ConocoPhillips (COP) signed an agreement with the Bangladesh state-run Petrobangla for the exploration of hydrocarbon in the Bay of Bengal. The deal is subject to the signing of a production sharing contract (PSC), which has been detained by disputes with Myanmar and India.
Conoco is set to explore around two blocks (block 10 and 11), which are situated in the undisputed region. The company is expected to initiate seismic surveys and exploration around those deepwater gas blocks after signing the PSC.
Following two years of discussion, both parties have finally reached an agreement to cope with the shortage of gas supply with the current production of 2,000 million cubic feet per day (MMcf/d) against demand of about 2,500 MMcf/d. ConocoPhillips will spend about $111 million for the two blocks, which are expected to take around five years to generate results.
Bangladesh is in discussion with both countries to settle maritimes and has filed a case with the International Court of Justice in The Hague. Both India and Myanmar had raised objections to some parts of the two gas blocks overlapping with Bangladesh.
The Bangladesh government highlighted that the current gas reserves are expected to be exhausted by 2014–2015 at the present consumption rate. The country’s proven gas reserves are 7.3 trillion cubic feet (tcf) and probable reserves are 5.5 tcf.
Many companies took part in the bidding process for the blocks, namely Britain’s Tullow Oil Plc, Australia’s Santos International, Longwoods Resources Limited, Korean National Oil Corporation, China’s CNOOC Ltd. (CEO) and Comtrack Services Limited of Cyprus.
We remain encouraged with ConocoPhillips’ recent discoveries and new exploration efforts. Moreover, while we appreciate the company’s plan to offload its stake in LUKOIL this year and next, it remains to be seen how the company moves toward improving its bottom line.
Although management’s decision on Lukoil appears to be the right choice on a cash flow basis, reported earnings per share and return on capital employed will experience substantial dilution, which in turn could potentially reduce the stock’s attractiveness for some investors.
Consequently, we have a Zacks #3 Rank (short-term Hold rating) and maintain our long-term Neutral recommendation for Conoco shares.
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