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ConocoPhillips to Divest Barnett Shale Stake: Here's Why

Upstream energy player ConocoPhillips COP has decided to divest its stake in the Barnett Shale for a consideration of roughly $305 million plus net customary adjustments. The buyer of the asset is a unit of Miller Thomson & Partners, involved in the acquisition and development of natural gas resources.

It is to be noted that proceeds from the sale will likely be utilized for ConocoPhillips’ general corporate activities.

What’s Behind the Divestment?

The divestment reflects the company’s objective to lower its exposure to natural gas rich resources. During 2016, net production from the Barnett Shale was 11,000 barrels of oil equivalent per day (BOE/D).

Of the total output, natural gas accounted for 55%, while natural gas liquids comprised 45%. Investors should know that other gas rich plays likely to be divested by ConocoPhillips are situated in the Gulf of Mexico and Anadarko basin.

Impact on Cashflow

With the Barnett Shale transaction likely to close by the third quarter of 2017, the company’s 2017 production guidance is likely to get slashed by 5 thousand barrels of oil equivalent per day (MBOED).

However, the company believes that there will not be any material impact on cashflows for this year following the divestment.

About the Company

Houston, TX-based ConocoPhillips is among the leading exploration and production players in the world. The company has huge base of proved reserves and production.

We appreciate the company’s divestment of the bulk of its Canadian resources for $13.3 billion. With this, ConocoPhillips has reduced its oil sands exposure and can now use the proceeds to develop core acres in the Eagle Ford shale and Permian Basin. The upstream firm’s last one-year pricing chart shows positive investors’ sentiment as reflected by the company’s 1.3% gain, comparing favorably with the Zacks categorized Oil & Gas-U.S Exploration & Production industry decline of 22.2%.

However, we are concerned about ConocoPhillips’ substantial debt load. Looking at the financials, we note that since the beginning of 2014, the company’s long-term debt has been rising exponentially, thanks to persistently low crude.  

Zacks Rank & Key Picks

Currently, ConocoPhillips carries a Zacks Rank #3 (Hold).

A few better-ranked players in the energy sector are Canadian Natural Resources Limited CNQ, Enbridge Energy Partners LP EEP and W&T Offshore Inc. WTI. Canadian Natural and Enbridge Energy sport a Zacks Rank #1 (Strong Buy), while W&T Offshore carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.       

We expect year-over-year earnings growth of almost 725% at Canadian Natural in 2017.  

Enbridge Energy beat the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive surprise of 38.22%.

W&T Offshore had an average positive earnings surprise of 69.21% for the last four quarters.

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Enbridge Energy, L.P. (EEP): Free Stock Analysis Report
 
Canadian Natural Resources Limited (CNQ): Free Stock Analysis Report
 
W&T Offshore, Inc. (WTI): Free Stock Analysis Report
 
ConocoPhillips (COP): Free Stock Analysis Report
 
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