August 2010, Lukoil bought back 8%, and in September 2010, bought back another 5% in options from ConocoPhillips.[9] In February 2011, ConocoPhillips sold off its remaining 2% holding in Lukoil, completing its sale of all Lukoil shares.[10] By the end of 2010, Conoco held 2.25% interest in LUKOIL shares.[11]
Midstream (3% of 2010 net income)[3]
COP's midstream segment "gathers" natural gas, moving it from the well to the pipeline, and processes it, breaking it down into individual components and purifying it for use. On April 8th, 2008, COP announced that it would build a pipeline, in partnership with Chevron and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand[12].
On January 12, 2010 it was announced that BP and ConocoPhillips had a joint venture to plan and build a pipeline from the Alaskan North Slopes to the contiguous states. The earliest that it could be in operation is 2018, however TransCanada Corp TRP is also planning to build a competing pipeline, and has state backing which the BP-COP joint venture does not. Federal officials would like to see one pipeline rather than two competing projects, but it does not seem as if any agreement or deal between these two competing projects has been reached. [13]
Refining and Marketing (2% of 2010 net income)[3]
Petroleum refining operations turn crude oil into the petroleum products that people use everyday, like gasoline and diesel. ConocoPhillips is the second largest petroleum refiner in the U.S and the fourth largest refiner in the world. The company owns 12 refineries in the U.S (the largest of which, Wood River is jointly owned with Cenovus Energy) and either owns or has an interest in six European refineries. In 2009, refinery production was 1,986 million barrels per day with a utilization of 84%, lower than the 90% of the previous year due to economic conditions and higher planned downtime.[14][15]
The company has a distribution network of 10,500 branded outlets in the U.S, Europe, and the Asia Pacific. Its products are marketed under brand names Phillips 66, 76 and Conoco brand in the U.S and under the Jet and ProJet brands in Europe and the Asia Pacific region.[16]
Chemicals (4% of 2010 net income)[3]
COP's chemicals segment is essentially the company's 50% share in Chevron Phillips Chemical Company LLC, a JV between ConocoPhillips and Chevron. It processes petroleum into petrochemicals.[17]
Emerging Businesses (-1% of 2010 net income)[3]
COP's Emerging Businesses segment includes its investment in new technologies or businesses outside of its normal operations.
Coal-Seam Methane Beds
In September 2008, COP entered a, $8 billion, 50/50 joint venture with Australian energy company Origin to develop coal-seam methane beds.[18]
Trends and Forces
Oil Majors Develop Response System for Deepwater Oil Spills
In an effort to respond to criticism from members of Congress and to reassure the public after the Deepwater Horizon rig disaster, some of the oil majors have come together to prepare for deepwater oil spills.[19] In July 2010 Exxon Mobil (XOM), Chevron Corporation (CVX), CONOCOPHILLIPS (COP) and Royal Dutch Shell (RDS'A) agreed to pool $1 billion to establish a new company, which would be tasked to respond to offshore oil spills at up to 10,000 feet underwater. Apache Deepwater LLC, a subsidiary of Apache (APA), subsequently joined on March 16, 2011.[20] The company would deploy equipment that could arrive within days and be operational in weeks of a spill.[19]
The company would be a nonprofit organization called the Marine Well Containment Company and would operate the response system that would be used for any spills.[19] The response system would use underwater equipment designed to seal busted wells and have the ability to separate oil from gas and bring it to the surface where the gas would be burned off and oil would be stored in containers. The equipment should be useful in depths up to 10,000 feet.[19] Currently, the system has capacity to contain up to 60,000 barrels per day of fluid in up to 8,000 feet of water, with plans to expand to 100,000 barrels per day in up to 10,000 feet by 2012.[20]
The establishment of the company is an effort for the oil majors to demonstrate that plans are in place to minimize any potential damage of deepwater drilling. All four companies rely significantly on offshore drilling, while Shell and Chevron have significant operations in the Gulf of Mexico. All companies will participate, however ExxonMobil will lead the effort.[19]
Your honesty is like a becoan
Falling Oil Prices Are a Double-Edged Sword to Vertically Integrated Oil Companies like ConocoPhillips
Since the middle of 2008, oil prices have been trending downwards, to levels not seen since 2004. These falling oil prices have driven down COP's E&P margins. However, the company earns about 45% of its revenue, not including its Lukoil investment, from its Refining & Marketing segment.[21] Since oil is the primary input for a refiner, when oil prices rise, refining costs rise. In the first quarter of 2008, right after oil prices hit $100/barrel for the first time, COP's oil refining (downstream) business saw productivity decline. Capital utilization dropped 6% year on year. U.S. refining margins fell $3.56 per barrel from the fourth quarter of 2007, while international refining margins fell $0.30 per barrel (international demand for refined products is rising, while U.S. demand is falling).[22] Q3 earnings reflect a similar situation, during which crude oil prices for West Texas Intermediate averaged $117.83. Earnings estimates for the first quarter of 09 are a little less than 50% earnings for Q3 08, taking into consideration the new, low price of oil.[23]
International Growth Presents Opportunities for Reserve Expansion - and the Risk of Massive Losses
As one of the oil majors, ConocoPhillips control oil resources in countries around the world; with oil prices soaring, the company's E&P segment has a strong incentive to push forward and explore in countries that are less politically stable Most of COP's petroleum comes from North America and Europe, two regions where oil production is declining; expanding around the globe allows the company to keep growing its average reserve life.
In a partnership with Lane Energy, ConocoPhillips is looking to drill a horizontal well in Poland to harness the country's 3 trillion cubic meters of shale gas reserves. With Poland consuming over 14 billion cubic meters of gas per year, and importing over 70% of its consumption from Russia, this deal will greatly relieve the country of its dependency on Russia.[24]
An international presence makes the company highly vulnerable to terrorism. In early July, 2008, the company penned a $10 billion deal to develop the Shah natural gas field and build a one bcf gas-processing facility in the United Arab Emirates.[25] Just a month earlier, however, the U.S. released a high-alert warning for its citizens living and working in the region - after the UK did the same.[26] A terrorist attack on one of COP's facilities would halt production and hurt employees, leading to higher costs and lower margins.
Exploitation of natural resources in other countries also puts COP at risk of property loss from nationalization. For example, ConocoPhillips' 3Q07 income of $3.7 billion appears to be many times higher than the 2Q07 income of $301 million. In 2Q07, however, the company's Venezuelan assets were seized by Hugo Chavez, causing the company to lose $4.5 billion of expected income.[27]
COP's investment in Lukoil is another example of the benefits and possible risks of international expansion. Lukoil has the second-largest reserves of any publicly-traded oil company[28], and ConocoPhillips has a 20% share of the value generated by them. Russia, however, has gone through numerous upheavals in the last century, and, with Vladmir Putin in power, is less friendly about its resources than it has been in years. In 2006, the Kremlin forced Shell to cede 50% of its share of the lucrative Sakhalin-2 gas field to Gazprom, the state-controlled oil company, at below-market prices by using "environmental concerns" to pressure the company.[29] In early 2008, the Kremlin made multiple raids of BP and TNK-BP's Moscow offices, supposedly for investigating allegations of industrial espionage; a little over a year before, Gazprom expressed interest in the $40 billion TNK-BP project.[30] All these events indicate that the Russian government has no problem with pressuring companies into ceding their interests in Russian petroleum projects, especially at lower price, after significant capital has been sunk into the projects. With a 20% stake in Lukoil, ConocoPhillips is risking significant losses, especially if the Kremlin decides to nationalize Lukoil and its assets.
Legislation Supporting the Development of Renewable Energy Threatens the Long-Term Strength of Hydrocarbons in the U.S.
Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and it is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022[31], the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.
Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while the Democratic candidate for President has pledged to reduce carbon emissions 80%, to below 1990 levels by 2050.[32] While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but in the first quarter of 2008 ConocoPhillips sold 74% of its petroleum in the U.S.[33] A changing American environmental and energy legislation landscape would be disastrous to COP's business without the development of some effective carbon sequestration technology.
A more immediate threat to oil based demand is the rapidly evolving technology of solar and wind and the heavy government subsidies that make them competitive in some cases with oil based energy. John McCain recently introduced a bill that would give a 50% government subsidy to solar panels. President Obama himself has endorsed nuclear energy and backed government subsidies for them, and the first nuclear power plants in 30 years are currently being built, with 33 slated to be built.
ConocoPhillips Often has to Pay Recompense for Environmental Damages
Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by COP's operations occur to the extent that they break environmental protection laws, the company is sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, ConocoPhillips, Shell, BP, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether[34], an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.
Competition
The major competitors of ConocoPhillips are the oil majors: BP, Exxon Mobil, Valero, Chevron, Royal Dutch Shell, Total S.A., etc.
The table provided below compares the operational metrics for ConocoPhillips vis-à-vis its competitors in 2008.
| CONOCOPHILLIPS | ROYAL DUTCH SHELL | EXXONMOBIL | CHEVRON | BP | LUKOIL(1) | Eni S.p.A(1) | Total S.A. | |
|---|---|---|---|---|---|---|---|---|
| Reserves | ||||||||
| Oil and Gas Liquids (Millions of barrels) | 5,817[35][36] | 3775[37] | 7,576(2)[38] | 7,350[39] | 10,353[40] | 15,715[41] | 3,219[42] | 5,695[43] |
| Natural Gas (Billions of cubic feet) | 24,948[44] | 40,895[45] | 31,402(2)[38] | 23,075[39] | 45,208[40] | 27,921[46] | 18,090[42] | 26,218[43] |
| Production | ||||||||
| Oil and Gas Liquids (Thousand b/d) | 1,108[47] | 1,695[37] | 2,405[48] | 1,649[49] | 2,401[50] | 1,954[51] | 1,020[42] | 1,456[52] |
| Natural Gas (Million cf/d) | 4,970[47] | 8,595[45] | 9,095[48] | 5,125[49] | 8,334[50] | 1,586[53] | 4,114[42] | 4,837[52] |
(1) Latest data is for 2007 (2) Does not include reserves of equity affiliates
| SUNOCO | CHEVRON | VALERO | EXXON MOBIL | Royal Dutch Shell | SINOPEC | WESTERN REFINING | ConocoPhillips | BP | LUKOIL(1) | Eni S.p.A(1)[54] | Total S.A. | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Refinery Capacity (Million BPD) | 0.91[55] | 2.139[56] | 2.99[57] | 6.2[58] | 3.678[59] | 3.376[60] | 0.238[61] | 1.986[62] | 2.678[63] | 1.135[64][65] | 0.544 | 2.604[66] |
| Number of Refineries (including partial interests) | 5[67] | 18[56] | 16[68] | 37[58] | 40[69] | 17[70] | 4[71] | 12[62] | 17[63] | 9[72] | N/A | 25[66] |
| Number of Retail Gas Stations | 7,785[73] | 25,000[74][75] | 5,800[68] | 10,516[76] | 45,000[77] | 29,279[78] | 153[79] | 8,340[80] | 22,600[81] | 6,287[82] | 6,441 (in Europe) | 16,425[66] |
(1) Latest data is for 2007
The oil majors face intense competition from national and state-owned oil and energy companies. Governments in oil-rich countries support these companies and give them preferential access to reserves by prohibiting direct foreign investment in oil exploration and production projects. Further, investments made by foreign companies are made unattractive by the government through taxation and other measures. Oil and gas companies, such as ConocoPhillips, thus face problems in gaining access to oil reserves and commencing operations in spite of their large size.
References
- ↑ COP 2007 10-K, Page 66
- ↑ COP 2007 10-K
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 COP 2010 10-Q pg. 37
- ↑ COP 2010 10-Q pg. 36
- ↑ COP 2010 10-Q pg. 41
- ↑ COP 2007 10-K, Page 66
- ↑ LUKOY 1Q 2010 report
- ↑ Lukoil Eyes ConocoPhillips Assets, December 18, 2009
- ↑ [1]
- ↑ [2]
- ↑ COP 2010 10-Q pg. 31
- ↑ MarketWatch: "BP, Conoco team up on major Alaska gas pipeline"
- ↑ BP-ConocoPhillips JV Denali To Solicit Interest In Alaska Gas Line January 12, 2010
- ↑ COP 2009 10K Page 15
- ↑ COP 2009 10K Page 33
- ↑ ConocoPhillips Company Website, accessed on September 16, 2009
- ↑ COP 2007 10-K
- ↑ MarketWatch: "ConocoPhillips bids $8B for Origin Energy assets"
- ↑ 19.0 19.1 19.2 19.3 19.4 Kahn, Chris "Big Oil Plans Rapid Response To Future Spills" TheStreet.com, July 21, 2010
- ↑ 20.0 20.1 MWCC Welcomes Apache
- ↑ COP 2007 10-K
- ↑ Seeking Alpha: "ConocoPhillips Q1 2008 Earnings Call Transcript" Page 2
- ↑ BusinessWeek - Investing:ConocoPhillips (COP:NYSE)
- ↑ [3]
- ↑ MarketWatch: "ConocoPhillips joins $10 billion Abu Dhabi project"
- ↑ The National Terror Alert Response Center: "US Puts Citizens In UAE on Terrorism High Alert"
- ↑ COP 2007 10-K, Page 11
- ↑ http://www.lukoil.com/
- ↑ BBC News: "Shell yields to Gazprom pressure"
- ↑ Energy Business Review: " Gazprom confirms TNK-BP interest, more gas deals"
- ↑ WhiteHouse.gov, Fact Sheet: Energy Independence and Security Act of 2007
- ↑ Washington Post: "A Green(er) Obama"
- ↑ COP 1Q08 10-Q
- ↑ The New York Times: " Oil Giants To Settle Water Suit "
- ↑ COP 2008 10-K, Item 8,Page 149
- ↑ COP 2008 10-K, Item 8,Page 152
- ↑ 37.0 37.1 RDS’A 2008 20-F, Supplementary Information, Crude oil and natural gas liquids
- ↑ 38.0 38.1 XOM 2008 10-K, Item 1, Page6
- ↑ 39.0 39.1 CVX 10-K 2009, Item 1, Page 7
- ↑ 40.0 40.1 BP 2008 20-F, Item 1, Page 16
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 11
- ↑ 42.0 42.1 42.2 42.3 ENI S.p.A. – Fact Book 2007, Page 11
- ↑ 43.0 43.1 TOT 2008 20-F, Item 4, Page 10
- ↑ COP 2008 10-K, Item 8, Page 151
- ↑ 45.0 45.1 RDS’A 2008 20-F, Supplementary Information, Natural gas
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 12
- ↑ 47.0 47.1 COP 2008 10-K, Item 6, Page 42
- ↑ 48.0 48.1 XOM, 2008 10-K, Item 6, Page 36
- ↑ 49.0 49.1 CVX 2008 10-K, Item 1, Page 5
- ↑ 50.0 50.1 BP 2008 20-F, Item 1, Page 14
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 13
- ↑ 52.0 52.1 TOT 2008 20-F, Item 4, Page 12
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 14
- ↑ E 2007 Annual Report
- ↑ SUN 2008 10-K, Item 7, Page 35
- ↑ 56.0 56.1 CVX 10-K 2009, Item 1, Page 24
- ↑ VLO 2008 10-K, Item 1, Page 3
- ↑ 58.0 58.1 XOM 2008 10-K, Item 6, Page 43
- ↑ RDS’A 2008 20-F, Results, Refining Data
- ↑ Sinopec Investor Relations, Operational Statistics for 2008
- ↑ WNR 2008 10-K, Item 7, Page 34
- ↑ 62.0 62.1 COP 2008 10-K, Item 1, Page 16
- ↑ 63.0 63.1 BP 2008 20-F, Item 1, Page 29
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 15
- ↑ Conversion factor is 1 BPD = 50 tonnes per year
- ↑ 66.0 66.1 66.2 TOT 2008 20-F, Item 4, Page 36
- ↑ SUN 2008 10-K, Item 1, Page 1
- ↑ 68.0 68.1 VLO 10-K 2008, Item 1, Page 1
- ↑ RDS’A 2008 20-F, Results, Manufacturing
- ↑ Sinopec Refining Overview
- ↑ WNR 2008 10-K, Item 1, Page 19
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 16
- ↑ SUN 2008 10-K, Item 1, Page7
- ↑ CVX 10-K 2008, Item 1, Page 25
- ↑ CVX 10-K 2008, Item 1, Page 26
- ↑ XOM 2008 10-K, Item 2, Page 25
- ↑ RDS’A 2008 20-F, Results, Marketing
- ↑ Sinopec 2008 Annual Report, Business Review and Prospects, Page 20
- ↑ WNR 2008 10-K, Item 1, Page 3
- ↑ COP 2008 10-K, Item 1, Page 18
- ↑ BP 2008 20-F, Item 1, Page 30
- ↑ Lukoil Investor Relations – Fact Book 2008, Page 60
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