While the world focuses on ConocoPhillips' (COP) bold strides in the global LNG market and its ambitious Alaskan projects, a subtle shift in the company's Lower 48 strategy might be signaling a contrarian bet against natural gas. Could this be the secret ingredient that gives COP an edge in a volatile energy landscape?

The first quarter earnings call highlighted COP's commitment to "capital efficient growth" in the Lower 48, with a focus on drilling and completion efficiencies. However, amidst the usual discussions of longer laterals and operational frac gaps, there's a whisper of a change in the wind.

Bill Bullock, COP's CFO, acknowledged the "transitory issues" with natural gas pricing in the Permian Basin. He specifically mentioned negative gas prices appearing towards the end of the first quarter, highlighting the significant pressure on Waha pricing, the Permian's primary natural gas benchmark.

But here's where things get interesting. While other Permian players are scrambling to adjust their drilling plans in response to low gas prices, COP remains steadfast in its commitment to "flow assurance," a fancy way of saying that they prioritize the ability to produce and move their gas, even if it means accepting lower prices for now.

This commitment to flow assurance is directly linked to COP's strategic shift in the Permian from gas-weighted Delaware Basin development in the first half of 2024 to a more oil-focused Midland Basin program in the second half. This pivot allows COP to capitalize on the strength in oil prices while riding out the storm in natural gas.

Here's where the hypothesis kicks in. Could COP be quietly positioning itself to benefit from a rebound in natural gas prices later in the year, even as it prioritizes oil production in the short term? The company's sophisticated gas marketing organization, capable of moving volumes several times larger than its equity production, gives it the flexibility to capitalize on any pricing improvements that emerge.

Let's look at some numbers. In the first quarter, COP's natural gas realizations were about 70% of Henry Hub pricing, which is already considered a strong performance. However, Bullock anticipates "particularly low" realizations in the second quarter due to the ongoing pipeline constraints and maintenance activities.

But as new takeaway capacity comes online in the third quarter, particularly with the Matterhorn pipeline, the expectation is for a return to more "normal" differentials. COP expects to see gas realizations climb back to around 80% of Henry Hub, indicating a potential 10 percentage point improvement in pricing.

This is where the "secret weapon" comes into play. By maintaining flow assurance and patiently waiting for the natural gas market to rebalance, COP is laying the groundwork for a significant boost in cash flow from its Lower 48 operations in the latter half of the year.

This strategy is in stark contrast to some of its peers who are choosing to curtail gas production in response to weak prices. While this may offer immediate relief, it also means missing out on the potential upside of a market recovery.

This isn't the first time COP has demonstrated its willingness to zig when others zag. The company's opportunistic acquisition of the remaining 50% interest in Surmont during a period of industry uncertainty proved to be a masterstroke, demonstrating a keen understanding of value and a long-term perspective.

Projected Natural Gas Realizations vs. Henry Hub

The following chart illustrates ConocoPhillips' projected natural gas realizations as a percentage of Henry Hub pricing, based on information provided in the Q1 2024 Earnings Call.

COP's quiet confidence in natural gas may seem counterintuitive in the current market environment. However, this contrarian bet, combined with the company's diversified portfolio and disciplined approach to capital allocation, might just be the winning formula that propels COP to even greater heights in the years to come.

"Fun Fact: Did you know ConocoPhillips was the first oil company to adopt the triple bottom line framework, considering not only economic performance but also environmental and social responsibility? This focus on sustainability is evident in their ambitious GHG emissions intensity targets and recent recognition for their methane reduction efforts."