Earlier today, Texas-based integrated oil major ConocoPhillips (COP) signed an agreement with state-run Abu Dhabi National Oil Company (ADNOC) to develop the Shah Gas Field project in the United Arab Emirates (UAE) at an estimated cost of $10 billion. ConocoPhillips was awarded the contract by ADNOC in February last year, but negotiations on the final deal have taken over a year to conclude.
The project includes development of natural gas condensate reservoirs within the onshore Shah field, construction of a new one billion cubic feet/day natural gas processing plant, as well as new natural gas and liquid pipelines and sulfur-exporting facilities at Ruwais Industrial City, UAE.
The Shah development, located approximately 180 km south-west of Abu Dhabi, would have the capacity of pumping 540 million cubic feet per day of gas. The project is expected to be completed by early 2015.
Under terms of the deal, both entities will equally share costs of the project and set up a new company to manage Shah facilities once it becomes operational. ADNOC will own 60% interest in the joint venture, while ConocoPhillips would own the rest.
We believe that this deal with ADNOC to develop the Shah field is another example of ConocoPhillips’ growing exposure to lucrative international regions. However, the outlook on U.S. natural gas and refining markets remains relatively cautious. And since the company has heavy exposure to domestic natural gas (about a third of total volumes) and refining segments, we are concerned.
As such, we maintain our Hold recommendation on ConocoPhillips’ shares given the company’s competitive disadvantages relative to its super-major peers such as Chevron (CVX) and Exxon (XOM).
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