ConocoPhillips Announces 2015 Capex Budget

ConocoPhillips Announces 2015 Capex Budget

http://seekingalpha.com/article/2739585-conocophillips-announces-2015-capex-budget

Summary

• ConocoPhillips announces its 2015 capital budget.
• Spending is to decline 20% to $13.5B.
• Much of this decline is focused on “emerging” North American unconventional plays (shale).
• At current prices, ConocoPhillips yields around 4.40%.

Early on Monday (December 8), ConocoPhillips (NYSE:COP) announced its 2015 capital budget. The company plans to invest $13.5B next year, down 20% from the 2014 projected budget of $16.7B. Much of this decline is related to lower spending on major projects, many of which are nearing completion. In addition, ConocoPhillips will be delaying spending on North American unconventional plays (mostly shale).

Despite lower spending, ConocoPhillips is still projecting 3% production growth in 2015 (excluding Libya). This is towards the low end of the long-term growth target of 3% to 5%.
In terms of cash flows, ConocoPhillips noted that it was "prudent" to lower spending given the current pricing environment. The company plans to focus on cash flow neutrality and paying out its large dividend.

A breakdown of ConocoPhillips planned 2015 capital spending and comparisons to 2014 is provided below:

• $1.9B on Base Maintenance (compared to $2.2B in 2014)
• $5.0B on Development Drilling Programs (compared to $6.5B in 2014)
• $4.8B on Major Projects (compared to $5.8B in 2014)
• $1.8B on Exploration and Appraisal (compared to $2.2B in 2014)

A couple notes on this front:

The Development Drilling Programs, which saw a $1.5B cut in capex, will now focus on the Eagle Ford and Bakken and defer significant investment in other "emerging" North American unconventional plays. Hardest hit shale plays include the Permian, Niobrara, Montney and Duvernay. ConocoPhillips noted that it could ramp up or down activity in the unconventionals, likely depending on oil prices.

The Major Projects capex spending was cut $1.0B. This decline is related to lower spending at the APLNG and Surmont Phase 2 projects, which peaked in 2014, not really related to oil prices.
Conclusion

Basically, an across the board cut in spending. This news should not come as much surprise. With WTI oil below $65 per BBL, some of ConocoPhillips's newer shale plays simply do not make much economic sense. However, it is good to see that the company is focusing on getting its cash flows to match capex spending and dividends. ConocoPhillips had been adding incremental debt to its balance sheet as these were slightly exceeding cash flows.