If you haven’t looked at Conocophillips (NYSE:COP), then you probably won’t recognize this energy giant. This new-and-improved Conocophillips (NYSE:COP) is looking to make a big splash as one of the premiere domestic oil and gas producers. To make this happen, though, will require some adept maneuvering from management to avoid some potential pitfalls that could cause Conocophillips (NYSE:COP) to stall. Let’s take a look at 3 issues that could slow Conocophillips (NYSE:COP) turnaround.
1) The Return of Infrastructure issues
The biggest gains that Conocophillips has made in the last several quarters is transitioning its exploration and production more toward North America, more specifically the lower 48 states. While the company has started to see the benefits of this shift, there is one issue that could cause Conocophillips and almost every other American-centric producer some headaches: lack of infrastructure.
For the past year or so we have been talking about how infrastructure is starting to catch up with oil and gas production in several regions thanks to pipeline expansion and the surge in oil-via-rail, but the problem is that production has been growing just as quickly and could potentially overrun our oil and gas infrastructure again. Take for example the Eagle Ford formation. The Texas Railroad Commission estimates that this oil play’s production has grown by a factor of 40 over the past 3 years, so it is incredibly difficult for pipeline to get built fast enough to keep pace. Kinder Morgan Energy Partners LP (NYSE:KMP) has plans to build a 200,000 barrel per day gathering system in the Eagle Ford just to satisfy Conocophillips pipeline demand in the region, but competition from others seeking to move production out of this region could result in a drop in prices.
If pipe cannot be built fast enough, we may find ourselves in a situation much like last year where we saw the price for domestic crude trade at a steep discount to international crude because of infrastructure issues. For every dollar that West Texas Intermediate prices drop, Conocophillips (NYSE:COP)’ earnings could take a $30 to $40 million hit. So the company may need to take a tempered approach to expanding production in the US.
2) Righting the ship in Alaska
The one region of the US that Conocophillips has struggled with recently has been Alaska. Alaskan production slipped more than 8% year over year, and the company’s management had hinted at scaling back its exploration and development operations in the region because of an unfavorable tax structure and more lucrative alternatives elsewhere.