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Lacking pipeline space, Conoco hits brakes on Permian oil, gas production

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Lacking pipeline space, Conoco hits brakes on Permian oil, gas production

Citing a lack of contracted pipeline capacity in the Permian Basin, ConocoPhillips is pulling back on production in the Permian Basin, a booming oil shale centered in West Texas and one of the company's "big three" U.S. plays.

CEO Ryan Lance told the Financial Times in a July 2 article that drilling in the Permian had picked up faster than the company anticipated, leaving it short in the competition to move its hydrocarbons. "We have other opportunities to go spend our capital, and I am not sure it makes sense to drill into that headwind."

Lance's comments were similar to those made May 31, when he first indicated that Conoco may have to pull back in the Permian due to the expected pipeline shortfall. "I'll tell you today, the conversation in the company is: 'Should we stop [funding Permian production]? Why should we keep spending capital there and be subjected to $10, $15 [per-barrel price differentials], when we can reallocate that to something else?'" he said. "But our view is, help is coming, but it doesn't come until 2020."

Some of the other opportunities Lance mentioned are likely to be in the Eagle Ford and Bakken shales, the other two of the big three, which produced significantly more than Conoco's Delaware Basin assets in the first quarter. During the first quarter, the company's Eagle Ford production was 163,000 barrels of oil equivalent per day, with the Bakken producing 68,000 boe/d. Production in the Permian's Delaware Basin, by contrast, was 19,000 boe/d.

"Conoco is likely to divert the capital to other assets, with the Eagle Ford likely to receive a significant portion of the capital," Raymond James analyst Muhammed Ghulam said.

The company could also use saved capital from the Permian to reduce debt, but analysts believe that option is less likely. Conoco has used the proceeds from asset sales to fund its debt reduction plan, and the funding needed to meet its goals appears to be in place. The company's budget shows a breakeven point of $50 per barrel of oil, spurring belief that Conoco will reapply the capital in other basins as opposed to using it in other ways while oil is north of $70/bbl.

"They've already got a clear plan for debt reduction and shareholder returns are set as a function of cash flow, so not really a need to add to either," Morningstar analyst Allen Good said. "Given they've reoriented to a returns focus, I'd assume that incremental capital would then go to attractive opportunities in those other basins, or just not be spent if it's not going to get acceptable returns."

Conoco shares were down 1.6% to $68.60 in early afternoon trading July 2 on the NYSE.