Conoco to Shed Kashagan Stake

ConocoPhillips ( COP - Analyst Report ) plans to sell off its interest in Kazakhstan's giant oilfield, Kashagan, to India’s major energy explorer, ONGC Videsh Limited, which is the international arm of India's Oil and Natural Gas Corporation Ltd. This marks Conoco’s ongoing effort to offload its non-core properties while investing in new high-margin areas and boosting profitability. The transaction, expected to close in the first half of 2013, is subject to customary closing conditions.

The to-be sold properties include ConocoPhillips’ 8.4% interest in the giant Kashagan field in Kazakhstan that will fetch $5 billion for the company. Located in the North Caspian Sea, approximately 50 miles (80 kilometers) southeast of Kazakhstan, the Kashagan field found in the past 40 years is considered the largest in the world.

Kashagan has estimated reserves of 30 billion barrels of oil, of which 8 billion to 12 billion are potentially recoverable. First oil from the field is expected next year. The field is developed by a consortium comprising Eni SpA ( E - Analyst Report ) , ExxonMobil Corporation ( XOM - Analyst Report ) , Royal Dutch Shell Plc ( RDS.A - Analyst Report ) , French energy giant Total SA ( TOT - Analyst Report ) , Japan's INPEX Holdings Inc, ConocoPhillips and the Kazakh state-run oil company KazMunaiGas.

KazMunaiGas entered the Kashagan project in 2005 as a shareholder and since then has doubled its stake to 16.81%. The other partners also hold a share identical to KazMunaiGas barring INPEX with 7.56% interest and ConocoPhillips with 8.4%.

Eni was in charge of phase I of the field's development while Shell was accountable for production operations. However, the project ran into delays since its discovery. These included technical problems of extracting oil in an extreme climate and the presence of sulphide in the associated natural gas. Besides these hurdles, rising costs have been an impediment.

As part of ConocoPhillips’ three-year strategic plan, the Houston, Texas-based company plans to shed assets that do not fit well with its business model. It has generated $2.1 billion in proceeds from asset sales for the first nine months of 2012 and has maintained a divestment target of $8–10 billion through 2013 end. The latest sale will bring about $7 billion in proceeds for the company. The proceeds are earmarked for portfolio optimization, debt reduction and increasing shareholder distribution.

ConocoPhillips said that the book value of assets related to its Kashagan interest was about $5.5 billion as of September 30. It expects to record an after-tax impairment of about $400 million in the fourth quarter in order to lessen the carrying value to fair value.

We maintain our long-term Neutral recommendation on the company, which retains a Zacks #3 Rank (short-term Hold rating).