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ConocoPhillips (COP - Analyst Report) expects its production for the upcoming first quarter to be lower than the year-earlier period as expressed in its interim update.
The U.S. major now projects hydrocarbon production of approximately 1.62 million barrels of oil equivalent per day (MMBoe/d), down almost 5% from the year-ago level of 1.70 MMBoe/d. However, the anticipated figure exceeds its forecast for full-year average output of 1.55 MMBoe to 1.60 MMBoe, on a daily basis. This year-over-year downfall mainly confirms the company’s $10 billion asset sale venture that will likely hit the 2012 output.
Earlier, the company had disclosed that it expects production growth to average between 3% and 5% in the next five years, as it focuses on liquid-rich ventures primarily in the U.S. and Canada.
ConocoPhillips is in the midst of a three-year strategic operation that includes an asset sale program, large-scale share buybacks and the spin-off of its refining unit. The company has already received approval for the spin-off of its refinery unit, Phillips 66, which will likely start trading on or about April 12.
The company is on track with its first initiative, having already divested $20.2 billion of non-strategic assets last year and plans to further offload $10 billion worth of properties this year. From 2013, ConocoPhillips may continue to divest $1 billion to $2 billion of mature assets per year.
The company already wrapped up its divestiture agreement for its Vietnam business operation and expects to record an after-tax profit of approximately $940 million during the quarter. North Sea and North American conventional natural gas assets are on the asset sale contracts, which are slated to close in the second and third quarters of 2012.
The U.S. oil company intends to use the proceeds from the sale for its share repurchase program, under which Conoco repurchased 155 million shares for $11.1 billion last year. For 2012, the company aims to buy back shares up to an additional $10 billion, with $1.9 billion targeted for the first quarter.
Moreover, the company pointed out that its first quarter 2012 refinery margins will likely be adversely affected by extensively weaker crude differentials and secondary product margins owing to higher crude prices.
Although we remain positive on the outlook for the new ConocoPhillips post-split, as it holds the promise of unlocking significant value, we remain on the sidelines considering its sensitivity to changes in the crude oil price, as well as geopolitical risks associated with international operations and operational challenges. Hence, we believe that ConocoPhillips shares will perform in line with the broader market and maintain our long-term Neutral recommendation.
The third biggest U.S. integrated oil company, following ExxonMobil Corporation (XOM) and Chevron Corporation (CVX), holds a Zacks #3 Rank (short-term Hold rating).