The Motley Fool

ConocoPhillips Is Getting Ready to Cash in on the Oil Sands

ConocoPhillips (NYSE: COP) is already the second largest producer of oil using SAGD technology out of Canada’s oil sands. It sees that production growing by a 21% compound annual growth rate through 2017 as it executes on its seven major projects. Once those projects are complete the company will really be able to cash in on the oil sands as its cash flow is expected to surge. That’s only the beginning of the company’s oil sands story.

Opening up the floodgates of production
In 2014, ConocoPhillips and 50% joint venture partner Cenovus Energy (TSX: CVE)(NYSE: CVE) are expected to complete Phase F of Foster Creek. That will be followed by the completion of Phase G next year and Phase H in 2016. On top of that the pair is optimizing Phases C, D, and E at Christina Lake while completing the startup of Phases F and G in 2016 and 2017, respectively. Last, but certainly not least, the ConocoPhillips/Cenovus Energy partnership will complete the startup of Phase A at the Narrows Lake project in 2017. Add it all up and the partners expect to deliver consistent production growth from these three oil sands joint venture areas.

What’s unique about ConocoPhillips’ position in the oil sands is that Cenovus Energy isn’t its only partner. The company also has a 50% joint venture with Total (NYSE: TOT). The pair is working on an optimization project at Surmont 1 to improve production. However, the biggest production booster of them all is the completion of Surmont 2, which is expected to come online next year. The project, which is 68% complete, is expected to increase the gross capacity of Surmont to 150,000 barrels per day and produce through 2030 with significant development capacity beyond that phase.

As these projects come online over the next few years, ConocoPhillips’ capital spending will begin to fall while its production and cash flow will surge higher. In fact, the company sees its oil sand production fueling about a billion dollars in annual cash flow by 2017, which is a big shift from the capital-intensive nature of these projects the past few years. It’s just the type of step change investors want to see as it will help the company grow its already large dividend.

Big untapped potential
In addition to those projects already in development, ConocoPhillips has four additional oil sands assets consisting of undeveloped land. The company’s undeveloped leases are Saleski, Thornbury, McMillian Lake and Crow Lake. All four assets could be developed in the future to add to the company’s production.

Another option is that ConocoPhillips could simply decide to cash in on these assets as it did with its Clyden lease last year. It sold Clyden to Exxon Mobil (NYSE: XOM) and Imperial Oil (TSX: IMO)(NYSE: IMO) for $751 million. The deal enabled the Exxon/Imperial partnership to add another oil sands lease in close proximity to its Corner lease making it a good strategic fit. Meanwhile, ConocoPhillips was able to cash in on an asset that would have taken a lot of money and time to develop. This really enhances ConocoPhillips position in the oil sands.

Foolish bottom line
ConocoPhillips’ massive oil sands position holds the potential for upwards of 15 billion barrels of oil equivalent. Over the next few years the company will really be cashing in on that position as its production and cash flow surges. Beyond that the company holds a nice option in the form of its undeveloped leases. Because of this the company has great oil sands upside, which when combined with its tremendous diversity across the world makes it a great way for investors to gain exposure to the oil sands, without its many pitfalls.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo owns shares of ConocoPhillips.

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