Alaska has historically been an important operating segment for ConocoPhillips, and recent activity suggests that Alaska is emerging to a position of greater importance to the company’s future. The narrative and the numbers support this view.
In the fourth quarter of 2018, ConocoPhillips completed a transaction to acquire BP’s non-operated interest in the Greater Kuparuk area and Kuparuk Transportation Co. in Alaska, and to sell a subsidiary to BP, which held 16.5% of the ConocoPhillips 24% interest in the BP-operated Clair Field in the United Kingdom.
In May 2018, ConocoPhillips completed an acquisition of Anadarko Petroleum Corp.’s 22% non-operated interest in the western North Slope of Alaska, as well as Anadarko’s interest in the Alpine pipeline, for $400 million in cash, “before customary adjustments.”
When the sale was announced, Al Hirshberg, ConocoPhillips executive vice president of production, drilling and projects, said, “We now own 100% of these assets containing about 200 million barrels of gross reserves and about 900 million barrels of risked gross resource, with gross production of about 63,000 barrels per day in 2017.”
The company said that in the first quarter of 2018 the production associated with the acquired 22% lease interests was 11,000 barrels of oil equivalent per day.
In the meantime, ConocoPhillips was actively pursuing the disposition of properties elsewhere, reporting investing activities proceeds from asset sales in 2018 of $1.1 billion.
In 2018, ConocoPhillips booked an additional 289 million barrels of oil equivalent of total proved reserves in Alaska related to the purchases, together with 48 million boe from extensions and discoveries, the company said in its year-end 2019 10K filing.
The company ended 2018 with 1,795 million boe of total proved reserves in Alaska, vaulting the region well ahead of the Lower 48 operating segment which finished the year with 1,312 million boe in the category.
At the end of 2019 the company reported 1,779 million boe of total proved reserves in Alaska, compared with 1,447 million boe in the Lower 48, while Canada, Europe, Asia Pacific/Middle East and Africa posted a combined total of 1,188 million boe, down from a 2016 total of 1,606 million boe. In 2016, Alaska accounted for 1,294 million boe in the category, while the Lower 48 notched 1,570 million boe.
Alaska, leading the way to higher cash flow potential
Despite having the highest production costs, in 2018 Alaska displayed its potential to lead the company’s discounted future net cash flow higher at times of higher oil prices.
In 2018, Alaska led all of the operating segments in discounted future net cash flows with $13.377 billion reported, while the Lower 48 posted a strong second with $12.544 billion in that category, the company said in its year-end 10K filing. Asia Pacific/Middle East posted the third highest amount in the category, with $4.663 billion reported. Company total discounted future net cash flows were $35.434 billion in 2018.
In 2019, the average sale price of Alaska crude oil (per barrel) fell to $64.12, versus $70.86 in 2018.
Alaska’s discounted future net cash flows fell to $9.681 billion in 2019, compared to $10.019 billion in the Lower 48 and $27.372 billion company wide. Once again, Asia Pacific/Middle East posted the third highest amount in the category, with $2.977 billion reported.
Alaska contributed $1.52 billion of net income to ConocoPhillips in the fiscal year ending Dec. 31, 2019, down from $1.81 billion in 2018. the company said in its year-end 10K filing.
The decrease in Alaska earnings was mainly due to lower realized crude oil prices and higher production, operating, and depreciation, depletion and amortization expenses associated with incremental volumes from acquisitions completed during 2018.
In 2019, net income from the Lower 48 operating segment was $436 million, from Canada $279 million, from Europe and North Africa 2.724 billion, and from Asia Pacific/Middle East $1.929 billion. Other international income was $263 million.
Lower 48 production decreased by 10,000 boe per day due to non-core dispositions in 2018. Earnings decreased due to lower realized crude oil, NGL and natural gas prices; higher DD&A due to increased production volumes; a $301 million after-tax impairment of Niobrara assets; higher exploration expenses, primarily due to a combined $197 million after-tax of leasehold impairment and dry hole costs associated with the decision to discontinue exploration in the Central Louisiana Austin Chalk, the company said.
ConocoPhillips’ total net income in FY 2019 was $7.189 billion, up from $6.257 billion in 2018, and up from a 2017 net loss of $855 million.
Total company production of 1,348,000 barrels of oil equivalent per day increased 5% in 2019 compared with 2018.
The increase in total average production resulted primarily from new Lower 48 wells; the Western North Slope and Greater Kuparuk acquisitions; and higher Norway production, the company said.
Alaska contributed 25% of worldwide liquids production, averaging 217,000 barrels per day in 2019.
Full-year 2020 company wide production is expected to be 1,230 MBOED to 1,270 MBOED.
Dispositions accelerate into 2019; continue in 2020
ConocoPhillips aggressively continued its divestiture program in 2019.
In the company’s fourth quarter 2019 conference, CEO Ryan Lance said ConocoPhillips generated over $3 billion of disposition proceeds in 2019, with another $2 billion of announced dispositions expected to close in early 2020.
“We’re also on the lookout for opportunities to add low cost of supply resources to the portfolio, like we did last year in the Lower 48, Alaska and internationally,” he said.
When reserves closed for the year, he said, ConocoPhillips replaced 117% of its production organically.
According to the 2019 year end 10 K, in January, ConocoPhillips agreed to sell its 12.4% interest in the Golden Pass LNG Terminal and Pipeline. It completed the sale in the fourth quarter.
In the fourth quarter, it sold its interest in the Magnolia field for $63 million, shedding less than 1,000 boe per day.
Also in Q4, the company agreed to sell its interests in the Niobrara shale for $380 million, and royalties on some wells. Production there was 11,000 boe per day in 2019. The sale is expected to close in Q1 2020.
On Sept. 30, the company completed a sale of two U.K. subsidiaries to Chrysaor E&P Ltd, for $2.2 billion. Annualized average production of the assets was 50,000 boe per day in 2019, with 84 million boe in reserves upon disposition.
In Q2 in Asia, ConocoPhillips had an after tax gain of $52 million on the sale of its 30% interest in the Greater Sunrise fields to the government of Timor-Leste for $350 million.
In October, it agreed to sell subsidiaries which hold it Australia-West assets and operations to Santos for $1.3 billion. The production associated with the sale was 48,000 boe per day, while year end reserves associated with the assets was 17 million boe. ConocoPhillips will retain its 37.5% interest in the Australia Pacific LNG project along with operatorship of the project’s LNG facility.
Notable divestitures in 2017 included the sale in May of the company’s 50% non operated interest in the Foster Creek Christina Lake partnership as well as the majority of ConocoPhillips western Canada gas assets to Cenovus Energy. Consideration was $11 billion cash, 208 million Cenovus shares valued at $1.96 billion at closing, and a five-year uncapped contingent payment of $6 million Canadian - quarterly for every $1 CAD by which the quarterly average crude price exceeds $52 CAD per barrel.
In July, ConocoPhillips completed a sale of its interests in the San Juan Basin to an affiliate of Hilcorp for $2.5 billion in cash, and a six-year contingent payment of up to $300 million triggered for periods in which the monthly Henry Hub gas price is at or above $3.20 per million British thermal units.
In Alaska, the company recorded impairments of $180 million primarily for the associated property, plant and equipment carrying value of its interest in the Point Thomson unit.
Billions in store for Alaska over 10 years
ConocoPhillips remains on track to invest $25 billion of capital over the next 10 years in Alaska, said Michael Hatfield, president of Alaska, Canada and Europe in its fourth quarter 2019 conference call.
Alaska will see the lion’s share of exploration spending for the company in 2020. Its exploration plan calls for its “largest Alaska exploration and appraisal winter season.”
“This year, about half of our exploration capital is going into Alaska, and half is going elsewhere,” said Matt Fox, executive VP and COO.
“In 2020 alone, our net capital and opex spend in Alaska is expected to be roughly $3.4 billion,” Hatfield said. said. “On a gross basis, in 2020, total industry capital and opex spend in Alaska is expected to be about $6 billion.”
Don Wallette, executive VP and CFO, said a previously announced offering of a share in some the company’s North Slope fields is on hold for now.
“At this point, we only plan to sell down after the uncertainty related to the citizens’ initiative has been resolved, and after we fully interpreted the results of our exploration and appraisal program, and when we’ve progress through Willow through the concept select gate,” he said. “After we’ve satisfied those three criteria, that’s when we plan to execute this sell-down, so that pushes the sell-down most likely well into next year.”
