Overall, 2011 was a strong year for the oil industry, with almost all companies showing revenue and profit growth as a result of high crude prices.

Brent prices remained above the $100 per barrel mark for most of the year, driven by an improved economic outlook in the first half of the year and supply concerns in the second half. The year also saw the announcement that ConocoPhillips (COP) would divest its downstream business and focus on upstream exploration and production and unconventional resources such as shale. Other majors like BP (BP) and Chevron (CVX) also divested some of their refining assets in 2011.

We have an $80 price estimate for ConocoPhillips, which is about 10% ahead of its current market price. The stock posted a 7% increase in 2011, which outperformed the S&P but lagged peers such as Chevron.

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High prices drive growth

Oil prices saw a resurgence in 2011 driven by higher demand and supply shocks, including the turmoil in Libya. Major oil producers saw output reduced because of the natural decline in production fields, asset sales and political issues. Despite the declines in output, most of these companies reported healthy revenue growth because of higher energy prices. Higher liquefied natural gas (LNG) prices in the Asian market have also led companies to announce multi-billion dollar LNG facilities in Australia.

Like other oil majors, Conoco expanded its operations in shale gas in 2011. High oil prices are pushing companies to explore more technically challenging resources such as deepwater and reserves in the Arctic. Conoco was one of the successful bidders in the recently concluded lease sale rounds in the Gulf of Mexico and Alaska.

Litigation issues

Another major trend in 2011 was the increased regulatory actions related to offshore spills in the aftermath of the Gulf of Mexico spill in 2010.

Conoco was at the receiving end of severe criticism from the Chinese government because of its response to the Bohai Bay spill in China earlier this year. This incident has also resulted in a court action against the company.

While oil companies are no strangers to litigation, their forays into more challenging territories and expanding operations in foreign countries with volatile political conditions are likely to lead to greater geopolitical and regulatory risks.