Playing it safe

Conoco's $5-bn Kazakh sale is the easy part

For ConocoPhillips, the $5-billion sale of its stake in a Kazakhstan oil field probably will be the easy part. The US oil giant’s investors should be happy to see the costly project in central Asia go. The cash also will help it fund lavish capital expenditure plans and a generous dividend. But Conoco’s real chore is to prove it can boost sluggish output while retreating from promising, if risky, regions.

The Kashagan investment has been a big headache for Conoco and its multiple partners, including state-controlled KazMunaiGas, Exxon Mobil, Royal Dutch Shell and Total. After 12 years and close to $50 billion of investment, the field is on track to yield a disappointing initial trickle of oil. Cost overruns and delays mean Kashagan is likely to produce thin margins for several more years. And, with a stake of less than 10 per cent, Conoco was in no position to call the shots.

With net debt of close to $18 billion, Conoco’s balance sheet could use the help. By contrast, its closest rival, Occidental Petroleum, carries just $3.5 billion. Conoco’s relatively free-spending ways compound the problem. The company is using about another $16 billion for capital expenditure this year, about $3 billion more than projected operating cash flow, according to Morningstar. Conoco also offers an industry-beating dividend, distributing over 30 per cent of profit, compared to Exxon’s 22 per cent. Chunky assets sales make the payouts possible until the exploration investments start to payoff.

Yet Conoco hasn’t shown it can hit its ambitious targets of boosting production by between three per cent and five per cent a year. In the most recent quarter ended September 30, output actually slipped by one percent from the year before. Conoco’s strategy of pulling out of politically troublesome nations that offer high output potential could make it harder still meet its goals. It has retreated from Russia and says it want out of Nigeria, too. Instead, Conoco is focusing on rich nations, including the United States and Australia.

Playing it safe may make Conoco an attractive sizeable investment alternative in a sector susceptible to dangerous places. But it also leaves the company’s margin for error increasingly narrow.