The issue, though, is that Alaska represents about 13% of the company’s total production and 33% of income from operations. Replacing a cash generating source like Alaska would be rather challenging no matter how fast production from the Lower 48 grows.
Now that Alaska has reformed its tax code to be more exploration friendly, Conocophillips (NYSE:COP) has said that it will add another rig to its own North Slope fields to slow the decline rate in Alaska to 2%. Also, it has plans in the works with BP plc (ADR) (NYSE:BP) and Exxon Mobil Corporation (NYSE:XOM) to start a $3 billion, 110 well program in the Prudhoe Bay region to bump oil production. It will still be several years until this turnaround happens, but Conocophillips would be hard pressed to find a comparable replacement for its Alaska assets.
3) Getting seasick
Despite the big shift toward North American production, exploration off the Scottish and Norwegian coastlines in the North Sea still represents 20% of net income. Like Alaska, finding adequate reserve replacement for these assets would be rather challenging.
The issue with operations in the North Sea today relates to problems encountered by Total SA (ADR) (NYSE:TOT) at its Elgin Field on the Scottish side of the sea. The company issued a statement saying that a gas leak last year was the result of corrosion in a well casing from using Bromide in its drilling fluids. Total SA (ADR) (NYSE:TOT) plans to kill 10 wells at the Elgin complex at a cost of $2.34 billion because of this issue.
Much of the drilling today across the North Sea is in what are called High Pressure, High Temperature–commonly abbreviated to HPHT–formations, and using Bromide in drilling solution has been a common practice in offshore drilling for many years. If it is determined that well casings in this region are at risk because of using Bromide in HPHT wells, then Conocophillips may be staring down a big bill to correct its own wells in the region as well because it is the primary operator on 5 of its 10 working fields in the North Sea.
What a Fool Believes
Overall, Conocophillips has done a commendable job in both the spin off of Phillips 66 and the restructuring of its assets. The company is still in the middle of this asset turnaround as it just sold its assets in Trinidad & Tobago and its interest in the Clyden oil sands project, so we may yet see the best of the company. If it can successfully manage the upcoming issues we just discussed and continue to beat its former peers in the integrated major space, then perhaps Conocophillips might be worth putting on your radar.
The article 3 Threats to Conocophillips’ Success originally appeared on Fool.com is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow Tyler at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.The Motley Fool recommends Total SA. (ADR).
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