ConocoPhillips (NYSE:COP) got rid of the tar baby on its balance sheet by selling most of its western Canada “oil sands” assets to Cenovus Energy Inc (USA) (NYSE:CVE), a Canadian company, which presently dropped by 11% in early trade March 30.
COP stock, on the other hand, quickly jumped 7% — not just on optimism for the deal, but also the big gift Conoco will dole out to shareholders.
This is the third deal in a month where U.S. and other foreign energy companies are retreating from the Alberta tar sands, which are strip-mined like western coal, then processed, to produce a bitumen-like product which, when combined with natural gas liquids, can be shipped through pipelines and refined like oil.
Environmentalists call the stuff tar sands, but oil companies like to call them oil sands, claiming that it gives Canada the third largest “oil” reserves in the world, after only Saudi Arabia and Venezuela — even though 97% of the resource is too deep in the ground to be strip-mined and produced profitably with current technology.
Either way, they’re a drain on many balance sheets, with the product currently selling at about $37 per barrel.
ConocoPhillips getting out looks like the right thing to do, if the reaction in COP stock is any indication.
The Tar Baby
Investors are calling ConocoPhillips a big winner here. It combined the oil sands with western Canadian natural gas assets into a $13.3 billion deal, most of it in cash, with plans to both reduce debt and double its stock buyback once the deal closes in the second quarter.
COP shares jumped in early trade because investors saw the energy giant finally moving back toward profits after years of losses. The company’s debt-to-assets ratio before the deal was already below 30% — low for an oil company — and this transaction will drop it closer to 25%.
But the tar baby isn’t completely gone.
ConocoPhillips is taking 208 million Cenovus shares in the deal, which it valued at $207 million, although with the early trade action they’re already worth under $200 million. The deal will give Conoco a nearly 25% stake in Cenovus, which lost $545 million (65 cents per share) on revenue of $12.134 billion last year.
This means that ConocoPhillips still has a big stake in the future of the oil sands, which are a big political issue in Canada. Prime minister Justin Trudeau was elected over Stephen Harper over the objections of Alberta voters, and his January statement that production from the oil sands must be “phased out,” while quickly walked back, was seen as a signal to sell.
Earlier this month, Marathon Oil Corporation (NYSE:MRO) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) both agreed to sell Alberta properties, mainly to Canadian Natural Resource Ltd (USA) (NYSE:CNQ), whose stock has managed to hold firm as investors bet it will eventually be able to ramp up production.
While the average Canadian oil stock is down 25% this year, with low prices and a possible U.S. “border adjustment tax” or tariff keeping prices down, CNQ is up slightly.
The Bottom Line on COP Stock
The boom in ConocoPhillips may be short-lived as investors come to realize it is still attached to oil sands production, through its stake in Cenovus, but for now the stock buyback — which looks to be $3 billion in 2017, with another $3 billion across 2018 and 2019 — and potential profits down the road will keep investors smiling.
ConocoPhillips remains an international oil producer, with extensive operations in the Middle East and North Africa. If you’re buying COP stock today you’re betting that the price of oil, now fighting to hold $50 per barrel, can stay up over several years, because the company’s downstream operations were split off as Phillips 66 (NYSE:PSX) in 2012.
Since the split, shares of Phillips have doubled in value. Those of ConocoPhillips are down 35%.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
