CitiGroup Gives 'Thumbs Up' To ConocoPhillips Plan To Determine Low Oil Price Contingency Plan

by Emma Whatson Financial news analyst

Investment banking group bullish about the oil major’s prospects, pointing to its long term plan in dealing with oil prices.

CitiGroup, Inc. has given its stamp of approval to ConocoPhillips, Inc. (COP), after careful analysis made them feel bullish that the oil and gas producer has got the strength to overcome the tide of lower oil prices not just for now, but for the foreseeable future, in which a $100 per barrel is ruled out.

While the plan is mostly long term, ConocoPhillips had initiated on short term plans also for the past couple of weeks. The oil major is also targeting its home market by preparing to sell off some of its core oil and gas producing properties in America. These assets are situated in the Northern Louisiana, South Texas, East Texas, and Rockies. It has hired Wells Fargo to facilitate the sales that is likely to fetch between $1 billion to $2.5 billion.

This is in addition to the company selling off its Canadian operations, which many analysts say that it makes sense, as it is difficult to extract oil, which has been under a lot of environmental pressure, especially as the EU is labeling it as a dirty fuel. A limited pipeline capacity also is the factor. Furthermore, whatever crude is sold from Canada comes with discounts. For example, light oil is sold at 20% discount, compared to 30% discount from heavy oil. Overall, many cost disadvantages were associated with the operations in Canada, leading to many sell offs.

A couple of weeks ago, ConocoPhillips outlined a 3-year plan till 2017. The priorities for the organization include dividend, maintaining its investment grade credit rating, and having cashflows match or exceed cash outlays or cashflow neutrality. Operationally, it aims to bump up its production by 11% within the period whilst cutting its CAPEX costs at the same time, mostly from the aforementioned steps. This includes shifting to higher margin liquids productions in the form of shale, which has a shorter cash cycle and immediate returns.

CitiGroup believes that ConocoPhillips may be setting themselves up from what it believes will see a recovery in the prices of oil in the 60’s or the 70’s in the fiscal year 2016/17. Similarly, Devon Energy, Total, and Statoil, are likely to ride through smoothly from the oil price trough, although ‘forex’ factors for the latter two need to be taken into consideration.

In conclusion, CitiGroup made the right choice by selecting ConocoPhillips, as the ultimate E&P company with a massive cash flow, robust 4.3% dividend yield, and their solid 3-year plan being put into action. It seems the stock market agrees, with ConocoPhillips stock price rising more than 1.50%, closing at $69.40.