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ConocoPhillips Continues to Core Up Its Portfolio

Matthew DiLallo, The Motley Fool

ConocoPhillips (NYSE: COP) has been one of the best-performing oil stocks in the market recovery. One of the fuels driving its outperformance has been the company's efforts to reshape its portfolio. Those actions not only brought in some cash to pay off debt and buy back stock but have sharpened its focus on its best assets.

One of them is its legacy position in Alaska, which the company has been able to bolster in recent months by taking advantage of similar portfolio streamlining moves by rivals. The company has already completed two deals this year, giving it more control over an important growth driver.

An oil pump with the sun in the background and snow on the ground.

Image source: Getty Images.

Drilling down into the deal

Earlier this week, ConocoPhillips announced that it entered two separate but related agreements with oil giant BP (NYSE: BP). In one transaction, ConocoPhillips will sell a 16.5% interest in the BP-operated Clair Field in the U.K. North Sea to the British oil giant for an undisclosed price. ConocoPhillips would still retain a 7.5% interest in that field, which BP hails as the largest undeveloped oil and gas resource in the region. BP, meanwhile, will boost its stake up to 45.1%.  

In the second deal, ConocoPhillips will acquire BP's 39.2% interest in the Greater Kuparuk Area in Alaska as well as its 38% stake in the Kuparuk Transportation Company, which owns the Kuparuk Pipeline, for an undisclosed price. These transactions would give ConocoPhillips a 94.5% interest in the oil fields and 95% of the pipeline.

The deals would be cash neutral to both companies. However, ConocoPhillips will see a more immediate boost to production since its interest in Clair only yielded 3,000 barrels of oil equivalent output per day (BOE/D) last year while BP's Kuparuk stake averaged 38,000 BOE/D in 2017.

A snow covered pipeline.

Image source: Getty Images.

Taking control in Alaska

This transaction follows an earlier one where ConocoPhillips bought Anadarko Petroleum's (NYSE: APC) 22% interest in the Western North Slope of Alaska as well as its interest in the Alpine pipeline for $400 million in cash. That deal gave ConocoPhillips total control of an asset that wasn't core to Anadarko's operations. ConocoPhillips, on the other hand, sees it as a core part of its future due to the promising Willow discovery, which holds an estimated 300 million barrels of oil. The company recently drilled three appraisal wells that further verified the potential of that play as well as three more exploration wells that each made additional discoveries.

Meanwhile, by significantly increasing its stake in Kuparuk, the company can address the "misalignment" it experienced in operating that asset, according to comments by the president of the company's Alaskan operations. He further noted that the company has been contemplating buying BP's interest for some time. While it needed to be creative, ConocoPhillips finally found a deal that worked for BP since it sees Clair as a core asset to its portfolio.

With near-total control of these two Alaskan assets, ConocoPhillips can set the pace of the development in a region that's becoming increasingly important to the company due not only to the oil in the ground but recent improvements in supply costs. Driving the reduction is a tax cut the state passed a few years ago aimed at spurring development as well as advancements in technology. The second factor has helped drive down the cost of supply for phase two of the company's Greater Mooses Tooth Unit by 15% to just $34 a barrel. That's helping make Alaska an appealing low-cost development area for the company, which should only improve as it benefits from increased scale in the state.

Building a better oil company

ConocoPhillips' focus over the past few years has been to transform into a company that grows shareholder value, not necessarily the size of its portfolio. That shift led it to trim away at the edges while bolstering its core. This strategy has already paid dividends by helping propel the company to generate peer-leading total returns over the past year while setting it up for even better results in the future.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.