thursday, 30 march of 2017

ConocoPhillips sells oil sands assets for $13.3bn

ConocoPhillips of the US has become the third company this month to announce a large sale of assets in the oil sands of western Canada, agreeing a $13.3bn deal with Calgary-based Cenovus Energy for heavy crude and gas operations.

Houston-based ConocoPhillips said the sale would enable it to pay down debt and return cash to shareholders, and also cut the average cost of its production from about $40 to about $35 per barrel.

The deal follows Royal Dutch Shell’s decision, announced earlier this month, to sell most of its oil sands assets to Canadian Natural Resources for $7.25bn.

Marathon Oil of the US sold its Canadian subsidiary, which owns 20 per cent of the Athabasca Oil Sands Project, for $2.5bn to Shell and Canadian Natural Resources in a related deal.

All three deals involve international companies selling operations in the oil sands to Canadian companies that are specialists in that industry.

Shell said Alberta’s oil sands had ceased to be a priority in its investment plans, which were focused on deep water developments and petrochemicals. Conoco similarly said it was making sure that its capital spending was focused on its lowest cost and most profitable operations.

Conoco will retain one oil sands asset: a 50 per cent stake in the Surmont joint venture with Total of France. But heavy Canadian crude will drop from 15 per cent to 5 per cent of its production.

The deal received an initially favourable reaction from the market, with Conoco shares rising 5.8 per cent in after-hours trading in New York.

Under the deal, Conoco will sell its 50 per cent stake in the Foster Creek Christina Lake oil sands partnership and the majority of its western Canada Deep Basin gas assets to Cenovus. The Canadian company already owns the other half of Foster Creek Christina Lake.

Conoco will receive $10.6bn in cash and 208m Cenovus shares, valued at $2.7bn on March 28. There is also a small extra payment triggered if the oil price goes high enough: Conoco will be paid an extra $6m for every C$1 of the benchmark Western Canada Select oil price above C$52 per barrel, every quarter for five years.

The cash will be used to pay down its gross debt from $27bn at the end of last year to $20bn at the end of 2017, and for a $3bn share buyback.

Conoco was forced to cut its dividend last year because of its strained financial position. Ryan Lance, chief executive, said the Canadian asset sale would “make us a much stronger company and put us in an advantaged position for strong free cash flow generation and improved returns”.

The moves by international companies to reduce their exposure to the oil sands do not look like a sign that the industry is stagnating, at least in the near term.

The International Energy Agency, the watchdog backed by rich countries’ governments, said earlier this month that it expected Canada to “remain a key contributor” to global oil supply growth over the next few years.

It highlighted production ramp-ups at Conoco’s Surmont project and Cenovus’s Foster Creek as two of the principal developments driving that production growth.

(Published by Financial Times - March 29, 2017)

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