Safer plays key for Conoco after Venezuela exit
Jun 27, 2007
By Michael Erman - Analysis
NEW YORK (Reuters) - Oil major ConocoPhillips (COP.N: Quote, Profile, Research) is likely to focus on the development of its more stable natural gas and Canadian oil sands assets to help make up for the loss of its Venezuelan production sites.
ConocoPhillips and Exxon Mobil Corp. (XOM.N: Quote, Profile, Research) decided on Tuesday to quit multibillion-dollar projects in Venezuela's Orinoco oil belt rather than agree to a nationalization of their assets.
Analysts and investors hope ConocoPhillips will not undertake a dramatic strategic shift through a major acquisition because of the loss of the Venezuelan properties, equal to nearly 10 percent of its proved reserves.
ConocoPhillips's $34 billion takeover of Burlington Resources last year was too expensive, analysts said, and did not offer enough new production, even though it added potential long-term prospects.
ConocoPhillips will be harder hit by leaving Venezuela than Exxon -- about 4 percent of its 2006 production came from the country compared with only about 1 percent for Exxon Mobil.
"These were obviously some bad investments and they are going to have to rethink their political risk and exposure," said Todd Lowenstein, a portfolio manager at HighMark Capital Management.
Still, analysts said that much of the negative impact from the nationalizations have already been priced in to the company's stock, which fell 3.5 percent on Tuesday.
Furthermore, they said the company's recent strategy -- which has focused more heavily on natural gas and an oil sands joint venture with EnCana Corp. (ECA.TO: Quote, Profile, Research) -- could be viewed as a roadmap for the company's future investment.
"What are they running away from in Venezuela? Political risk," said James Halloran, energy analyst with National City Private Client Group, which manages about $35 billion in assets.
"The gas market will carry less political risk on a global basis than the oil markets -- it's much more diversified. And Canada right now would seem to have very little political risk also."
Oppenheimer analyst Fadel Gheit also suggested in a research note that political and fiscal stability make North America one of the most attractive areas for capital spending, saying that natural gas deposits and Canadian oil sands were among the most attractive areas on the continent.
Canada has touted its oil sands as having potential second only to the reserves of Saudi Arabia, although developing that resource is more expensive and technically challenging than many conventional oil plays.
The oil sands also have an additional benefit for ConocoPhillips and other companies exiting projects in Venezuela's Orinoco region. The expertise they have gained in Venezuela with the extra heavy Orinoco crude can be moved north to the bitumen found in Canada.
David Kirsch, manager of the market intelligence service for consultancy PFC Energy, said that the oil companies leaving Venezuela may try to lure staff away from their joint venture partnerships to work in other parts of the world, including the oil sands projects.
"There is still an incentive for all the companies to not let the staff that they trained up go ... and I think some of the local staff want to leave," Kirsch said.
(Additional reporting by Matthew Robinson)