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COP to Sell Kashagan Stake

Zacks Equity Research

ConocoPhillips (COP) plans to offload its interest in Kazakhstan's giant oilfield, Kashagan, as per Kazakh Oil and Gas Minister, Sauat Mynbayev.

Located in the North Caspian Sea, approximately 50 miles (80 kilometers) southeast of Kazakhstan, the Kashagan field is regarded as the largest in the world found in the past 40 years. KazMunaiGas, the Kazakh state-run oil company, has shown interest in acquiring the stake that will be divested by ConocoPhillips.

The field, discovered in July 2000, is developed by a consortium comprising Eni SpA (E), ExxonMobil Corporation (XOM), Royal Dutch Shell Plc (RDS.A), French energy giant Total SA (TOT), Japan's INPEX Holdings Inc, ConocoPhillips, and KazMunaiGas.   

KazMunaiGas entered the Kashagan project in 2005 as a shareholder and since then has doubled its stake to 16.81%. The other partners also hold a share identical to KazMunaiGas barring INPEX with 7.56% and ConocoPhillips with 8.4% interests.

Eni was in charge of phase I of the field's development, while Shell was accountable for production operations. However, the project suffered several delays since its discovery that included technical problems of extracting oil in an extreme climate and the presence of sulphide in the associated natural gas. Besides these hurdles, rising costs have been an impediment, with the latest deadline now set for late 2012 to mid 2013.

We remain apprehensive of ConocoPhillips’ weak production profile, which experienced a 6.1% year-over-year decline in the most recent quarter. The decline was mainly due to the impact of divestitures and maintenance downtime, accompanied with reductions in North American conventional natural gas. Again, the 2012 production guidance range was narrowed to 1.565-1.585 million barrels of oil equivalent (MMBOE/d) from 1.550-1.600 MMBOE/d earlier.

Considering these factors, we maintain our Underperform recommendation for the company. However, ConocoPhillips retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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