ConocoPhillips Makes A Bold Move

By Robert Rapier • March 30, 2017 • Energy Strategist Weekly

I just got off the phone with Tamar Essner, who is a lead energy analyst at NASDAQ. I will report on more of our conversation next week, but there were a couple of things she told me that might be of immediate interest to subscribers. First, she said that oil prices below $50/bbl simply aren’t sustainable in her view. Below that price starts to kill off shale oil production, and it doesn’t work for OPEC. In particular, she noted that it doesn’t work for Saudi Arabia with an IPO for Aramco on the horizon. So a price below $50/bbl isn’t likely to remain for long.

She did say she expects to see oil prices remain below $70 for the next couple of years, but she added that oil companies are presently underinvesting, and that is setting up a potential supply/price shock in just a few years.

Her thoughts on this are very much in line with my own. That’s why, earlier this month after the price of West Texas Intermediate (WTI) fell below $50/bbl, I reiterated our Buy advice for both EOG Resources (NYSE: EOG) and Apache Corporation (NYSE: APA). After spending most of March under $50/bbl, today the price of WTI has risen back above $50, and EOG and Apache are both moving higher. In just the past couple of trading sessions, both are up over 5%.

But the big mover this week has been ConocoPhillips (NYSE: COP), which received a new Buy alert here last week. I noted that “The company is one that is likely to make money if oil prices settle in for a while in the $50-$60/bbl range and investors should accumulate shares at the current stock price.”

On Wednesday ConocoPhillips announced it is selling its Canadian oil sands and natural gas holdings to Cenovus Energy (NYSE: CVE) in a $13.3 billion deal. The holdings include COP’s position in the Foster Creek Christina Lake oil sands partnership and most of its western Canada Deep Basin gas assets. (Incidentally, I visited the Christina Lake site in 2013; see my report Opportunities in the Oil Sands).

ConocoPhillips will receive $10.6 billion in cash and $2.7 billion in shares of Cenovus. That’s a big number considering ConocoPhillips’ $56 billion market capitalization. Or that “was” its market cap before the announcement. Shares surged by 10% on the news before pulling back a bit, but are still trading 8% higher on the day. In the week since I issued the Buy alert, ConocoPhillips is up 11%.

I set the Buy limit for ConocoPhillips at $50, and it has bounced above and below that today. I am not inclined to raise that limit right now, but would rather recommend investors maintain discipline and buy on dips below that price. Odds are you will get a second chance.

My conversation today with Tamar Essner supports my belief that if oil pulls back below $50/bbl, it is a buying opportunity. But this hinges on OPEC’s moves as they prepare to meet in May. I believe it is highly likely that OPEC will extend the production cuts it announced last November, but we have to prepare for the possibility they do not. Should they extend the cuts, we are likely to see $60 oil by year-end. Should they abandon the cuts, $40 isn’t out of the question. Stay tuned.

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Bill Carr

03/30/17 ‐ 5:07pm ET March 30, 2017 at 5:07pm ET

Great news on COP. Ive been buying for sometime, adding to a long held position.
My question, I live in Tulsa and gave been aware of the SCOOP/STACK play for sometime.
Apollo Global (APO) announced yesterday it had taken a position in the SCOOP/STACK through a partnership in a private firm, Chisholm Oil and Gas
I’ve added to DVN and ENLK over the past year and opened a new position in Newfield (NFX).
Your thoughts on SCOOP/STACK and what companies have a presence.
Thanks

Robert Rapier

03/30/17 ‐ 7:57pm ET March 30, 2017 at 7:57pm ET

I was actually in the STACK last month, so I got a close up look. We are operating a unit there to clean up flare gas. In addition to those you mentioned, Continental Resources is making big moves there. Continental, Devon, and Newfield are the three names you hear most often, and the people I spoke with believe the breakeven costs will rival the Permian Basin.

Mark

04/19/17 ‐ 3:36pm ET April 19, 2017 at 3:36pm ET

Hi Robert,
What are your thoughts regarding Devon? Is this a good time to start accumulating, or still too much downward pressure in your view? Anything you can share would be very helpful for me. Thanks in advance for your feedback.

04/19/17 ‐ 4:23pm ET April 19, 2017 at 4:23pm ET

I think Devon looks pretty good right here. They have increased free cash flow for four straight years now, including through the collapse of oil prices. They had a huge asset write-down in 2015 that weighed on their net income and probably scared some investors away. But it’s one of those paper losses that isn’t a cash charge. It’s a movement of reserves back into the resource column, to be developed as oil prices rise. Debt has crept up some but is not at an alarming level. I don’t see much downside in oil prices unless OPEC surprises everyone next month. I think Devon will manage fine at current prices and thrive if oil prices recover toward $60.

04/24/17 ‐ 9:27pm ET April 24, 2017 at 9:27pm ET

Thank you sir. I sincerely appreciate all of your recommendations and prompt replies.

Greg J

04/03/17 ‐ 8:42pm ET April 3, 2017 at 8:42pm ET

So would really appreciate your current thoughts on the CVE with big pullback and their capital raise and the deal.
Thanks!

04/04/17 ‐ 1:27am ET April 4, 2017 at 1:27am ET

I think CVE is being pretty harshly punished here. They paid a pretty good price for COP’s assets, but I think they can still make money at $50 oil. They have generated positive cash flow at current oil prices, and others in the oil sands have done OK in this environment. Suncor has done quite well. So on the face of it, I think it’s an overreaction to push CVE down so much.

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