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ConocoPhillips steps up unconventional drive

US giant sells conventional assets in San Juan basin to Hilcorp as it looks to increase shale sector efforts

ConocoPhillips has sold its conventional natural gas assets in the San Juan basin in the US for up to $3 billion to privately held Hilcorp Energy in an effort to refocus on its unconventional holdings and pay down debt.

Hilcorp is paying $2.7 billion in cash for the southwestern US assets, with a further maximum of $300 million in contingent payments that call for ConocoPhillips to receive $7 million for each month that US benchmark natural gas prices at Henry Hub average more than $3.20.

The contingent payments element is effective from 1 January next year and has a term of six years.

Hilcorp, which acquired the San Juan assets in partnership with private equity giant Carlyle Group, has emerged as an active buyer of large conventional assets.

“We are excited to move into the San Juan basin and proud to work with ConocoPhillips on a deal that will enhance Hilcorp’s presence in the southwestern United States,” Hilcorp founder and chief executive Jeff Hildebrand said. 

“Hilcorp has a long and successful history of efficiently investing capital into similar assets to increase production.”

The package includes 1.3 million acres with 10.1 trillion cubic feet of proven, probable and possible reserves that is producing 750 million cubic feet of natural gas equivalent per day (78% gas) from 12,600 vertical wells.

ConocoPhillips is the largest producer in the play and if the San Juan business unit were a company, it would be among the top 20 largest producers of natural gas in the US, according to marketing materials seen by Upstream.

The acreage is located primarily on public lands in Rio Arriba and San Juan counties, with almost all of the leases held by production from conventional vertical wells tapping the Fruitland Coal, Pictured Cliffs, Mesa Verde, and Dakota formations.

After its discovery in the late 1920s the San Juan basin become one of the largest natural gas producing areas in the country.

With the rise of shale gas plays such as the Barnett, Haynesville, Marcellus and Utica, interest in the San Juan natural gas plays waned, but the basin remained a production juggernaut. 

In addition to the conventional plays, operators such as WPX Energy and Encana have tried to prove up the Mancos and Gallup tight oil play in New Mexico to the south of the dry gas fairway along the New Mexico and Colorado border. 

The sales price was in line with or even slightly above analyst estimates for the value of the package.

"We believe the sale has positive implications for other producers in the basin potentially looking to divest," Cowen said, adding it expected a "slight outperformance" on ConocoPhillips' stock. 

“The $3 billion sale value is slightly above the $2.8 billion we were expecting based on our estimated 2017 production," it added.

Despite the strong price, ConocoPhillips will book an impairment on the deal in the second quarter, with the net book value of the assets at the end of last year put at $5.9 billion.

However, the move is consistent with ConocoPhillips’ stated goals of increasing its focus on short-cycle unconventional fields onshore US and Canada and minimising its natural gas production in the US.

“This transaction significantly accelerates value from our San Juan basin assets,” ConocoPhillips chief executive Ryan Lance said. 

“These transactions will materially reduce our exposure to North American gas and achieve an immediate step change improvement in our balance sheet and cash margins, while accelerating our return of cash to shareholders.”

The San Juan move comes after ConocoPhillips brought in $13.2 billion in cash and shares from the sale of its conventional gas business in western Canada and its non-operated 50% share of the Christina Lake and Foster Creek oil sands projects.

Once both sales are complete, ConocoPhillips will have reduced the amount of North American natural gas production in its portfolio from 20% to 10%, while increasing its oil production from 35% to 45% of its total portfolio.

ConocoPhillips expects to spend about $5 billion this year, primarily in the US onshore, to keep production roughly flat at around 1.54 million barrels of oil equivalent per day.