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Why NGL production is driving ConocoPhillips’ Lower 48 growth

Kshitija Bhandaru

Must-know: Key takeaways from ConocoPhillips’ Q2 earnings (Part 5 of 8)

(Continued from Part 4)

Segment-wise production

ConocoPhillips’ (COP) major business segments include the Lower 48, Alaska, Canada, Europe, and Asia Pacific & the Middle East (or APME). Of these, the Lower 48 has consistently had higher production volumes, and therefore higher revenues, than any other segment.

The Lower 48 States segment’s 2Q 2014 production was 10% higher year-over-year, at 540 MBOED. It constituted 35% of the total production volume.

Increased liquids production is driving earnings growth

The company noted that the 4% production growth was a result of increased natural gas liquids (or NGLS) production, the majority of which came from the Lower 48 States.

NGLs are usually priced higher than natural gas. So they improve the volume mix (crude oil, natural gas, and NGLs). This leads to higher margins.

An improved volume mix resulted in a 5% increase in total average realized prices across all commodities. The total average price realized this quarter was $70.17 BOE compared to $66.82 last year.

Two major regions contributing to liquids growth

Most of the growth in COP’s Lower 48 production came from the Eagle Ford and Bakken shale plays. The Eagle Ford’s production the second quarter was 157 MBOED—30% higher year-over-year. The Bakken’s production, on the other hand, was 70% higher than last year, at 51 MBOED.

COP has chalked out huge amounts of capital to further develop both these regions. The Bakken will see an investment of approximately $1 billion annually up to 2017. Capex in the Eagle Ford is slated to be $ 3 billion through 2017.

As we noted above, natural gas liquids are more profitable than natural gas. The average price of NGLs in the second quarter was $39.93 per barrel. For natural gas, the average price was $6.66 per thousand cubic feet. So a volume mix containing higher volumes of NGLs is likely to fetch better operating margins.

Indeed, gas-heavy companies like Chesapeake (CHK), Cabot Oil and Gas (COG), and Range Resources (RRC) have started plowing capital into liquids-rich areas to generate more profits. Most of these companies are components of the Energy Select Sector SPDR ETF (XLE).

Prices and margins

The following part of this series discusses COP’s realized prices in 2Q 2014 and the subsequent cash margins it earned.

Continue to Part 6

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