Conoco Phillips - What To Expect In 2012

By Eric Fox | December 27, 2011 AAA

Conoco Phillips (NYSE:COP) plans a 15% increase in spending on exploration and production activities in 2012, and will devote a higher proportion of these funds to North American oil and gas plays. The company also expects to complete its previously announced split into separate upstream and downstream entities.
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2012 Capital Spending
Conoco Phillips announced a capital spending program for 2012 totaling $15.5 billion, with $14 billion of that total allocated to exploration and production activities. In 2011, Conoco Phillips budgeted $13.5 billion in capital spending across the entire company, with 90%, or $12.15 billion devoted to exploration and production.

Separation
In July 2011, Conoco Phillips announced that the company would split into two separate public companies. Conoco Phillips is retaining the upstream oil and gas operations of the company, while Phillips 66 will hold the refining and other downstream assets of Conoco Phillips.

Conoco Phillips plans to pay a special dividend of Phillips 66 stock, with shareholders receiving one share of the new company for every two shares owned of Conoco Phillips. The company expects the reorganization to be complete by the end of the first quarter of 2012. (For related reading, see Which Is Better: A Cash Dividend Or A Stock Dividend?)

Conoco Phillips was not the only company to split up in 2011, as this reorganization trend has spread quickly in the energy sector over the last few years. Marathon Oil (NYSE:MRO) and Marathon Petroleum Company (NYSE:MPC) started 2011 as part of the same company, but separated midyear through a stock dividend.

North America
Conoco Phillips estimates that 60% of the $14 billion exploration and production capital program in 2012 will be spent in the United States and Canada, and it will be used towards oil and gas areas that produce the highest returns. The company has identified these plays as the Eagle Ford Shale and Permian Basins in Texas, the Bakken formation in the Williston Basin and oil sands projects in Western Canada.

Divestitures
Conoco Phillips will also continue to divest properties that the company considers to be non-strategic. This asset divestiture program is expected to total $15 billion to $20 billion over the 2010 to 2012 period and has yielded $8 billion in proceeds through September 2011. The most recent divestiture involved the sale of pipeline assets to Enbridge (NYSE:ENB) and several other companies for $2 billion.

Share Repurchases
The major integrated oil and gas companies are known for large share repurchase programs and Conoco Phillips plans to continue this in 2012. The company estimates that it will purchase 11% of its outstanding common stock in 2011, and it just authorized another $10 billion in purchases when the current authorization expires. Exxon Mobil (NYSE:XOM) also has a large share repurchase plan and spent $16.6 billion during the first nine months of 2011 to buy back shares.

The Bottom Line
Conoco Phillips will start 2011 as a major integrated oil and gas company, but it will shed its downstream assets in the early part of 2012. The company also plans a double-digit increase in spending on exploration and production activities during the year. (For related reading, see A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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