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4 Signs of Big Oil's Future From ConocoPhillips

Stocks in this article: COP

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Natural Gas Weakness
The recent slide in the price of natural gas led Chesapeake Energy (CHK), the largest independent driller in the U.S. and second only to Exxon Mobil (XOM), to announce that it is curtailing production .

ConocoPhillips offered its view on how the current natural gas pricing doldrums is shaping its decision-making.

The company said that its spending plan for 2012 doesn't allocate much to new gas drilling, totaling no more than a few hundred millions of dollars (that's versus a total capital spending plan of $15.5 billion). And even at this relatively low level of spending, ConocoPhillips is "pretty closely looking at" whether it makes sense given the recent pricing developments, said Jeffrey Wayne Sheets, ConocoPhillip's chief financial officer, during the earnings conference call. That should tell you something about the economics of natural gas drilling -- right now, it's a losing proposition.

Sheets said that production shutdowns, like those announced by Chesapeake and EQT (EQT), may be coming.

ConocoPhillips' fourth-quarter natural gas production in Canada and the lower 48 states was around 2.5 bcf (billion cubic feet) a day. Across that portfolio, roughly two-thirds of the drilling activity and economics are driven by liquids production and not natural gas prices, and that's good news since it's not going to make sense to shut in this production. This would imply 1.5 bcf of the 2.5 bcf total won't be impacted by current natural gas pricing. On the remaining production, ConocoPhillips has production partners, and those partners have different views about shut-ins.

One of the key issues related to the Chesapeake shut-in announcement was whether the rest of the industry would line up and follow suit , showing the discipline to cut production and help support prices. For some companies, the lost cash flow from shutting in production would be too severe a strain on the balance sheet -- Chesapeake, with a large debt load, may face funding issues as a result of its decision, even if the decision was the right one. ConocoPhillips hinted at this Catch-22 when its finance chief commented that its partners generally don't want to shut in natural gas and lose the cash flow associated with it.

ConocoPhillips is looking at the portion of production that it controls, but that's a subset of its overall natural gas drilling.

"I think that we will have some shut-ins of natural gas going forward and it's going to be on the order of 100 million cubic feet a day, or something like 15,000 to 20,000 BOE (barrels oil equivalent) per day going forward, and we'll continue to watch that. As the year goes on, we'll see how the natural gas markets develop," Sheets said during the conference call.

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