ConocoPhillips’ Shale Operations In The Face Of Sub-$70 WTI

Picture of ConocoPhillips Drill Rig drilling in the Niobrara Play - Image Credit ConocoPhillps

Picture of ConocoPhillips Drill Rig drilling in the Niobrara Play – Image Credit ConocoPhillps

Callum Turcan – Seeking Alpha – November 28, 2014


  • OPEC decided to meet its current production target, which caused a 7% slide in oil prices.
  • ConocoPhillips is investing heavily in shale plays that are very vulnerable to swings in WTI.
  • Even in the face of sub-$70 WTI prices, ConocoPhillips can still be profitable in its core shale operations.

WTI slipped down to below $70 a barrel after the OPEC meeting in Vienna on November 27. Oil prices fell by 7% as OPEC said it plans to stay the course and keep its production levels at 30 million barrels of oil per day. Many in the energy industry were hoping for a supply cut to increase oil prices, which have fallen by over 30% in recent months. An ample supply of crude is putting a lot of downward pressure on prices, as Kuwait sees the global oversupply at 1.8 million bo/d while Venezuela puts that a little higher at 2 million bo/d. OPEC isn’t living up to its production target either, as the group of nations produced 30.97 million bo/d on average in October.

What makes matters worse for OPEC and the energy industry as a whole is that OPEC sees the world needing only 29.2 million bo/d of its crude next year. This means the oversupply will continue unless OPEC or other oil producing countries, like Russia or the United States, decide to curtail production.

Top tier shale will prevail
Unfortunately for OPEC, American shale producers have been able to drive the cost of developing shale formations way down relative to where the industry was a few years ago. Even in a low cost environment, ConocoPhillips’ (NYSE:COP) shale operations can thrive. With an average wellhead breakeven price of under $40 a barrel, ConocoPhillips can still make money even as WTI falls below $70.

To generate a good return from its operations, Conoco would have to focus its attention towards the Eagle Ford and the Bakken/Three-Forks formations. Both plays have a full cycle finding and development cost of $20 – $25 a barrel. This the full picture, as it doesn’t take into account SG&A expenses or transportation costs, but it does point towards these plays being more economical than its unconventional average.

Management noted in its latest quarter that it would cut back on some of its spending. Conoco’s core acreage in the Eagle Ford and Bakken/Three-Forks shale plays will probably be spared for the most part as management focuses on reducing exploration expenses in less economical plays. This means that Conoco could slow down its exploration efforts testing out the lower benches of the Three-Forks formation under the Middle Bakken. Exploration of the Niobrara play in Colorado could also be curbed. Another area that could be affected is its Permian operations.

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