ConocoPhillips Loses $7 Billion on LUKOIL Stake in 2008

(MoneyWatch) 

• The Company: ConocoPhillips, an integrated energy company with interests around the world.
• The Filing: FORM 10-Q filed with the SEC on October 29, 2008.
• The Finding: The 2006 acquisition of a 20 percent stake in LUKOIL by ConocoPhillips, initially applauded by energy analysts because it increased production growth prospects by opening access to the Russian market, could prove to be an expensive investment, and will likely lead to an asset write-down if oil prices and demand continue to weaken in 2009.

The Upshot: LUKOIL and ConocoPhillips are collaborating on a major find, the Yuzhno-Khylchuyu field in Siberia (Naryanmarneftegas joint venture), which holds estimated reserves of more than 500 million barrels, and could possibly work together in Iraq's West Qurna oil fields, too.

For the third quarter of 2008, ConocoPhillips estimated its equity share of LUKOIL production was 422,000 barrels of oil equivalent per day.

At $80 a barrel, LUKOIL had positive cash flow of $2.0 billion, according to the company's vice-president Leonid Fedun. However, with oil now selling for half that amount, it is likely that Russia's No. 2 oil producer is no longer profitable. Ergo, the closing price of LUKOIL shares (ADRs) on the OTC market was $33.10 per share on December 31, down $50.75 per share, or 50.5 percent, for 2008. The aggregate market value of ConocoPhillips' ownership stake in LUKOIL declined to $5.63 billion at year-end, or $$7.24 billion below the stated $12.86 billion book value. If the loss in the carrying value of the investment proves to be "other than temporary," the company would record a non-cash impairment of the holding.

ConocoPhillips has significant international exposure, from Columbia to Kazakhastan. In 2007, the company recorded an impairment of $4.6 billion related to investments in Venezuela following the state-owned oil company's unilateral seizure of 60 percent stakes in its heavy-oil and offshore ventures.

The Question: ConocoPhillips' business model leverages existing opportunities with national oil companies (NOC). However, could this dependence leave ConocoPhillips financially vulnerable if other NOC follow Venezuela's action?