The energy sector is reshaping rapidly as the participants try to replace depleting reserves. We are seeing divestitures, spin-offs and shedding of non-core assets to streamline the core businesses, as well as focus on high-growth segments. ConocoPhillips (NYSE:COP) is one of the most important players in the sector, and last year spun off its downstream business into Phillips 66 (NYSE:PSX), an independent entity. As a result, the company has become more focused and lean, which will result in enhanced value creation for its shareholders, in my opinion.
A look at the quarterly performance
For the quarter, the company reported adjusted earnings of $1.75 billion, consistent with analyst estimates but down 2% year-over-year. The main reasons for earnings decline were higher depreciation, amortization and depletion expenses and lower prices. Production is a concern for the company, as the quarterly production stood at 1,596 million barrels of oil equivalents. More worrying news is that the company is expecting the production levels to be lower in the next quarter.
An important strategy is the sale of non-core assets – during the last quarter, it sold assets worth $1.1 billion. Further sales are expected during the year in Algeria, Kashagan and Nigeria. At the moment, proceeds from any sales are being directed towards new drilling and exploration activities. As I mentioned above, the companies are trying to add to their depleting reserves through new discoveries.
For the purpose of executing new exploration activities, the company has planned $15 billion in capital expenditures every year for the next three years. Cash flows are under a little stress at the moment, and assets sales will be needed to meet the capital expenditures. Currently, ConocoPhillips (NYSE:COP) is focusing on politically stable regions with consistent regulatory environments, i.e. North America and Australia. In the long term, the strategy will allow the company to maintain its production levels and generate substantial cash flows.
Replacing depleting reserves and future growth
Moving on to new investments, the company has decided to invest more than $1 billion in the U.S. and Colombian shale plays. ConocoPhillips (NYSE:COP) already has a strong portfolio of assets in these shale plays (Eagle Ford and Bakken), which are expected to contribute heavily towards the future production targets.
Furthermore, the company has a substantial share (30%) in recently discovered reserves in the Gulf of Mexico. At the moment, ConocoPhillips holds 1.9 million acres in the Gulf of Mexico area. In addition, the projects in Australia, Malaysia and Christina lake oil sands in Canada are also on track. Over the next three years, substantial reserves will be added to the current portfolio and the production levels will improve. The confidence in the success of these projects gives ConocoPhillips (NYSE:COP) the belief that it will be able to meet its long-term growth target of 3-5%.
A look at peers
First of all, Phillips 66 (NYSE:PSX). The spin-off has been hugely beneficial for the shareholders as the stock has gone up by almost 81% since the spin-off took place. The company has been growing since the spin-off and recently announced the plans to develop a natural gas liquids (NGL) fractionators in Old Ocean, Texas. The facility will have a capacity of 100,000 barrels per day and will be close to the company’s Sweeny refinery. The export of NGL over the next decade should open new doors for the company to grow, and the current transportation and storage infrastructure of Phillips 66 in that region should be ideal for the new fractionators.
Another energy giant, Exxon Mobil Corporation (NYSE:XOM), announced its quarterly earnings in the last week, beating analyst estimates by $0.07 – the company reported earnings per share of $2.12 per share. Exxon’s impressive earnings indicate that Phillips 66 might also report better than expected earning as the company has a substantial refinery business. Exxon Mobil Corporation (NYSE:XOM) itself is expected to grow as it recently started production at its Kearl Oil Sands project in Alberta – the project is expected to produce 4.6 billion barrels of oil equivalent over the next 40 years. The project will produce 110,000 barrels per day, a solid addition to already impressive production levels.
Conclusion
ConocoPhillips (NYSE:COP) is one of the best picks in the sector for both income and growth investors – the company pays an attractive dividend yield of over 4.50%. Its spin-off, Phillips 66, is also a solid investment for growth investors as the refinery business is growing at a faster pace than the exploration business. However, Phillips 66 has less than attractive dividend yield of just 2%. In my opinion, energy sector is set to grow over the next decade, which makes it one of the most attractive sectors.
The article Why You Should Buy ConocoPhillips originally appeared on Fool.com and is written by Ishtiaq Ahmed.
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