ConocoPhillips CEO Bets Farm on Shale, Sees Oil Rebound

ConocoPhillips, one of the world’s largest shale producers, sees crude prices rising by the end of the year, bolstering the company’s growing wager on U.S. oil.

Chief Executive Officer Ryan Lance is staking a big part of the company’s future on shale, pledging to spend 50 percent more over the next three years primarily in the U.S. and Canada even as crude prices fell by more than half.

ConocoPhillips joins Exxon Mobil Corp. in making wells from Texas to North Dakota a central focus as oil companies adapt to market conditions that require the ability to ramp up or cut back drilling swiftly. Relying on flexible, low-cost opportunities that can stop and start on a dime will be critical as U.S. drillers become the world’s swing suppliers, Lance said Wednesday in an interview at Bloomberg’s headquarters office in New York.

“This is my fifth rodeo,” Lance said of his previous experience with energy downturns. “We’re going into a world that’s going to be characterized by lower, gradually rising prices and a lot of volatility.”

The shift for ConocoPhillips away from billion-dollar projects that take years or decades to complete is rooted in a belief that crude prices could gyrate wildly for years to come. Any price recovery in the near term will be modest, he said, as slowing U.S. production helps push up prices to between $70 and $80 a barrel within three years.

Exxon’s Plan

Exxon CEO Rex Tillerson said in March that the global energy giant will double the amount of oil it pumps from U.S. shale fields during the next three years, even as it moves more cautiously on investments in big projects elsewhere. Decades after quitting many U.S. fields to pursue bigger reserves from the Middle East to the North Sea, Exxon now sees its U.S. assets as its most reliable cash engines.

ConocoPhillips is focusing on North America because it has among the lowest costs for operations among the 20 major producers in the region. The company can turn a profit on its U.S. and Canadian wells with prices of $50 a barrel or less, according to analyses by consultants ITG Investment Research, Wood Mackenzie Ltd. and Rystad Energy that were cited in a company presentation Wednesday.

The third-largest U.S. oil producer behind Exxon and Chevron Corp. plans on spending about $11.5 billion a year globally to develop oil and gas resources, and set a goal of reducing costs by $1 billion by the end of 2016.

Shale Viability

The budget plan amounts to a vote of confidence in the future of North American oil as some have questioned the viability of prospects in Texas and Canada with crude trading at about $50 a barrel. The companies shares, which have fallen 6.2 percent this year, dropped 1.5 percent to $64.81 at the close in New York Wednesday after oil had its biggest decline in two months.

Lance was adamant in a presentation to investors Wednesday that ConocoPhillips isn’t for sale. That guidance came on the same day that rival Royal Dutch Shell Plc announced a deal to buy BG Group Plc for $70 billion, the biggest energy acquisition in a decade.

“Not just no, but hell no,” Lance said at the company’s analyst meeting in New York.

Three major energy acquisitions have been announced since November, totaling more than $115 billion including debt, according to data compiled by Bloomberg.

Unlikely Wave

Even so, a wave of consolidation comparable to the one that transpired in the 1990s, when the biggest publicly traded oil companies joined in a series of megamergers, is unlikely in the current market, Lance said in the interview.

Many oil producers are trading at valuations that still reflect a price more like $80 a barrel, meaning most acquisitions would be a more expensive way for ConocoPhillips to increase its oil and gas resources than developing existing assets, he said.

Assets “are still pretty pricey,” he said. For a lot of distressed companies that might be seen as opportunities, the problem is that their properties “aren’t very good. There’s a reason why they’re distressed.”

The company is looking for opportunities, constantly evaluating the operations and profits of competitors, but hasn’t yet seen the right price, Lance said. ConocoPhillips was among the companies that looked at buying Whiting Petroleum Corp., a producer in North Dakota, before judging the prospect too expensive, he said.

Export Ban

Lance, who is leading a group of oil producers in advocating for an end to the U.S. ban on most crude exports, said there is only a slight chance such a change will make it through Congress this year. The company is pushing for an end to the restrictions at least by 2017, he said.

ConocoPhillips received approval from the U.S. Commerce Department “a couple days ago” to export processed condensate, a type of ultra-light oil produced in South Texas, Lance said. The letter will allow the company to export the fuel after some processing that qualifies it as a refined product.

“The export ban is an anti-consumer policy,” Lance said. If the policy doesn’t change, “it’s going to be a constraint on the industry.”

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