How ConocoPhillips Makes Its Money

In the developed world, and even in the underdeveloped world, petroleum, natural gas and their derivatives are an indispensable part of modern life. Oil and gas have just about every attribute you’d want in a desirable energy source. They’re dense (in terms of potency per volume), denser than most any energy source not produced in a breeder reactor. They’re extremely plentiful. And they’re relatively easy to bring to market; per unit of power, far easier than solar or wind. That’s why ConocoPhillips Co. (COP), the self-proclaimed world’s largest exploration and production company, has grown to become one of the largest corporations on this hydrocarbonated planet.

ConocoPhillips can trace its origins back to the 19th century, when Continental Oil and Transportation (later Conoco) was founded. Philips Petroleum was founded in 1917, the two merged in 2002, and about a decade later the new ConocoPhillips separated into two. It spun its midstream (transportation) and downstream (refining, retail) operations into a new company, Phillips 66 (PSX), while retaining the upstream (finding energy sources and developing them) business. That business is now a $91 billion operation with one of the most robust balance sheets on Wall Street. Among other superlatives, ConocoPhillips has $37 billion in treasury stock on hand, emblematic of a company with a public issue so valuable, it’s worth buying back some of it from the public.

Let’s see why ConocoPhillips stock has been such a historically good investment, both for investors and for the company itself. (For more, see: Invest in Share Buybacks With This ETF.)

Crude, Gas and Bitumen

As an exclusively upstream provider, ConocoPhillips has a relatively small but potent workforce (it’s barely one-quarter the size of Exxon Mobil’s [XOM], for instance). The company operates in 30 countries, several of them not typically regarded as hotbeds of energy activity; such as Poland, Greenland, and East Timor. As for the energy sources themselves, ConocoPhillips is mostly in the business of uncovering three primary ones — crude oil, natural gas (and byproducts, such as propane and butane) and bitumen (which for purposes of discussion among lay people instead of petroleum engineers, is solid oil, more or less).

ConocoPhillips divides its American operations between Alaska and the lower 48. Fully one quarter of the company’s liquid natural gas comes from the Land of the Midnight Sun. Alaskan development is concentrated on the North Slope, and to a lesser extent Cook Inlet (the latter is the body of water delineating the eastern edge of the Alaska Peninsula, 150 miles southwest of Anchorage. Or in Alaskan terms, just down the street). (For related reading, see: OPEC's Restraint Sends Oil Stocks Lower.)

Vast Shale, Offshore Holdings

South of the 49th parallel, Conoco Phillips has onshore and offshore land holdings that cover an area comparable to the size of the state of West Virginia. In descending order, those vast reaches of land are in the San Juan Basin of New Mexico and Colorado, the Bakken Formation of North Dakota, and the Eagle Ford of south Texas. That’s in addition to another 3,000 square miles of Gulf of Mexico seabed that ConocoPhillips drills in. (For related reading, see: How Chevron Found Itself Spanning the Globe.)

The company has been forced to turn its gaze domestically after encountering multiple roadblocks in its previously fertile South American operations. In 2007 and 2008 the governments of Venezuela and Ecuador just up and commandeered ConocoPhillips’s operations and infrastructure, ignoring rulings issued by the World Bank and impacting the portfolios of tens of thousands of stockholders. Fortunately, there are enough oil and gas deposits in the United States and surrounding waters (and enough highly skilled American employees willing to participate in those deposits’ extraction) that ConocoPhillips can still turn a sizable profit — $9.2 billion last year, down from a zenith of $12.4 billion in 2011.

Canadian Gas, Oil Sands

Now concentrating on exploration in nations with governments more amenable to capitalism, ConocoPhillips’s largest foreign operations are in Canada. The company owns half-interests in natural gas and oil sands properties in northeastern Alberta, with plans to produce further plants that, once online, will produce the equivalent of 125 million oil barrels daily. ConocoPhillips also explores miles upon miles of offshore fields in the Canadian part of the Beaufort Sea — subterranean oil doesn’t recognize the Alaska-Yukon border.

In Europe, ConocoPhillips is the one of the major companies responsible for the commoditization of the nether reaches of the North Sea. Liquid production there outpaces that of Canada currently, with the company’s European operations (both in the Norwegian and British sides of the North Sea, along with comparable finds in Poland and Greenland) totaling about 146 million barrels a day. (For related reading, see: Which Canadian Oil Stocks are the Best.)

Holdings Spanning the Globe

Continuing with a geographic list of ConocoPhillips’s operations would result in little more than a United Nations roll call. China, Malaysia, Qatar, Libya, Russia, Nigeria, Algeria and Australia all contribute millions of cubic feet of natural gas and barrels of liquid petroleum to Conoco’s operations daily. (For more, see: ConocoPhillips' International Projects.)

ConocoPhillips’s most profitable region of the globe is Asia, the Pacific and the Middle East — the company made $3.53 billion there last year on sales of $8.43 billion, making for a profit margin uncommon even in the energy industry. That’s followed by Alaskan operations, which accounted for $2.27 billion profit on revenues of $8.55 billion. The margins might not be as impressive as those for the former, but on a per-square-mile basis, none of ConocoPhillips’s realms can touch Alaska. (For related reading, see: Why Schlumberger is a Name You Should Know.)

The Bottom Line

The petroleum industry dominates worldwide for several reasons. Not only is it of critical importance to just about every other industry around the world, but the players have refined, if you will, the complicated and multi-step process of delivering energy from its natural sources to its ultimate consumers. By focusing on upstream production and farming out the subsequent links in the chain, ConocoPhillips has consistently maximized profits in one of the most capital-intensive industries known to man. (For related reading, see: ExxonMobil's Massive and Reliable Money Machine.)