Does Conoco Know Something That Its Competition Doesn’t?

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By Irina Slav

When everyone in oil seems like they are ready to pay anything for a piece of land in the Permian Basin, a report that one oil company is actually selling Permian acreage might come as something of a shock. It doesn’t make sense, at least at first glance. But Conoco this week announced just that—it is offloading non-core assets in the Permian and South Texas to the tune of US$250 million.

In the same update, Conoco announced the acquisition of acreage in the Montney conventional play in Canada and in the Austin chalk in Louisiana. One can’t help but wonder if Conoco doesn’t know something the rest of Big Oil has been missing.

That’s hardly the case. Conoco is in fact following its strategy of buying low and selling high, while securing its business against the new normal in oil markets, which comes down to permanently excessive price volatility and a heightened risk of another meltdown like the one in 2014.

Oil energy vet and Forbes author David Blackmon noted in a recent story that the news about Conoco’s asset sale in the Permian is not as shocking as it sounds when you first hear it because of the non-core nature of the assets sold. For Conoco, Blackmon says, it’s not a priority to hold onto all its acreage in the hottest shale play in the world at any cost. The company’s priority is to streamline its portfolio as much as possible, focusing on low-cost, potentially high-return assets and offloading the rest.

Indeed, Conoco has not left the Permian. It has a pretty robust position there. The assets it sold were small, underdeveloped patches of land. Conversely, the Montney assets are adjacent to acreage the company already has in this part of Canada, and they cost just US$120 million. Conoco did not give a price for its Louisiana acquisition, but executive vice president Matt Fox said in the announcement of the acquisitions that “The acreage we’ve acquired in Louisiana and the Montney has the potential to add to our low cost of supply resource base without requiring significant near-term capital commitments.”

The second part of this quote is important. Conoco is in no rush to boost its capex after oil prices improved, unlike many of its peers. In fact, it is keeping its belt tightened for the foreseeable future, it seems. And it is already reaping the benefits of this approach.

In the past 12 months, Conoco’s share price gained almost 30 percent as opposed to an almost 10-percent slide for Exxon. It has chosen to share the benefits from higher oil prices with its shareholders and make sure there will be more of these benefits to come.

Conoco’s sustaining cost per barrel is US$40. At the start of February, the company announced it will lift the 2018 dividend by 7.5 percent and buy back shares worth US$2 billion, despite booking a loss for 2017. Conoco also paid down US$7.6 billion in debt and bought back US$3 billion in shares. Besides, it reported a 200-percent organic reserve base replacement rate.

The tactics are clear enough: pay down debt, return cash to shareholders, boost reserve base. It sounds like the most sensible thing to do under any circumstances, but the most sensible thing has not been a characteristic of the oil industry traditionally: growth has been the top priority.

Now Conoco is showing its peers clearly that this prioritization is flawed. It is also demonstrating that the best acreage is not necessarily in the hottest play—something that a few analysts have already noted. Conoco is bucking the trend and is winning.

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