Is ConocoPhillips Making the Right Choice to Abandon Deepwater Exploration?

By Matthew

Source: Anadarko Petroleum.

Continue Reading Below

Deepwater exploration has become one of the major casualties of low oil prices. Offshore development was challenged even before prices plunged due to cost overruns and dry holes, made worse by the harsh conditions and the nearly incalculable environmental risk. For a company like ConocoPhillips , the rewards of offshore drilling are simply no longer worth it, which is why the company is winding down its offshore exploration efforts.

Risky businessConocoPhillips has had mixed success in recent years with deepwater exploration. In late 2014, it announced two discoveries offshore Senegal, which could open up a new oil frontier. Meanwhile, it was a partner with Anadarko Petroleum on a couple of promising discoveries in the Gulf of Mexico. That said, its exploration efforts in Angola have largely come up dry as have some of its other efforts in the Gulf with its recent misses costing the company $142 million in dry hole expenses alone, with the total cost of $482 million when leasehold impairment expenses and other costs are included.

That said, in the grand scheme of things a half billion dollars isn't all that bad given that offshore projects gone wrong have been known to cost producers billions of dollars, with big oil blunders from Royal Dutch Shell and BP costing investors dearly. Shell, for example, invested over $7 billion in an Alaskan Arctic debacle, which was abandoned after its first well came up dry while BP's Macondo accident in the Gulf cost the company upward of $54 billion, which for perspective is higher than all of its profits since 2012.

That being said, the reward can be even greater, which is why producers invest heavily in offshore projects. Anadarko Petroleum, for example, has createdtremendous value from its exploration program over the past decade.

Source: Anadarko Petroleum.

That slide notes that Anadarko's $10 billion of investments netted the company $13 billion in realized cash value to go along with a substantial retained resource base. So, clearly, the reward can be quite high.

The great wind downThat said, when ConocoPhillips looked at the strengths of its own portfolio it realized that it was better off letting someone else chase the potential gains offshore. Some of that can be attributed to its own success, or lack thereof, in deepwater exploration. Over the past few years the company's deepwater success rate has been below 50%. That's much weaker than Anadarko, which has enjoyed a 65% deepwater exploration and appraisal success rate over the past five years. Not to mention the industry average of 60% over the past five years, though that rate is expected to slip to just 40% in 2015.

On the other hand, ConocoPhillips has enjoyed tremendous success onshore having developed a world-class position in the top North American shale plays along with a leading position in the oil sands. Because of that, it has a huge captured resource base, which is noted on the slide below.

Source: ConocoPhillips.

From that slide it's pretty clear ConocoPhillips has captured substantially more resources onshore than it has in the deepwater.

So, with its dry holes starting to pile up, and better opportunities on dry land, ConocoPhillips has started a slow exit of its deepwater exploration program. The company detailed its approach on its third-quarter conference call with Matt Fox, ConocoPhillips' EVP of E&P, noting that at the moment the company is in a phase of "ramping down of exploration commitments and continuing appraisal on the existing discoveries." This means that the company will stop searching for new sources of oil but still test recent discoveries. Further, it might even develop some of its best prospects if that's the best way to capture the value it has already captured. However, it's clearly turning its focus back onshore, because that's where its greatest strengths lie both in terms of its captured resource base as well as its development prowess.

Investor takeawayIt's hard to argue with the move because ConocoPhillips clearly doesn't have Anadarko's magic touch in the deepwater. So, it makes sense to stick to its strengths and avoid the risk of a multibillion-dollar debacle like those that have befallen BP and Shell in recent years.

The article Is ConocoPhillips Making the Right Choice to Abandon Deepwater Exploration? originally appeared on

Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.