Morning. Thank you everybody for that little delay. I think we're ready to get started. My name is Ellen DeSanctis. I'm the Vice President of Investor Relations and Communications for ConocoPhillips. On behalf of our entire leadership team, it is my sincere pleasure to welcome you to the 2017 ConocoPhillips Analyst and Investor Day. Today, you're going to hear from four of our executives. At this time, I'd like to introduce them and tell you a little bit about today's agenda. Ryan Lance, our Chairman and CEO, will address our value proposition. Many of you will recall that about a year ago at this event, we rolled out a disciplined returns-focused offering to the market. We've made tremendous progress on executing on that value proposition in 2017. We're sticking with it.
Matt Fox, our EVP of Strategy, Exploration and Technology, will describe our differentiated strategy in more detail. He'll show you how we expect to deliver strong performance over the next several years in any price environment. Al Hirshberg, our EVP of Production, Drilling and Projects, will discuss how our portfolio is uniquely aligned and integrated with our strategy. He will also cover our three-year investment plan. Don Wallette, our EVP of Finance and Commercial, and our Chief Financial Officer, will describe our financial priorities and demonstrate how the execution of our strategy drives a very sound financial plan. Ryan will come back for some quick closing comments. Then we'll turn the meeting over to question and answers. Today's event is being webcast. The materials are now available on our website. We will also post a transcript and a replay of this event shortly.
If you've looked ahead in the materials, you'll notice that we have a slightly shorter presentation deck this year than in previous years. That's because we want to take the time today to really emphasize the highlights of the plan that we're laying out for the next three years. However, you'll notice that we've also included several detailed slides in the appendix. These include our 2018 capital and production guidance. They include some slides on our environmental, social, and governance performance. Then several slides that present supplemental information on some of our key assets. We will make some forward-looking statements this morning. The risks and uncertainties in that future performance are described on the cautionary statement shown here and also in our periodic filings with the SEC.
We will use some non-GAAP terms today as well. We've provided reconciliations of any non-GAAP to GAAP terms in today's materials and also on our website. Again, welcome. It's my pleasure again to see all of you. Thank you for those joining us by webcast. Now it's my pleasure to turn the meeting over to Ryan Lance.
Well, good morning, and thank you, Ellen. We appreciate everybody in the room here today and those joining us on the webcast. We're certainly pleased to be here today and look forward to updating you on the progress that we've made over the last year since our last analyst investor meeting. More importantly, we look forward to sharing with you the progress on our future plan for value creation. Our plan is truly distinctive for an E&P company, and that's what we're here to demonstrate to you today. Let's get started. This slide should look familiar to you. It describes the disciplined returns-focused strategy that we rolled out one year ago. When we rolled this out, we were met with some skepticism. Certainly, production growth was all the rage.
It was time for an E&P company like ours to step up with a plan for creating value, and our conviction on this plan and what we're doing here today is even stronger. The principles of our value proposition are shown here on the left side of the slide. It's to maintain financial strength, grow distributions to shareholders, and pursue cash flow expansion on a disciplined per share basis. These three principles are strongly linked to value creation in the E&P sector. In the middle column, we list our five priorities for capital allocation. We laid these out last year, and they're listed in order. Our first priority is to invest enough capital to maintain our production and pay the dividend. Second priority is to grow the dividend, its per share rate on an annual basis.
Third, to reduce our debt to achieve an A credit rating. Fourth, to supplement that ordinary dividend with share buyback such that we return 20%-30% of our cash back to our shareholders annually. Finally, we'll allocate cash to our high return investments that drive per cash flow share expansion. We think these principles and these priorities are smart for this business, but not every company can do this. On the far right, we show you why. We've listed four characteristics that we think are necessary to execute and to win at a value proposition like ours. Many companies have some, but not all. We have all of them. If I move clockwise, you need a low sustaining price. That's the key to driving free cash flow generation. You need a low cost of supply portfolio to drive returns.
You need capital flexibility so you can adapt to higher and lower prices, and you need a strong balance sheet also to manage through the cycles. These characteristics need to be linked to returns, which is what you see at the heart of that diagram. Our principles, the priorities, and the characteristics are at the heart of our goal to deliver superior returns to shareholders through cycles. We want to be the energy company that can attract investors back to a sector that has underperformed for far too long. We laid this strategy out a year ago. We had some work to do to accelerate it, and that's what we did in 2017. If you start on the left side of this slide, we've strengthened the portfolio significantly. That gives us a significant competitive advantage.
We've lowered the sustaining capital to $3.5 billion and importantly, our sustaining price to less than $40 a barrel. We believe these both are industry leading. We've high-graded the less than $50 per barrel resource base that we have in the company, and that inventory today has a cost of supply of less than $35 per barrel. Next, we've laid the groundwork for improving our financial returns and delivering a significant return of capital back to our owners. We expect to divest about $16 billion of asset sales in 2017. We've used those proceeds to reduce our debt by $7 billion this year alone, return the equivalent of 65% of our cash from operations back to our shareholders in the forms of dividends and share buybacks. Next, we believe we have a strategy has been further differentiated, especially relative to the traditional E&P growth model.
Our lower sustaining capital and our industry-leading sustaining price enable us to deliver top-tier cash flow. The proof? For over a year now, we've covered our dividends and our capital from our cash flow. That demonstrates our resolve in this area. As I mentioned, our payout to shareholders is top tier. We were early to differentiate on discipline with a focus on returns and per-share cash flow expansion, not production growth. Other companies today, I think, are trying to catch up. Now on the far right, we've delivered on our operational targets as well. We're continuing to elevate our environmental, social, and governance performance. In 2017, we're on track for record personal and process safety performance. You can never, ever take your eye off that ball. For the 11th consecutive year, we've been named to the Dow Jones Sustainability Index.
We take pride in being a leader in ESG performance. We strive to continuously improve. That's why this morning you saw an announcement that we're taking a proactive step. We announced a greenhouse gas intensity emissions target. We intend to reduce our emissions intensity by 5%-15% by 2030. This is an industry-leading step. It shows our commitment really to the environment. This is a key strategic objective for the company. You certainly manage what you measure. We've transformed the business in 2017. We think the market has taken notice. This slide shows our total shareholder return since last year's Analyst & Investor Meeting when we rolled out this new value proposition and strategy. We're showing a one-year total shareholder return versus the four main energy benchmarks, which are shown on the right side of the ConocoPhillips bar.
Each of these represents a different industry set. We have outperformed them all. Now on the left, you see the S&P 500 index. We and energy have underperformed this benchmark. We think it's important to keep this index in sight. We want to be the energy investment that competes against broad market performance. I think we're pleased with our performance. We certainly do not take it for granted. We're not resting there. We're not done delivering strong performance. The reason is we've positioned the company to work in high and in low prices. On the left, we believe we're advantaged offering investors resilience through low prices. We have low capital intensity, meaning it takes less capital to maintain our production. We believe our $40 per barrel sustaining price is an industry leading today.
We maintain a relentless focus on cost because we know that the low-cost producer wins in this business. We have a 15-billion-barrel resource base with a low cost of supply that can fuel returns with a high degree of capital flexibility. We have a strong balance sheet, helps us manage through the cycles. We think the market understands how we perform in a low-price environment, but what about high prices? We can outperform in that environment as well. Our portfolio is oil weighted. Our exposure to Brent and LLS pricing is an advantage relative to other E&Ps. We're predominantly in a tax and royalty structures, we don't have to materially cap our upside. We have a cost focus that works on both sides of this ledger. Recall that we had contingent value payments in both our Canadian and our San Juan Basin transactions.
These are multiyear structures that will be a source of cash when market prices achieve certain thresholds. Recall, we took equity in Cenovus in our Canadian sales. Those shares will likely be more valuable as commodity prices rise. We're unhedged, unlike many of our pure-play peer competitors, which gives us immediate exposure to price upside. We can increase capital or share distributions to create more value in those up cycles, but we'll keep our discipline when we think about that. I think this slide summarizes why we believe we're so well-positioned whatever the market may bring. Let's shift gears. That's a little bit about the past. Let's talk about where we're headed. I'm going to give you the punchline for what you're going to hear from the rest of the speakers today. This is our racetrack.
We know we have a formula for how we're going to deliver significant value over the next three years, we're going to do that at a flat $50 price. What you're going to see today is a flat real $50 price for the next three years in our plan. This plan is fueled in the middle by a 15-billion-barrel low cost of supply resource base. You're going to hear a lot about these numbers today, I'll take you quickly around the racetrack. The goal is to grow returns, that's the red box at the top of this chart. Our plan targets annual cash return on capital employed growth of two to three percentage points per year. At that rate, our cash return exceeds 20% by 2020.
We can sustain our production for $3.5 billion per year, that drives an industry-leading sustaining price of $40 per barrel. By the end of 2019, we expect to have gross debt of $15 billion, which results in a very strong leverage ratio. As you saw this morning, we're extending our 2018, 2019 buyback run rate of $1.5 billion per year into 2020. In that plan, we exceed our 20%-30% target in every year. The shareholder wins. We still have cash available. Our debt-adjusted share count drops by over 10%. If you're looking at per-share performance, that is very strong as well. We'll average $5.5 billion of capital over the next three years, a level that maintains discipline, but it delivers 5% production growth and more than 5% cash margin growth.
That brings us all the way back to returns, the ultimate measure of value creation. What do we deliver? We deliver cash returns of 20% by 2020. 20 by 20. I want you to know, it's a returns target. It is not a growth target. We're excited about the plan. We know that we're racing against stiff competition in this business, but I believe, once again, we're going to set the pace for the sector. I'm going to stop there. I'm going to turn the meeting over to the rest of the folks. They'll describe the plan in a fair amount of detail. Let's get started, and we'll go with Matt Fox.
Thanks, Ryan. Good morning, everyone. Ryan just took you around our value creation racetrack and showed you the targets that we have for our three-year plan. My objective today is to lay out the strategy, to let you understand how that strategy drives our ability to achieve these targets. In our view, strategy for an E&P company boils down to three things: what portfolio you choose to have, how you choose to allocate capital, and how you manage uncertainty. We've been very clear on our choices across all three of these dimensions. First, we've radically reshaped the portfolio over the last few years, and none more so than this year with more than $16 billion of expected asset sales. We have several smaller dispositions to complete over the next few months, but we see our major portfolio restructuring as essentially complete.
We now have high-margin assets that all offer low cost of supply investment opportunities, our portfolio is fully aligned with our strategy. Second, we've been crystal clear. I don't think we could have been more clear on our priorities for capital allocation. On the next slide, I'll show you how this three-year plan delivers all of those priorities. Third, we're choosing to manage uncertainty by focusing on the fundamental characteristics that drive competitive advantage in a commodity business, a low sustaining price, a low cost of supply, capital flexibility, and a strong balance sheet. This framework is the basis of how we think about strategy. Every strategy must begin with a clear goal. Otherwise, you're recreating Alice's conversation with the Cheshire Cat. If you don't know where you're going, any strategy will do. Our goal is very clear.
We intend to deliver superior returns to shareholders through cycles by growing the dividend, reducing debt, reducing share count, and growing cash flow from operations. Let me repeat that because you can think of this as our strategy in a single sentence. We'll deliver superior return to shareholders through cycles by growing the dividend, reducing debt, reducing share count, and growing cash from operations. How does our plan deliver this strategy? Let me start with cash sources and uses at our sustaining price of below $40 a barrel. At $40 a barrel, we expect to deliver about $5 billion a year of cash from operations. As Al will describe in a few minutes, we can sustain our current production for $3.5 billion a year. At $40 a barrel, we can cover our sustaining capital, pay a growing dividend and still have cash left over.
No future growth is required, no miracle needs to occur. Our sustaining price is below $40 a barrel right here, right now. Priority three, reducing our debt to $15 billion. Priority four, returning a total of 20%-30% of cash from operations to shareholders, are fully funded by the remaining cash flow at $40 a barrel, and cash on hand. This includes extending our $1.5 billion a year buyback pace into 2020. Through the combination of the growing dividend and share repurchases, we plan to distribute more than 30% of cash from operations in all three of these years. In fact, the average over this period is more than 35%. This doesn't fully utilize our cash proceeds, as you can see on the chart here. There'll be further cash coming in over these three years as we liquidate stock associated with the Canada transaction.
Finally, let's look at priority five, disciplined investment. Given our success in fully achieving priorities one through four, we think it's time to activate this priority while maintaining cash flow neutrality. Included in the $5.5 billion capital, we intend to invest an average of $2 billion a year in our low cost of supply portfolio to deliver cash flow expansion of more than 10% a year through a combination of production and cash margin growth. I'll go into this in more detail on the next slide. Based on this plan, at $50 a barrel, we expect to meet all five priorities and still have cumulative cash available of around $4.5 billion. How will we allocate this excess cash? Our intention is to allocate it across priorities four and five, and the exact split will be guided by circumstances at the time.
Let me be clear, maximizing total shareholder returns through the cycles is the primary decision criterion for allocating free cash flow. Let me dig a little bit deeper into how we'll allocate the $2 billion of cash flow expansion capital. It'll be allocated across three types of investments. On average, we'll invest about $1.2 billion a year into our unconventional assets to grow high margin, short cycle production over these three years. We'll also invest an average of $500 million a year into future major projects that will deliver production beyond 2020. We believe it's important to sustain our strategy into the next decade with these low cost of supply, lower decline rate projects that take advantage of our existing legacy infrastructure. Finally, we'll spend about $300 million a year on a mixture of conventional and unconventional exploration opportunities to deliver long-term resource additions and long-term production.
We expect this incremental capital to deliver high return cash flow expansion of more than 10% a year, and result in a three-year average reserves replacement of more than 100%. Al will go into more detail in all three of these investment categories in his section, but I want to take a few minutes here to make it clear why we believe this is a very good use of shareholder capital, and here's why. It improves financial returns, grows cash flow per debt-adjusted share, further reduces our sustaining price, and because CFO grows, our leverage drops and our shareholder distributions can increase. It provides a balance of near term and longer-term sustainable growth and adds to our low cost of supply resource base. Critically, it's more than fully funded from cash flow from operations and generates additional free cash flow.
To be clear, investing this capital isn't about growing production for its own sake. It's about generating high value earnings and cash flow to boost our financial returns. When we invest this average capital of $5.5 billion a year, how do we measure up against our targets? At $50 a barrel, we intend to achieve every one of them. Returns are at the top of the list because, as Ryan said, this is the ultimate measure of value creation in our business. In this plan, our objective is to increase our absolute ROCE by one to two percentage points each year, and increase cash returns on capital by two to three percentage points per year. When you have $50 billion of capital employed and you're investing just over $5 billion a year, this pace of returns improvement is substantial.
Our target is to grow production per debt-adjusted share annually by more than 10%, and deliver cash margin growth of more than 5%. By the way, that margin growth is beyond the significant improvement in margin we've already seen this year associated with the dispositions. When you put these two metrics together, you have very strong cash flow growth per debt-adjusted share. We'll also return an average of more than 35% of CFO to shareholders, exceeding our target range, and we'd achieve our debt leverage target of less than two. This will all be underpinned by a sustaining price of less than $40 a barrel and a significant portfolio of opportunities with an average cost of supply of $35 a barrel. Why have we picked a strategy focused on delivering these objectives? It's because they do two very important things.
First, we know that in our business, these metrics correlate most strongly to total shareholder returns over time. Therefore, we believe that long-term returns for our shareholders will grow strongly based on these metrics. Second, meeting these objectives ensures that we can profitably sustain the business, not just for the next three years, but for many years beyond that. We think these are an appropriate measure of short-term, medium-term, and longer-term objectives that will allow us to deliver superior returns through cycles, and that's our goal. We're committed to achieving these objectives at $50 a barrel. What if prices are not $50 a barrel? To give some context before I address that, I want to step back and give you some insight into how we think about price. In fact, we know with confidence what prices will do.
They'll go up and they'll go down, but not necessarily in that order. That's why we believe that predicting price is useless, but scenario planning is priceless. Before we get into what we do when price is above or below $50 a barrel, let me just remind you of our principal scenarios. At a high level, we have two supply side scenarios. We have a high supply case that we call unrelenting unconventionals. This scenario results from an increase in resource base and reduction in cost of supply of new production coming to market, and leads to the low supply curve you can see on the right. Our resource restriction scenario, on the other hand, is driven by potential limitations on global resource access, which results in the higher supply curve on the right. At a high level, we have two demand scenarios.
A high demand case, which we call great growth, is driven by stronger than expected global economic growth resulting in increased demand. Our low demand case is caused by weaker economic growth, carbon constraints, and technology advances in electric vehicles or renewable energy. For obvious reasons, we call this demand destruction. For each of these scenarios, we develop supply and demand curves, and where the curves intersect represent price scenarios. I guess scenarios are not really priceless, because in fact, the combination of each of these supply result in a different future price path, which I'll describe next. The combination of unrelenting unconventionals and demand destruction results in average prices over the next 10 years being constrained in a $40-$55 a barrel range, with the average likely declining over time.
On the other hand, the combination of resource restriction and great growth results in prices that are in the $60-$80 a barrel or even above that. The other two combinations result somewhere between this range. In all cases, there's significant volatility, cyclical behavior, and we can move from one scenario to another over time. What do we do with this range of possible outcomes? Well, the first thing we do is we acknowledge that we don't know what the price is going to be. That's why our strategy's focused on having a low sustaining price, low cost of supply, capital flexibility, and strong balance sheet. We must be able to deliver superior returns regardless of the future price path. The second thing we do is we recognize that portfolio diversification has a role in guarding against an unpredictable future.
For example, if resource restriction slows the pace of investment in the Lower 48 unconventionals, we'll be very happy that we have a large resource base we can invest in our conventional portfolio around the globe. That's also why when we're making portfolio decisions, we test them against these scenarios to inform our strategic choices and to minimize regrets. We believe this process has served us very well over the last few years as we've made some very significant strategic decisions. Of course, the final thing we do is we test our strategy against these scenarios, and in particular, assess our strategic flexibility to manage the inevitable cycles ahead. When we test at different prices, we start by aligning our potential actions with our priorities for capital allocation that you can see on the left here.
Our plan shouldn't need any significant adjustment with prices in the $45-$55 a barrel range. If prices are above $55 a barrel for an extended period, it'll be critical that we manage inflation to retain our low sustaining price. We'll also consider holding cash on the balance sheet such that our net debt could be below $15 billion as it is now. As our track record shows very clearly, increased shareholder distributions will certainly compete for capital allocation. We won't increase long-term capital commitments above our base plan. However, we might exercise flexibility to increase short cycle investments if we can do that efficiently, and if doing so results in strong returns at lower parts of the price cycle. Talking of prices cycling down, if prices are below $45 a barrel for an extended period, we'll capture deflation to reduce our sustaining price.
We'll still achieve our $15 billion debt target, and we'll use cash on hand to level load our buybacks. In this environment, total shareholder distributions could be significantly above our 20%-30% range. We'll be willing to exercise capital flexibility, even if that results in lower production growth rates. However, we wouldn't expect production to drop unless prices were significantly below $40 a barrel for a sustained period. The key point is we expect prices to vary over time, and our strategy is explicitly designed to accommodate that. Let me wrap up with a summary of our strategy to deliver superior returns to shareholders through cycles. Our strategy is based on a fundamental belief that to win in the commodity business, we must have the characteristics Ryan described at the beginning of the presentation.
We must have a low sustaining price, a diverse low cost of supply investment portfolio, capital flexibility, and a strong balance sheet. These attributes provide resilience to downside, allow us to expand cash flow while reducing debt and reducing share count, and ensure that we sustain significant leverage to upside prices. In our view, these attributes are not enough to deliver superior returns to shareholders. They must be combined with a focus on financial returns and a commitment to shareholder distributions. We are confident that this combination of strategic pillars is how we will deliver superior returns to shareholders through the cycles. It's also how we'll deliver the rest of this presentation. Al will cover the first three, and Don will cover the second three. Over to you, Al.
Very good work. Thanks, Matt. Matt tried to convince me that I should put some of his jokes into my section, those price jokes that he had, but after seeing the reaction, there wasn't a whole lot of laughter. I'm feeling pretty good that I didn't take him up on it. He tried to convince me that even if they didn't work for him, that because of my accent, they might work for me. I think I made a wise choice there. Okay. My objective for today is to give you an update on our unique high-quality portfolio. It's a key driver in our ability to be able to deliver the performance that Ryan and Matt just talked to you about because it's so well-aligned with our strategy. One of the strengths of our portfolio is its diversity.
We don't rely on any one geography or geology or product type. We can import and export technology and capabilities across our various assets around the world. In other words, we think our portfolio gives us a competitive advantage to deliver the strategy that we've just laid out. I'll start my section with a short overview of our five operating regions to give you some perspective on the role that each of them play in our strategy. In Alaska, we're undergoing a renaissance in this legacy asset. Over the past few years, we've been increasing capital there to pursue attractive infrastructure-led programs and expansions around our existing core position while significantly lowering our cost of supply. Earlier this year, we also announced a material discovery at Willow, which we believe has the potential to be a highly attractive future development opportunity.
Our Canada region has undergone a massive transformation this year, given our divestitures there. This region is now highly focused on and positioned to deliver strong performance from our remaining resource-rich asset base, including both the improving Surmont joint venture and our very competitive Montney position that we'll talk about a bit more in a minute. After a couple of years of constraining our activity in our Lower 48 region, we've put more money to work in this area starting this year. As you'll see, we're already generating positive net cash flow there. In Europe, we're all about leveraging our positions and our high-margin assets, both in the U.K. and in Norway. We've got several development drilling programs and medium cycle projects underway in that region. Finally, in the Asia Pacific Middle East segment, that really represents the best of two worlds.
We've got attractive LNG assets at Qatar and at APLNG in Darwin in Australia, we have a set of high-margin conventional assets in Malaysia, Indonesia, and China that come with profitable future investment opportunities. That's a quick flyover of our global operations from a regional perspective. Before I move forward, I just want to remind you that we have provided detailed proof point slides in the appendix of your deck for each of our key areas to show you the progress that we've made in these assets over the past year. I'll focus the discussion today on the overall quality of our portfolio and how these asset classes work together to generate exceptional results. I'll begin by providing an update on our low Cost of Supply resource base. This is a snapshot of our resource base shown by asset class and Cost of Supply.
You've seen this resource base data from us before. We want to update you on our progress since last year. Before I get into the details, though, just got to remind you of our key definitions here. Cost of Supply, it's the WTI equivalent price that generates a 10% after-tax return on a point forward and fully burdened basis. In our definition, Cost of Supply is fully burdened with midstream infrastructure, facilities costs, price-related inflation and forex changes, and both regional and corporate G&A costs. I think you could see that the way we use this metric is clearly not single well economics. Cost of Supply is the primary metric that we use in the company for capital allocation, and it has the advantage of being independent of price forecast. Any oil price above the Cost of Supply will generate an after-tax, fully burdened return that's greater than 10%.
On the far left, we showed you a resource base of 18 billion barrels with a Cost of Supply less than $50 last year. This year, after adjusting for 2017 production, for our asset dispositions that we've announced so far, and for additions that we've made over the past year, we now have 15 billion barrels of resource that has a Cost of Supply less than $50 on a WTI basis. By the way, if we showed you this same data on a Brent basis, the numbers would all be the same within rounding. We increased the portion of this resource that's $40 a barrel and less Cost of Supply by 30% over the past year. We also have over 23 billion barrels of captured resource that has a Cost of Supply that's higher than $50 a barrel, we're not including that here.
We're working hard to continue to bring that down and bring it into this less than $50 resource, but it's not there yet, so we don't include those 23 billion barrels. On the right side of the chart, I'm showing you our corporate cost of supply curve for everything that's below $50 a barrel. You can see, we've got attractive investments in all three of our asset types, unconventional shown in yellow, conventional shown in green, and the LNG and oil sand shown in orange. Each of these asset types plays a different role in our overall strategy, as I'll explain in a minute. Importantly, the average cost of supply of these resources has dropped to below $35 a barrel over the past year.
In a nutshell, our resource base keeps getting better and better as we work on every aspect of high grading, cost improvement, technology-driven efficiencies, and execution. All of these drive stronger returns. Over the next few pages, I want to ground you on the characteristics of each of our asset classes, starting with our unconventional portfolio. Our world-class unconventional portfolio is comprised of about 8 billion barrels with an average cost of supply below $35 a barrel. You can see in the green stacked bar, about 85% of this resource has a cost of supply that's below $40 a barrel. Our unconventional assets represent the flexible, short cycle investments in our portfolio. These assets generate attractive margins and strong returns with relatively quick paybacks.
The key to expanding cash flows in a more uncertain macro environment with lower oil prices is to have that low cost of supply. Shown on the map are the five core plays in our unconventional portfolio today. Each of these is at a different stage of maturity and asset life cycle. The Niobrara and the Montney are still relatively immature and in the appraisal phase, but they do show great promise. We're planning more active appraisal programs in both of those in 2018. Our Delaware position is emerging from the appraisal phase and moving into the development phase. Our Bakken position is the most mature of our North American unconventional plays, although it's continued to improve significantly in performance over the past year. Finally, our Eagle Ford position. It's in an optimal place on the maturity life cycle curve, and it's still in its prime.
It's the poster child for how we approach an unconventional play to maximize the value of the asset. Next, I want to provide you an overview of our conventional asset class. Last year, we said these were the great assets that seemed like nobody ever asked us about. Today, investors have shown more of a keen interest in these assets. They understand the unique role that they play by delivering medium cycle chunks of profitable production. This is a set of assets that's often been overlooked since the shale frenzy. You find these assets in our legacy positions, places like the U.K., Norway, Alaska, China, Indonesia, and Malaysia, as well as in the U.S. The 4 billion barrels of conventional assets shown in the green stacked bar have an average cost of supply that's less than $30 a barrel, an improvement of about 20% compared to last year.
About 95% of this resource base has a less than $40 cost of supply. We like these assets, and they have a significant role in supporting our strategy, and so do our LNG and oil sands assets. These are the low to no decline assets, and the role they have in our strategy is to lower our capital intensity of our overall asset base. Within this asset class, we find 3 billion barrels of resource with a less than $35 average cost of supply. Since last year, we've achieved a 15% reduction in the average cost of supply, and we continue to improve the competitiveness of these assets. On the right side of this chart, you can see the key assets in this part of our portfolio. Our Surmont joint venture in Canada, QG3 in Qatar, and APLNG and Darwin LNG in Australia.
That was a quick overview of our 3 asset classes. On the next few slides, I want to spend some time taking you through the 2 key headlines that Ryan and Matt gave you, which is our annual sustaining capital of less than $3.5 billion and our sustaining price that's less than $40. My goal with the next few slides is to provide the proof points for how we can hold our production flat for just $3.5 billion a year. We've been reducing this number every year as we've transformed the company through focusing the portfolio and driving down costs, both OpEx and CapEx. Low sustaining capital is important because it's the most leveraging factor for us in being able to generate free cash flow.
The less we need to spend to stay flat, the more cash that we have available to deploy into other priorities and the greater the resilience that we have to low prices. This is a true competitive advantage. I showed you this construct last year, and I think it's still useful for describing conceptually how our diversified assets in the portfolio work together. Moving from top to bottom, our unconventional production wedge today produces about 250,000 barrels a day. We can maintain flat production in the unconventionals for about $1.3 billion a year, including new infrastructure costs. Moving down in green is the conventional wedge. We produce about 600,000 barrels a day from our conventional assets, and that's with improved margins since our sale of much of our North American gas this year.
We can keep our conventional production flat over this period for about $1.9 billion of annual investment in high return projects and development drilling around our legacy fields. Finally, our LNG and oil sands wedge. It produces about 300,000 barrels per day. This production has also been high-graded this year with the sale of FCCL, leading to improved margins for these assets as well. These assets require relatively little sustaining CapEx, about $300 million annually to stay flat. Now, our ability to stay flat in the LNG and oil sands with little sustaining capital is pretty self-evident. On the next few pages, I'll focus on describing in more detail how we can keep both the unconventional and the conventional wedges flat over the next several years, and I'll start with the unconventionals.
The unconventional wedge on the left side of this chart shows our current base in darker yellow, which is declining at about 25% per year. Above that, in the light yellow, is the decline replacement wedge that grows to 180,000 barrels per day in 2020. In total, we need to spend an average of about $1.3 billion annually to keep our unconventional portion flat for the next three years. About $100 million of that will go to maintenance activities on our current production base, and an average of $1.2 billion will be invested to offset declines. That investment will add production of 180,000 barrels a day in 2020, offsetting decline and sustaining our unconventional production level. By the way, this average $1.2 billion a year includes about $300 million annually for new infrastructure. We have accounted for planned direct and indirect facilities and gathering investments over this period.
On the right, we show how many rigs we need to offset decline in our big three areas. Some people refer to this plot as our decoder ring. The curves show our estimate of the three-year production compound annual growth rate that would result for our big three as a function of average rig activity. The red line, labeled 2016, is the trend line that we showed you at last year's analyst meeting. The black line is our revised trend line for this year. I like these curves because they're independent of cost, inflation, deflation discussions. They really represent pure performance improvement for us over the past year. Due to that performance improvement, we can now deliver flat production for just under 5 rigs versus the 6 rigs that were required a year ago. Let's move on to our conventional asset class.
As I said a moment ago, these are the assets in our legacy positions across the world. Within the conventional wedge, we expect to spend about $400 million a year on average for maintenance activities on our existing production, shown in the dark green part of the plot. This work scope includes asset integrity, efficiency improvement, regulatory compliance, and emissions reduction efforts. In addition, we expect to spend $1.5 billion per year on programs that will replace decline of about 175,000 barrels per day in 2020 in order to sustain our conventional production. That's what's described on the right-hand side of the page. Within this asset class, there are two kinds of programs. First are our conventional drilling programs around existing fields and infrastructure. These are core quick payback programs.
The second type of investment in our stay-flat capital plan are medium cycle, lower risk projects that we've been doing successfully for years. In our sustaining capital case, we're only including medium cycle projects that will start up in the next three years. Projects further out in time, I'm going to show you separately in a few minutes. The bar chart on the right adds up the production buildup from both our development drilling programs and these medium cycle projects. These projects are expected to be completed and on production within the next three years. Projects like these add wedges of high-margin production that extend the life of our existing production areas. That wraps up the detail underpinning the $3.5 billion of sustaining capital. We've worked hard across every aspect of our business to lower that number over the past few years. Why have we done this?
We've done this to lower our sustaining price. As Ryan mentioned in his opening comments, today we've announced that we've achieved a sustaining price that's now below $40 a barrel. We know many other companies aspire to get to this level sometime out in the future, but ConocoPhillips has done it now. There's no waiting necessary. Through our portfolio upgrades, our capital efficiency improvements, and our cost structure reductions, we're now positioned with what we believe is one of the lowest sustaining prices in industry. The upper right side of this chart shows that our estimated cash flow from operations at $40 a barrel is expected to exceed the capital that we need to maintain production and pay our growing dividend. The lower right bar shows WoodMac's projection that ConocoPhillips will have the lowest sustaining capital cost per barrel of production amongst the U.S. independent E&P companies in 2018.
Low sustaining CapEx drives our low sustaining price, which is the key to cash flow generation across a range of prices. Of course, it's our job to allocate that free cash flow in a manner that generates returns for shareholders. That's what our priorities dictate, and that's what we intend to do. Let's talk about that next. As Matt described earlier, our planned three-year average CapEx of $5.5 billion includes $2 billion per year aimed at not only expanding our cash flows but fueling our future. This slide shows planned capital investment that we expect will deliver about 5% compound annual growth in our production, greater than 5% compound annual growth rate in our cash margins, and a greater than 10% compound annual growth rate in our cash flow. That's over the next three years at $50 a barrel.
Of the $2 billion, $1.2 billion will be directed to near-term, short-term projects, short cycle projects entirely in the Eagle Ford and in the Delaware Basin. I'll show you more detail on that $1.2 billion program in a moment. About $800 million of the $2 billion per year is capital that will fuel our future by driving medium and long-term cash flows and contributing to reserve replacement and resource additions over time. Of this $800 million, $500 million will be spent on what we call future major projects, shown in the middle bar. The green half of this bar represents investments that are analogous to our medium cycle projects that I described in the conventional wedge earlier, but these are not yet sanctioned, and therefore, they still have flexibility on timing. We also expect to spend on a project to develop gas to backfill the Darwin LNG plant.
That's shown in the orange part of the middle bar. I'll provide some color on this category of investment shortly. Finally, $300 million of the $800 million will be directed toward exploration. About half of that, the green part of the bar on the right, is for conventional exploration in and around our existing infrastructure. The other half, shown in yellow, is for unconventional exploration in places where we can acquire material positions for a low cost of entry with a flexible program pace. On the next slides, I'll demonstrate the value that we expect to create from these investments, beginning with the $1.2 billion Eagle Ford and Delaware investments. We can see here a very compelling case for our planned incremental $1.2 billion annual investment in unconventionals.
Over the next three years, we expect to grow our big three unconventional production by 22% on a compound annual growth rate basis. From my earlier slide, you know that we can keep production in the big three flat for five rigs. For an additional six rigs or 11 rigs in total across the three plays, we can deliver 80% more high margin, high return production in 2020. That's what's shown on the stacked bars on the left. Production grows from about 220,000 barrels per day in 2017 to over 400,000 barrels per day in 2020. A 22% CAGR with 11 rigs. For comparison, if we use last year's decoder ring curve, 11 rigs would have only given us a 15% CAGR. This 11-rig program is about the same level of activity that we've been running in the second half of 2017.
We're not increasing activity level to accomplish this result. Now, your next question should be, "So what do I get for this investment?" That's what's shown here on the right. The green bars represent more than $2 billion of cumulative net cash flow delivered from these assets through 2020. Our big three plays are net cash flow positive this year. With this plan at $50 a barrel, that net cash flow continues growing in the coming years, as shown on the right. Now, net cash flow does not grow quite as much as you would expect in 2018, and that is really due to Delaware infrastructure spending that does not start to pay out until the next year, in 2019. Finally, if you go out to the far right curve, we would expect to generate over $1 billion of net cash flow from these assets in 2020.
I should remind you that these net cash flow figures are fully burdened with regional and corporate G&A costs, as well as all the infrastructure costs. Now let me give you a little more detail on our three-year plans in the Eagle Ford, the Delaware, and the Bakken plays. I'll start with the Eagle Ford. You can see on the chart the usual data. I won't take you through it. We do have the benefit here of built-out infrastructure, and our data analytics program has driven continued improvements, which we're applying now across our extensive inventory of locations. Even though well count here in the Eagle Ford is increasing, and we're now over 1,000 producing wells, we're still been able to achieve a lifting cost that's below $2 a barrel.
Included in the appendix is the perennial chart that we show you that demonstrates that ConocoPhillips is the best in industry in the Eagle Ford. Again this year, maintaining the lowest cost of supply, the highest oil rate per well, and the highest net present value per acre of our competitors. In 2017, we expect to produce an average of about 130,000 barrels per day in the Eagle Ford, and this should grow to over 245,000 barrels a day in 2020 with a six-rig program. That's a compound annual growth rate of about 25%. Now, in the Delaware, we have a 75,000 net acre position in two focus areas, China Draw and Red Hills. Coring up our acreage over the past few years has allowed us to drill more 10,000-foot laterals, which doubles the reserves per well while only increasing the capital per well by about 40%.
We've improved our land position now to the point that most of our wells will be 10,000-foot laterals, and over 95% of our wells in this area will be long laterals of 7,500 feet or more. For the past few years, we've been appraising and we've been taking the time to apply the learnings necessary to ensure that we can execute an optimized returns-focused development plan. This is the key to maximizing recoveries without overcapitalizing. We're now at a more advanced stage of understanding the best development plan for the Delaware. All of you will be glad to know that we are going to put more money to work there over the next few years. We're producing about 20,000 barrels a day from this acreage in 2017.
Over the next three years, we plan to increase that production to over 85,000 barrels per day with a three-rig program. We're sometimes asked if our Delaware position is material enough for a company of ConocoPhillips' size. The answer is yes. On the far right side of this slide is the Bakken. Our Bakken position's at a more mature stage in its life cycle. We plan to execute a development program here that will maintain our plateau production of around 70,000 barrels a day going forward. We've got many years of low cost of supply locations to drill, but we're choosing to develop this asset for steady cash flow, not growth, while we continue to reduce costs and increase efficiencies there. There's a lot more detail on the progress that we've made on each of these, again, in your appendix slides.
Adding up all three plays, production will grow to over 400,000 barrels a day with an 11-rig program, and we could do this for many years. We believe this is a prudent and compelling use of shareholder capital. Now let's move on to the next tranche of spending within the $2 billion of organic capital, namely future major projects that have not yet been sanctioned, but that we will be funding in the 2018-2020 timeframe and that will contribute volumes out beyond 2020. Some of the projects are shown on the inset map on this slide. You can see that we have multiple medium cycle projects planned in Alaska, the North Sea, China, and Australia. We plan to spend an average of about $500 million per year between 2018 and 2020 to achieve production of about 90,000 barrels a day from these projects in 2025.
I'll show you now a few more details on the biggest two of these projects. On the left is a description of GMT 2 in Alaska. As we continue our westward expansion, we can leverage the infrastructure from prior projects such as CD 5 and GMT 1 to lower development costs as well as minimize our environmental footprint. We've successfully reduced GMT 2's total cost estimate by about 10%. Over the past year, and we continue to pursue additional improvements there through longer laterals and facility debottlenecking. These improvements, plus operating cost reductions, have resulted in a 15% decrease in the cost of supply for this project since last year. Barossa, shown on the right, is the leading option to backfill our Darwin LNG plant when Bayu-Undan goes on decline early in next decade.
We plan to invest about $750 million over the next 3 years in this project. We had a successful appraisal program at Barossa in 2017, which resolved volume uncertainties there favorably and increased our expected resource recovery by over 40%. Based on the appraisal data and the ongoing optimization work there, we've been able to simplify the facility design and reduce the development well count, and that's resulted in about a billion-dollar capital reduction for the project. This savings and the potential to backfill into Darwin are contributing to the less than $40 a barrel cost of supply for the project. A roughly 30% reduction is realized by not having to build a new LNG facility, and the additional 25% decrease in cost of supply has been realized due to the increased EUR and the optimized development plan.
Next, I want to cover our exploration investments, which are highly focused on a few themes and where we plan to spend about $300 million per year for the next 3 years. Now, as you know, we've undergone a significant shift in our exploration program over the past 2 years to core up in the areas where we have access to infrastructure and where the entry costs are low. This approach is integrated with our overall goal to keep a high degree of flexibility in our capital by adding resources that have shorter cycle times. Although we've retooled our program, we have retained the critical expertise that's allowed us to capture over 10 billion barrels of less than $50 a barrel cost of supply resource over the last 10 years, primarily in unconventional plays and around our legacy assets.
That expertise is being deployed in Alaska, Europe, and APME on infrastructure-led exploration. We're also utilizing our extensive expertise to pursue liquids-rich unconventionals in both North and South America and advantage gas plays in South America. Over the next 2 slides, I'm going to show you 2 exploration opportunities that could develop into material pieces of business for ConocoPhillips over the next few years, namely our Willow discovery in Alaska and our Montney position in Canada. We made this Willow discovery in 2016, we kept it tight until we could further evaluate our results and acquire different additional acreage in the area. Since the discovery, we've increased our ConocoPhillips net acreage in this area by over 600,000 acres at a cost of about $30 an acre. The map on the left side of the page shows our acreage acquisition progression over the last 18 months.
You can see we have a significant position now that's close to where we have infrastructure and a long history of strong operating capability. We estimate that the Willow discovery wells found gross resource of at least 300 million barrels. That makes it one of the larger recent conventional discoveries globally. We've utilized a ConocoPhillips proprietary seismic technology known as Compressive Seismic Imaging, or CSI, no, that's not the TV show. That was that one Matt joke I had to put in there. In 2018, we're planning a 5-well drilling campaign to appraise Willow and to drill 3 more exploration wells in the area. We also plan to shoot additional CSI seismic. This is a very exciting play for us. We expect to update you after our 2018 activities are complete.
Our Montney position is a great example of adding a new position in a play for a low cost of entry that's very flexible and has a low cost of supply. Back in the beginning of 2013, we only had 14,000 acres in this area. Over the past few years, we've very quietly built a 106,000-acre position, and it's all 100% working interest in what we believe is the sweet spot of the play where we have high liquids yields. The best part of this whole thing, though, is that we acquired this acreage for about $1,000 an acre. As part of our 2017 appraisal activity, we recently drilled, completed, and flow tested two wells that produced at double the average 30-day rates of competitor wells across the play. Those two wells are shown in the blue dots against the competitor wells in gray.
Notice that many of the competitor wells in the Montney show up on the far left side of the graph with very low liquids content. Our wells are in the 50%-60% range for liquids. I think you can see now why we didn't include this Montney acreage in our Canadian transaction earlier this year. We've added 1.5 billion barrels of resource to our resource base for this asset this year, bringing our total resource estimate for the Montney to 2 billion barrels with an average cost of supply of around $30 a barrel. We're leveraging the knowledge and the expertise from our other unconventional assets to accelerate our appraisal drilling here, and we're planning a 12-well pad for next year that will allow us to test spacing and stacking.
We've already improved our drilling times by about 50% over a relatively small number of appraisal wells, and I expect that we'll have more improvements in the future as we bring our best practices to bear on this position. Our Montney acreage has the potential to be a significant contributor to future cash flows for our company, and we look forward to updating you on this one as well as we learn more about this opportunity. I'm confident that you can see now why we say that our high-quality portfolio is well-aligned with our strategy. We've got an advantaged resource base of low cost of supply, unconventional, conventional, and oil sands and LNG assets with all of the important characteristics that are shown here. Our planned investments will make a meaningful impact on improving cash and earnings returns on capital employed.
That's our mission: to provide superior returns to shareholders through the cycles. Our portfolio is key to delivering on our goal, and we believe it offers us a distinct competitive advantage compared to our peers. I'm going to turn the meeting over to Don to show you how all of this progress translates into a sound financial plan.
Well, thanks, Al. My objective this morning is to show you how the differentiated strategy that Matt described, combined with the unique high-quality portfolio that Al just covered, can deliver a compelling financial plan, a plan that's strongly aligned with shareholder interest. Let's start with the financial tenets that we believe will attract and retain investors to ConocoPhillips. They're listed on the left side of this chart, and they should look familiar. They're the very same ones that we laid out a year ago. First, we're focused on generating strong and growing free cash flow. We have a natural advantage with our low capital intensity, low cost of supply portfolio, and our cash generation only gets stronger as we direct investments toward high-margin production growth. Second, we believe financial strength is a competitive advantage. Our balance sheet has been restored thanks to the success of our asset sales program.
Over the next couple of years, we'll use a portion of our current cash balances to continue reducing debt down to the target level of $15 billion. The combination of debt reduction and cash flow growth will bring our leverage down to a level that we think is optimal for our company. Third, we've differentiated ourselves by setting a shareholder payout target. Last year, we set a target to annually distribute 20%-30% of cash from operations to shareholders through the cycles. We've exceeded that target by a wide margin this year. In our plan through 2020, we also exceed the top range of that target in each year. Finally, everything must be in service to financial returns. That's the ultimate measure of value creation. In our plan, returns improve substantially without needing help from higher oil prices.
I intend to discuss each of these in more detail. Here's the punchline. We're planning on a step improvement change in all four of these areas, and that's shown in the next slide. We've transformed our financial performance in 2017. We're just getting started. We're delivering strong competitive results today. We expect significant improvement as we execute our three-year plan, which is built around a $50 real price. This chart illustrates the improvements our plan delivers over the next three years. Looking at our key financial targets out to 2020, here's what we're planning. Free cash flow to be greater than 35% of operating cash flow. Our leverage ratio reduces to less than two times on a gross debt basis.
We plan to return over $12 billion to owners from 2017 through 2020. In the $50 plan that Matt described earlier, we still have over $4 billion of cash on hand available for further allocation. We're targeting cash returns on capital employed to grow to over 20% by 2020. I want to give you some color and some proof points behind each of these metrics, beginning with our focus on free cash flow generation. We turned the corner on cash flow neutrality over a year ago. This chart summarizes our results over the most recent four quarters where competitor data is also available. I'll step through the waterfall starting on the left. Over that time period, we generated $6.5 billion of cash from operations excluding working capital.
You can see from the orange bar that we invested a little under $4 billion of capital, leaving free cash flow of a little bit more than $2.5 billion, which represents about 40% of operating cash flows. You can see our dividends in the next orange bar. Even after capital and dividends, you can see the free cash flow that we have remaining. This was during a period where oil prices averaged, as you know, in the upper 40s. Not only have we been generating strong free cash flow, the chart on the right shows we're delivering top-tier performance compared to both the integrated companies, oil companies, and the largest E&Ps. We're competitive with the strongest cash-generating IOCs, shown in yellow here, and we're truly distinctive when compared with the largest E&Ps, shown in blue.
We're not satisfied with today's level of free cash flow. We plan to double it within the next 3 years. This chart shows how and why our free cash flow doubles over the next 3 years at a $50 oil price. Starting on the left in 2017, production grows annually at about 5% a year over the next 3 years, as Al described. That's represented by the first green brick. Next to that is a brick representing cash margin expansion, that's greater than 5% a year over the next 3 years. We are growing volumes, but we're growing margins even more. By 2020, through this combination of modest production growth and cash margin expansion, free cash flow more than doubles. That's indicated by the green portion of the 2017 and 2020 bars.
Off to the right is a green bar that represents the free cash flow we could generate if prices are higher than $50. As you know, we have significant leverage to higher oil prices. Al described the sources of production growth that we expect. I want to take a minute to discuss the drivers of margin expansion as we go forward. I want to make 2 important points related to margin growth. First, the actions that we've taken this year to high-grade our portfolio have significantly reset our margins. This chart shows how the quality of our product slate has improved due to this year's asset sales. In 2016, North American natural gas and bitumen represented over 30% of our sales volumes. As we go into 2018, you can see that those products represent less than 15%.
As a result, our realizations have increased by about $5 a barrel equivalent. I'm not sure that this aspect of the impact of our asset sales has been fully realized or understood. Again, putting price movements aside, we see that the portfolio shift has driven a margin uplift of about 18%. That's locked in. The second important point is that we expect more to come. Looking forward, this time, margin expansion is not driven by portfolio effects, but rather by the investments that we're making into assets that improve underlying margins. The chart on the right shows how cash margins on a per-barrel basis are targeted to grow more than 5% a year through 2020. The stacked bars show how much each asset class is contributing to the per-barrel margin. Notable here is how the margin contribution from the unconventionals is expected to more than double over that time period.
If we look up to the drivers of the margin expansion represented by the gray bricks, we see that realizations have only a minor positive impact. The main driver is due to the investments we're making in the low-cost unconventionals. This ties back to Al's example from the Eagle Ford, where lifting costs are less than $2 a barrel. Since we're not adding rigs as cash flow expands, our unit overhead cost will be declining. The final gray brick up there on the right. We're also going to see margin improvement from the lowering of our interest expense as we continue to reduce debt. That covers our free cash flow generation discussion. We're there now, we're top-tier, and we're not stopping. Next, I want to touch on our financial position and reiterate our balance sheet targets.
Most of you are familiar with this because we've been updating you throughout the year. At last year's Investor Day, we laid out a plan to reduce debt to $20 billion by the end of 2019. Because of the success of the asset sales, we'll be below $20 billion this quarter. To make our gearing more compatible with our new operational footprint, we reset the debt target to $15 billion. We expect to easily meet that target over the next couple of years using cash on hand to retire debt. Along the way, our interest costs are going to be reducing substantially. When we reach the $15 billion target, annual interest expense will have dropped by about $400 million when compared to 2016. The progress we've made to restore our financial strength has been noticed by the rating agencies and the debt markets.
Our financial position is strong. As you've seen, we can already generate strong free cash flow at low prices. Our debt today is already the lowest that it's been since before 2012, when we became an independent company. As the chart on the right shows, we have no near-term need for refinancing. We have a large cash balance, ample liquidity, and a clear path to attaining each and every one of our capital structure goals. We're doing all the right things to meet our target of an A rating. I want to turn now to shareholder distributions, a prominent and differential part of our strategy. Our payout consists of our dividends and our buybacks. We seek a dividend that is top tier amongst E&Ps, and one that grows each year. We complement that with a level of buybacks that makes us competitive on distributions against energy overall.
We announced our 20%-30% target a year ago and have significantly exceeded it this year. We expect to return the equivalent of about 65% of operating cash flows to owners this year. The chart on the right shows this year's payout far exceeding a group of integrated and E&P companies. We've noted here also that our plan to 2020 delivers an average payout that would also exceed the top end of that range. As for buybacks, we have stated our intention to buy $1.5 billion of shares over each of the next three years, or a total of $7.5 billion, including 2017. At recent share prices, that represents about a 12% reduction in outstanding shares. We'll consider opportunities to increase buybacks during this plan period when cash is available and the value is attractive.
We're coming to the most important part of our financial plan, how our plans and actions will turn into returns, because that's what investors want, returns. We have a laser focus on earnings returns. As the chart on the left shows, based on consensus data, we're positioned to deliver some of the strongest relative improvements in ROCE in 2018. The drivers of this improvement are the investments that we're making in the unconventionals, reductions in unit DD&A over time, and reductions to capital employed due to debt reduction and the distributions to shareholders that we intend. We're targeting returns on capital employed to improve between one and two percentage points a year over the next several years, and that's at $50 a barrel. This metric has significant upside at prices above $50 a barrel. The key is to not forfeit the upside by losing discipline, and we won't.
As a big company with a large capital base, a one to two percentage point increase in a year is a big movement, especially when not counting on a boost from oil prices. Our cash returns on capital employed accelerate even faster, that's one of the most compelling aspects of our plan. Between 2017 and 2020, cash returns on capital employed are targeted to increase between two percentage points and three percentage points annually. That's substantial growth in returns. The waterfall indicates the expansion in the numerator, cash flow, which is driven by growth in production and expansion of margins. The reduction in the denominator, capital employed, is driven by the reduction in debt and the reduction in equity due to buybacks and dividend distributions. Our plan sees cash returns on capital growing to over 20% by 2020, under a $50 a barrel price scenario.
Let me end with a recap of our financial priorities and the compelling improvement we're poised to deliver between now and 2020. We double free cash flow. We cut our leverage ratio roughly in half. We return over $12 billion of capital back to owners, cash returns are targeted to grow to over 20% by 2020. All this at $50 a barrel. We believe this plan makes ConocoPhillips truly distinctive. We've given you a roadmap for tracking our progress on executing a compelling plan that's designed to deliver superior returns for shareholders through the cycles. Now I'll turn the meeting back to Ryan for some closing comments.
All right. Well, we've certainly taken a lap around the racetrack, we're back to where we started our value proposition on a page. Today, I think we've shown you the drivers and the metrics that perform against a differentiated strategy in the E&P space. I think we've shown you how the portfolio is uniquely aligned with our strategy. In fact, it's very integral to that strategy. I think we've shown you a financial plan that should attract and retain investors. It's clear, it's measurable, and it will drive superior returns to the shareholders. With that, let's get to the Q&A. I'll invite Doug and Matt now back up to the stage, if you hold one second, I think we have some microphones coming around. Let me get the guys in place, and we'll take your questions. Good. Doug, yeah. Doug Terreson here in front.
You got him?
Thanks, Ryan. You guys went in pretty much the exact opposite direction of your peers last year and were rewarded by beating the E&P stocks by around 25 percentage points, and you're also the only large cap E&P company to match the S&P 500. Today you're clearly doubling down on the value-based growth and return of capital pledge. We should reposition the company in many different ways, especially financially. While you covered capital allocation for organic growth and also for the balance sheet, my question is how do acquisitions play into the mix, especially given your forthcoming balance sheet, because it's going to be a lot stronger? Two, what's the current level of attractiveness of acquisitions? And three, what are the specific financial criteria, or are they the same as for normal investments?
Yeah. We have made a lot of progress, as you point out. Thank you, Doug. Again, I said at the beginning growth and production was all the rage a year ago. We set out a plan. We've doubled down on that plan really going here today. As I think about inorganic side to the equation, it is interesting. We've got the financial capacity and we've come to a place we consider some of that kind of stuff, but it's got to be accretive to returns. Whatever we do, it's not just getting big for big sake. It has to improve the return focus over the long term for the company as we think about that. We think about the M&A in kind of the three buckets and the very large stuff that most people kind of think about, it's really hard.
Shareholders and board members sitting in the boardrooms are quite divided. The bid-ask is really very wide if you're focused on anything you do to improve your returns. I'll also say it's a very high hurdle within our portfolio. Anything's got to be substituted in the portfolio. It can't be additive to the top. We've described to you the portfolio. We've done that for a number of years. That less than $50 barrel cost of supply, the average of $35, we've got anything we add into there has got to be competitive in the existing portfolio, and that's a very high hurdle. We are doing some of the smaller things. You saw the Montney position that we've added. You saw the acreage position we've added in Alaska as a result of some of those opportunities.
We're in that knife-fighting world every day adding the smaller things to the portfolio because we think it's improving the portfolio. More importantly, over time, it's going to improve the returns.
Thanks.
Yeah. Go ahead. Yeah, Phil.
Hi, Phil Gresh, JPMorgan. Wanted to kind of follow up on the payout to shareholders piece. If you look at slide 12, the sliver of dividend growth there is actually fairly modest, which I think is meant to illustrate a $40 case, not necessarily the $50 case, I was just wondering how you think about dividend versus buyback. You've laid out the buyback piece very clearly, but it seems like the dividend growth perhaps could grow with cash flows or some other metrics. How do you think about that?
Yeah. I think we think about the dividend. We want it reliable, sustainable annual increases to the dividend. If you're somebody who thinks we're going to go back to where we were in 2017 with regard to the dividend, we're not going back there. We want it to be sustainable. We want to be sustainable through the cycles, but we understand that in some of the up cycles, our cash flow is greater, and if we want to return 20%-30%, we're going to do it variably through the share buyback place. We want a dividend that's sustainable long-term. It's growable on an annual basis. You saw what we did last year when we raised the dividend.
You should expect that from us on a constant basis, not trying to go back to a place where we were a couple of years ago with the fixed cost of the company being that high. We have a view of volatility in prices. You can share that view, or you can have a different view. We think there's volatility, dividend's got to work through the cycles to be affordable, but we augment it with variable distribution to the shareholders. We believe we need to be distributing a fair portion of our capital back to the shareholders on an annual basis. That's how we think about it. Doug
Thanks, Ryan. Thanks, Ryan. Doug Leggate from Bank of America. I've got two actually. The related question to Phil's. You've laid out a three-year plan, $50 base case. Where does the share price appreciation come into the mix in a higher oil price environment in terms of how you continue to prioritize the buybacks versus balancing investment?
Yeah. I think there's kind of a short and a longer-term maybe question in there. Short-term, yeah, we've been above $50 a barrel for all of a month now, right? We're not going to change our distribution policies on a monthly basis direct to the prices. We believe that there's probably going to be some volatility. To your point, longer term, $60, $65 a barrel, you've seen the plan. You've seen what we generate at $50 a barrel. The incremental cash that we should have coming to the company over the next three years, even at $50 a barrel, let alone if you believe it's going to be $60 or $65. I would tell you that we've had a history as a company distributing that back to our shareholders. We have a target. That target's meant to work through the cycles.
Low end, high end of the cycles, we've shown you that we will share incremental surplus cash back with our shareholders. We did that through the Canadian transaction. You should expect us to be thinking about that as we consistently generate additional free cash flow as well. Based on our history, based on where we're at, as prices rise, we continue our discipline on our capital investments, we grow free cash flow, the shareholders ought to expect to get distributions that accommodate that.
To be clear, say your share price, let's be a little nuts for a second, your share price is $70. Do you still be as aggressive on the buybacks as you are today?
Well, we've said we will dollar cost average through the system. We're not going to try to time the market with extra or lower share repurchases. We're going to time through the market. What we've laid out today, I don't think is captured in our share price. To your point, we would hope that the shareholders would see the value of the value proposition we're putting forth, the strategy, and the delivery of that going forward, but we intend to dollar cost average as we do that.
My follow-up, hopefully a quick one. A key part of what everything you've laid out today is a sustaining capital of $3.5 billion. As you, I think Al talked about establishing or looking for the next round of legacy assets, which one would assume comes with legacy asset spending. At the same time, you're becoming a little bit more skewed towards unconventional. On the three-year view, what happens? How do you see that $3.5 billion sustaining capital evolving over the longer term?
Yeah, maybe you can ask Matt to talk about that, yeah.
Yeah, this $3.5 billion of sustaining capital is what it takes over the next few years. As we're growing production, our goal really isn't flat sustaining capital. Our goal is to drop the sustaining price. As production grows, the sustaining capital required to do that will increase a little bit over the years. The sustaining price will actually drop because as we're adding new production, it's coming at higher margins. Overall, we should expect to see beyond these three years some increase in sustaining capital, but a reduction in sustaining price, and that's our primary goal is the sustaining price.
Paul.
Yeah, thanks. Paul Sankey at Wolfe Research. The phrase was you've doubled down, I think in many ways you've tripled down because you've extended the timeframe through 2018, 2019, 2020. You've really gone through here on a line-by-line basis how you're going to get there in more detail, I think, than we've seen in any recent analyst meeting from any company. You've achieved your targets from last year, to your credit. I can't help but feel a little bit of a throwback to the 2000s when we used to get these kind of very detailed analyst meeting layouts, they all kind of went horribly wrong. One way or the other, they weren't delivered. I think on reflection, it was mostly costs and inflating oil price that were the problem.
I wondered what your perspective is on what are the threats to achieving this level of layout in terms of what you want to.
Well, I'll let any one of the guys chime in from their perspective as well. From my perspective going forward, I think what's different about the world today than it was in 2000 is if you're a company that has a large, compelling, big piece of your portfolio sitting in the unconventionals, it gives you a tremendous amount of flexibility that these companies didn't have back in 2000. You think about our company back in 2012. We had seven multi-billion-dollar major projects in execution at the same time. We had virtually zero capital flexibility. Even at $110 a barrel, we identified that as a significant issue for the company. I think what's different today, and I think we've demonstrated that last year, we're willing to dial back our flexible capital program.
We're willing to dial that back and not drill into the headwinds of inflationary pressures in order to keep the discipline in the company, keep the sustaining price to deliver the sustaining capital as low as we possibly can. Anybody? Anything?
Yeah, I think that's exactly right. A little bit more I might add on that is just on the inflation front. I think you've seen what we were able to do in 2017 with some pretty strong inflationary pressures in the lower 48, and we're still able to keep dropping our CapEx as we went through the year. I think we've not only transformed the portfolio of the company in the last few years, we've really transformed the culture also with respect to cost, both CapEx and OpEx. We've taken our operating costs from a few years ago, around $10 billion, to down in the $5.5 billion range, almost cut it in half. Of course, we've cut our CapEx more than in half. If we do get sustained higher prices, obviously there will be inflationary pressure on us.
We're going to drive our activity in a way to resist that and to not just feel like we have to hit the ask on the next rig or the next frack crew just to go out there and drive activity. Oh, you got the mic?
Yeah. Devin McDermott at Morgan Stanley. Your stock has been clearly very successful with an outsized asset sale program, a lower growth rate, and a higher cash return strategy. I guess my question is, why is 5% the right rate? Why wouldn't you grow less, buy back more, and sell assets that may not be optimized at your current pace, and really maintain that complete differentiation versus E&P peers, which at least in some segment are very similar to your unconventional?
We're a bunch of engineers. You can rest assured we'd study that ad infinitum. I'll let Matt describe to you. You're right, we could sum the extreme and say, just invest your sustaining capital, distribute everything else back. How did we hit that spot? Let Matt describe to you a little bit how our thinking revolves around that.
I think for everybody that asks us the question of suggesting keep your production flat and distribute everything to shareholders or somebody saying, "Boy, you guys have got a great portfolio. You should be putting more in the ground." Our view of that is that we think we found the right balance between those two things. We do have a very strong portfolio that can deliver improving returns over time, and we know that we should invest some capital in that. We think a company of our size in a mature industry should also be giving cash back to shareholders. What we think we've found here, and we've tested a whole load of alternatives, what we think we've found here is a sweet spot that balances those two things, and that's what we've laid out.
Maybe a follow-up, if I just could, on the impressive $3.5 billion sustaining capital number. Particularly because you have less clarity with that on the conventional wedge, how long do you see that sustainable for? I understand that, assuming a flat price or otherwise, how long could you sustain that low of capital base?
The sustaining capital, I sort of answered that a little bit earlier. That may increase beyond the three years, but the sustaining price will decrease. As we're growing production, we're growing our margins, and as we're growing production, we're increasing some barrels that will decline. The sustaining capital will increase a little bit, but the sustaining price will drop because the margins are growing faster than the requirement for capital.
well beyond three years is, I guess.
Well beyond three years. We've laid out what happens over these three years. The $3.5 billion works for five years, actually. The question is beyond. Once you're starting to show a lot more growth, then that sustaining capital increases. The most important thing is that the sustaining price drops.
That's really what we're focused on, Devin, is making sure we keep the sustaining price as low as we can, which then drives more free cash flow generation. That's really what's key to the business. That's what's improving the returns. Great. Let's go over here. John.
Yeah. Hi. For the unconventional spend, how much of it is midstream, and will you have to build a gas plant in the Montney?
That's one.
One, Al.
Yeah. The $1.2 billion that I talked about of spend on average per year over the next three years in order to grow that unconventional, about $300 million per year of the $1.2 billion, a lot of it's on water infrastructure, actually. Building to gas gathering points and building oil processing capacity. There's no gas plants in there. Our plans in each of our areas where we're spending infrastructure money involve building gathering to a gathering point and then using third-party gas plant processing.
Okay, that's great. The other thing is CSI. You want to explain it?
Yeah. Compressive seismic imaging is actually a proprietary technology that ConocoPhillips invented, we got patents on it, et cetera, that we've had for about five years now. We've done these CSI shoots around the world and, of course, as is natural in an organization, there was some resistance to a new technology at first. As our geoscientists around the world have seen this demonstrated and what it does for you, the demand has been voracious. We can hardly keep up with it. Fundamentally, what it does is instead of an orderly sampling pattern like you normally have in seismic, there's a random sampling, and then we use mathematics that really comes from the medical field.
The same tomography-type mathematics that's used when you get an MRI done at the hospital that allows us. It gives you a 10X upscale on the definition that you get, the resolution, for the same amount of seismic points. Of course, you can shoot less seismic point, get the same resolution you had before for a much lower cost. Of course, that's not what the geoscientists ever want to do. They want the 10X resolution and spend just a little bit less money. It's allowed us to see things that we couldn't see before without spending more money to get the seismic.
Facilitate your step-outs then?
Yes, exactly. That's why we're going back in Alaska. Another interesting thing about CSI that we haven't used it for so far, but it's next on our list next year, is we're going to start using it in the unconventional. We have a CSI shoot planned next year in the Permian. Go to Phil on this side, we'll work our way back. Behind you.
Thanks. Ryan Todd. You mentioned a little bit the Montney. The three-year plan looks like it's primarily driven by the big three U.S. onshore plays. Is there much capital allocated or much contribution expected for the Montney within that three-year window? What would you need to see to allocate additional capital to other areas within the unconventional onshore?
Go ahead, Al. The way that Dakota Range curve is built is based on the big three, because that's where all our significant volume growth over this three-year period comes from. The CapEx we're showing in there actually does include a rig in the Niobrara and also some drilling in the Montney, some of which is appraisal work and is in the exploration budget, but some of which is also in that development budget. There's also some infrastructure money in both of those places that's all in that $1.2 billion that I was talking about earlier. In this time period, we'll be starting next year and out into 2019, building the first tranche in the Montney of our infrastructure needs that'll get us up to that level 1 of production.
Which that's still not going to be big numbers in that time period compared to the kind of production that you see from our big three, from the Bakken and the Delaware, and from the Eagle Ford.
It's going to be an important stage in the Montney. I think Al described to you a 12-well pad, where we want to really get in there and do a judicious sort of appraisal activity to understand stacking and spacing requirements. We've learned how important that is before you launch off and you're manufacturing, to know exactly what you're going to go do. We'll do that this year, and it does represent a bit of an acceleration over what we thought maybe a year ago we'd be doing in the play.
In effect, in this 3-year period, we've got the money in there to continue doing that appraisal work in both those areas. We haven't loaded up on the volumes when we show you that curve. We're not counting on getting a lot of volumes from either of those two areas, the Niobrara or the Montney, in this time period.
Maybe one follow-up on Alaska. You mentioned do some stuff there on nearer-term projects. You mentioned Willow and the surrounding acreage you've picked up around there. What's the potential size of the prize, you think, there in that Willow and surrounding acreage area? Is this the type of thing that can extend your Alaskan plateau from 10-20 years? Can it drive higher levels of growth? How big of a resource are we talking about there?
Well, we don't think Willow's the last thing. Obviously, we picked up a pretty large block of acreage based on the seismic imaging, and Matt, maybe give them a little bit more color on that.
When we made the Willow discovery, that allowed us to calibrate our seismic to look specifically for that type of prospect. When we did that, we could see a lot of follow-up potential on the seismic structures and sediments that look the same size as Willow, many of them, and across that area. We see a lot of follow-up potential. These are stratigraphic traps, so just seeing them on seismic doesn't mean there's oil in them. Every one we've drilled so far has had oil in them, so we're hopeful that several of these Willow lookalikes will deliver additional production. This year, we're hoping to do a 5-well program here. Two wells to appraise Willow, because it's a large aerial extent. Three exploration wells. One out in the west, close to Willow, we call it West Willow.
two that are actually to the east of Alpine on the same sort of geologic play type. We see a lot of running room. As far as what the implications are for Alaska rate for the long term, time will tell. One thing we could do is just extend the plateau for 20 years. Depending, we'll do what makes the most economic sense, and that could be growing production once we get through this exploration and appraisal phase.
It's still early days. If you look at Willow itself, we said earlier that it could support about 100,000 barrel a day kind of development, just that first discovery that we made. We need to see what else we've got around it. We've got a lot of development planning work to do before we really know the optimal way to develop it.
Thanks.
Guy Baber, Simmons & Company. Thank you guys very much for all the details. Super helpful. My first question was on the free cash flow trajectory and the evolution over the next three years. For 2018, with $5.5 billion of CapEx, and your dividend, is the growth that you guys are driving and the margin expansion, is that sufficient to organically cover the CapEx and the dividend for 2018 specifically? Or is that even a priority for you guys? Do you think about it on a year-to-year basis like that? Or is it more that you're thinking about the free cash flow that you generate over the three-year timeframe?
I can let Don provide the details, we absolutely think about that as we think about how we manage the programs, both on a longer term and an annual basis.
For 2018, we do expect to achieve cash flow neutrality next year. Each of the three years in the plan that we just talked about. You'll find some sensitivities in the appendix of the material. I think we've updated those for 2018 going forward. This would probably be a good time for me to give you a good new benchmark, because over the last year, you've heard me say that we can generate $6.5 billion of operating cash flow at $50 Brent. Now looking forward to 2018, putting the vast majority of the dispositions behind us and the plans that we laid out today, and then shifting our convention back to a WTI convention now to be consistent with our competitors.
That new number I'd like for you to refer to as we go forward in 2018 is $7 billion of operating cash flow at a $50 WTI benchmark. I think that'll be useful as we go through earnings calls over the next four quarters or so.
I think we've updated the sensitivities to reflect sort of the portfolio and the plans going forward, so you can apply those.
Thanks, Don. You read my mind there. That's where I was going with that. My second question was, I wanted to talk, if you guys could talk a little bit about the evolution in the sustaining capital relative to last year. It looks like relative to last year, the big decline was on the conventional side of the portfolio at a pretty impressive decline. If you can just talk a little bit about what the specific drivers are there. I'm imagining deflation capture, when we look at the U.S. unconventional side of the equation for about the same amount of current production, 250,000 barrels a day. It looks like the sustaining capital there went up a little bit from $1 billion-$1.3 billion. Can you talk about what the drivers are there and what you're seeing differently?
Yeah. Okay. There's a little bit of apples and oranges between that chart from last year and this year. If I just take them from the top down, in the yellow, you're right that we talked about keeping our 250 of unconventional flat for around $1 billion last year, now it's $1.3 billion. Actually, all of that $0.3 billion is really due to these infrastructure costs that we put in there now for the Montney and Niobrara. They weren't mature enough last year for us to have a development plan to be able to estimate the infrastructure costs, and they weren't in there. Really, that number actually, when you look at it apples to apples, has actually come down year to year. On the flip side, on the conventional, it looks like it's come down a lot from last year.
On an apples to apples basis, it's not nearly that big. There's a change in convention there, where in last year's number, we had future major projects that weren't going to bring volume in the near term included in that capital number. This year, we thought it would be more transparent to build our CapEx from the ground up, show you the $3.5 billion that it takes to hold flat, and then separately justify the $1.2 billion of unconventional spend for growth, the $0.5 billion for future major projects, and the $0.3 billion for exploration. Those got pulled out of those stay flat numbers. It's a little bit of apples and oranges.
If you throw all that out and dig down into how much did it really come down, apples to apples, the $4.5 billion number from last year, if you convert everything, comes out about in the $4 billion-$4.1 billion range. We have reduced that number, apples to apples, about a half a billion dollars down to $3.5 billion this year.
Thanks. It's Blake Fernandez with Howard Weil. The first question is just pretty minor, but unless I missed it, I didn't see the typical operating cost and DD&A guidance for the year ahead.
Don, you want to take that?
Yeah, I think we're going to give that maybe in December or early in the year.
Okay.
The fourth Q call, I think.
Fourth Q.
Okay. Second question. It sounds like you're done with the major divestitures. I'm trying to understand, is the right runway going forward to think about $1 billion-$2 billion? Within that, Al, you mentioned a couple different times infrastructure. I'm wondering if there's an opportunity once you have enough scale there to consider a sale to MLPs or create your own or do something creative there.
I think on the disposition side, I wouldn't factor into $1 billion-$2 billion annually. I think we've gone through the portfolio pretty well. I think it may be $hundreds of millions as we clean up the portfolio. I wouldn't be considering large-scale dispositions in our plans over the next three years. We're constantly pruning the portfolio, and we'll continue to do that, I probably wouldn't put a $1 billion estimate in front of that if you're thinking about us over the course of the next two to three years. You'll see some more as we continue to clean up the portfolio, but they'll be smaller in size. The last part, I forget.
Just infrastructure. I know a lot of that was spun to Phillips.
The MLP. Most of that went to Phillips 66 in the spin. Obviously, we'd consider that as we grow up mass scale, we don't have anywhere near the scale right now to consider something like that in our portfolio. In fact, we're actually going a little bit different direction. By virtue of waiting a little bit in the Permian now, there's lots of opportunities to utilize third-party infrastructure for a very cheap cost. We don't have to put the capital employed in there to go do something like that. We're just a measured pace as we move that up.
Over here. Go back, Roger.
Thanks, Andy. Roger Read, Wells Fargo. Al, going back to your decoder ring kind of comments. Seeing the rig count come down from a year ago, as you look in the forecast to 2020, how much more, be it well productivity improvement is in there? It doesn't sound like it's an inflation deflation driven event. Just curious, room for improvement beyond the numbers laid out here as we think about CapEx on the maintenance and the growth side, or I guess, is this a static or a dynamic outlook as we're thinking about it from today to 2020?
Yeah. There's a couple different pieces of that. It's largely static in terms of the way that's been done. We're not assuming a strong CAGR of improvement in our performance out in those three years as part of how we've built that curve. It's essentially built on today's performance with maybe some places where we're early days, where we have obvious learning curve type improvements that we know we're going to get. Those will be built in there. It's not built on the next great thing data analytics is going to do for us or the next new discovery we're going to make in how to frack our wells. It doesn't have that sort of thing in there. In fact, that potentially could be a little bit of an offset to what Matt was talking about earlier.
He was saying the $3.5 billion doesn't last forever because as we grow, that number's going to tend to grow because your decline barrels are bigger. That statement is based on no big improvements in our performance. To the extent that we are able to continue to get more efficient, more capital efficient, more operating cost efficient, then we can potentially offset some of that, and that's not built into the numbers that we're showing you now. The cost of supply numbers and all the data that we showed you, the inflation that's assumed in there is based on a $55 world. is kind of what's assumed.
I would add, the culture of the company now is driving to do as much as you possibly can with those less precious capital dollars and operating cost dollars. I'm convinced we're going to find ways to continue the efficiency improvements. They may start waning a little bit, but we're going to continue to find ways to do more with less.
Thanks. Just a quick follow-up. On the exploration and appraisal spending, as you think about either more cash flow out of the operations, a higher oil price, how does that fit into the allocation question as you think out? Not necessarily you have to find something, but you want to find the next thing. Where does that weighting go in there relative to share repo, debt purchase, and conventional investments?
Yeah. We think that the optimum exploration program for us is about that $300 million that we've laid out over the next few years. We know how we're going to spend that money. There are attractive plays. As Al said, some around existing infrastructure, like the Alaska stuff we just talked about. Some in the Montney. Some in South America that we didn't talk about. For example, we have an exploration play in the La Luna Shale, which is the shale that sourced all of the oil in Colombia and Venezuela. It's the same sort of shale as the Eagle Ford. We think we've identified a sweet spot there, so we're going to be doing some exploration there.
We think that about that $300 million spend is going to be enough, certainly for the next several years, to continue to add to the low cost of supply resource base.
The thing we're doing on the exploration side is it's all got to compete in a lower than $50 a barrel cost of supply world for us, fully loaded.
Yeah.
We're not exploring for anything we don't meet that hurdle. If we find something that takes appraisal and development to go do it, and it gets above that hurdle, we'll probably try to monetize it somehow. We're actually thinking we've got opportunities and sets in there that would compete well as the discovery comes into the development portfolio. We'll make room for it. Jason.
Yeah. Thanks, everyone. It's Jason Gammel with Jefferies. Just looking at the sustaining CapEx at $3.5 billion, or even the all-in CapEx of $5.5 billion, with 100% reserve replacement, implies the $12.50 finding development cost at the high end and $8 at the $3.5 billion sustaining. Pretty dramatic increase in capital efficiency from, let's say, a trailing three-year average. Can you talk a little bit about how that's been achieved, and how much of it is just general deflation versus increasing quality of the portfolio and capital allocation? Then within that 100% reserve replacement, how much of that should we think of as coming from the unconventional investment versus the investment in the conventional?
So-
No, go ahead.
Our average F&D over this plan is around $11 a barrel. The reason for that is a lot of this capital is going into the unconventionals when you put the sustaining capital and the growth capital there. The F&D in that part of the portfolio is less than 10. The aggregate is somewhere in the $11 range. That's why we can get more than 100% reserves replacement with this capital efficiency.
Back. We'll come back. Who else on this side?
Thanks. Just to follow up to my previous question. One of the interesting aspects of BP's plans is that they've capped CapEx. They say they won't spend more than $17 billion. There's a real argument that prices in this timeframe, actually, as you've shown, could, let's say, go back to $75 a barrel sustained. How would this all change in a much higher price scenario?
Well, I think, the way I would describe it, Paul, is we've kind of set our scope over these three years. In a higher price world, we'll get some inflationary pressures. We might see some growth in capital. What we're trying to communicate to you is we feel really comfortable with the scope that we've outlined. If you come to me and say, "Are you going to double your scope?" Meaning, are you going to double your rig count in the unconventionals or something like that's not in our sight. We've really locked the scope down for this plan that we've described to you over the next three years. We said, on average, it's going to be about $5.5 billion. If we see $70 oil, we're going to be faced with some increased inflationary pressures.
We have ideas and ways we can offset that through efficiency gains and other kinds of things. More importantly, we feel our scope. We know the scope we want to deliver over the next three years. Then the price is going to be a function of how much that cost will be somewhat a function of what price environment we're in.
Yeah. It feels like the 5%, which I guess is an upside surprise from today, the 5% CAGR. Is that on a per share basis? I wanted to clarify.
The-
No. That's-
Volume growth. The production.
The production. That's absolute.
On a per-share basis, it's significantly higher than that because the share count's coming down. On a debt-adjusted per-share basis, significantly higher again. You can do that, I think we lay that math out in the deck.
Right. I assume that we would imply that it would be more about cash return to shareholders than acceleration.
Yeah.
significantly 50% higher.
I think we've demonstrated that in our past, where we will not drill into really significant inflationary headwinds.
I might add, that's the program we're staffed for as well across our organization around the world. We're not set up to go do some other plan with a lot more activity.
Yeah. There's one in back here. Yeah.
there's one here, Ryan.
I'm sorry. We'll get this, and I'll come right back to you once we get a microphone.
Thanks. Michael Hall with Heikkinen Energy. Just thinking through the allocation of that unallocated $4.5 billion of cash, how do you arrive at what's the right level of cash on hand for the business plan, and then what's the bias in terms of using that unallocated capital over time? Is it to further bolster the portfolio or to build onto the return of cash to shareholder theme?
I'm going to let Don ask how much cash we need to run the company, and we can both probably comment on the priority here.
Obviously, we have a lot of cash on hand today. That cash has pretty much been pre-allocated, right, for debt reductions, another $5 billion, and then share buybacks over the next two, well, three years now. To answer your question, what's the sort of operating cash needs of the company? That's less than $1 billion. Call it $1 billion. That's what we would normally do. Depending on the environment, if we feel like the market's kind of overheated, the commodity market's overheated, we don't mind letting cash balances rise because we don't think that they're going to last that long.
Again, our targets are through the cycles. We want to make sure we're willing to let cash rise on the balance sheet a little bit because we have a view of volatility, and we want to make sure that our distributions to shareholders, we don't want to super flex our capital program. We've locked scope. We know what we want to go deliver. If we have to flex the capital program, we're willing to go do that. If we keep a little balance sheet capacity on hand, we can flex that as we see what the market gives us. Our fear is if things go to $65, $70, $75 a barrel, the supply's going to come, and what happens to price in the next downturn?
We think the cycles are getting shorter and the volatility's going to be there, and we have to manage through this volatility and make sure that we're being consistent in terms of our returns and our distributions back to shareholder and how we're running the company in a period of a lot of volatility. We think that's here to stay. That's our view. That's how we're trying to manage the company.
The clear bias recently has been returning that cash to shareholders. As you move through the plan in future, let's say, weak periods of the cycle, would you use that to be more proactive in terms of building on the portfolio again, or?
We have that opportunity. We have that option. Again, we think we asked the question about M&A.
Sure.
Certainly the place we've come to, it just has to be accretive and a better return picture over the long haul relative to what we're executing today. That's a really high hurdle. We look at it. We look at all the options. We understand what we like. We know what we like. We know what fits with the strategy of the company. We know what fits with the value proposition of the company. We don't be blind to that, we are looking at it. It's just a really high hurdle.
Yeah. What's striking about this presentation is despite the dispositions and the cash returns to shareholders, you managed to significantly increase the resource with a cost of supply of $40 and less. Could you just give us from the top of the house, just a couple of reasons, a couple of drivers of the increased resource at that really low cost of supply? Is this something that could be repeated over time? Clearly, 30%, you can't grow that 30% ad infinitum, what's really driving that?
Well, I'll give you a couple high level marks. I can let Al get into maybe some of the details. The technology and the innovation that we've seen in the unconventionals are not just happening in the unconventionals. When we look at our Alaskan business, Al described a little bit of the reductions in the cost of supply there in our conventional assets. You look at Norway, you look at the U.K., you look at what's happening in China and what's happening in Indonesia and other places. All that's going on, that efficiency, that technology, that innovation is driving cost of supply down, that's what we see.
There's a bunch of great examples in the appendix of actual examples of all these different things around the world where we've been doing this. But I think frankly, part of why the $40 and less has grown so much over the past year is you may remember that when we introduced this corporate cost of supply curve last year at this same meeting, and we said then that in our company, everybody knew that you weren't even invited to the capital allocation meeting if you weren't below 50. Really what's happened over the last year as we've sort of seen the way the macro environment has developed and sharpened our own view of the future that Ryan was just talking about, you really don't get into the meeting at 50 anymore. It's really 40 now.
Everybody in the company now knows that if you expect to get unless you've got some really exceptional special story that if we don't do it right now, we're going to lose it kind of thing. You really got to be below 40 to get capital in the company today. Everybody knows that. I think that's really driven a lot of special efforts using today's technology, data analytics, et cetera, but also the work that we're doing with our contractors and the supply chain side, et cetera. Just so many different micro decisions and forces pushing down that cost of supply so that they can get into the capital allocation meeting at ConocoPhillips, really. You got to have a three handle, really.
You might get in the door, but you don't get a seat at the table.
Yeah. Standing room only if you're in the 40s.
It really has created a competitive tension in the company because everybody sees, and we share that pretty widely. We just got together our top 25 people across the company and all our regional presidents around the world. They see what the other regions are doing. They see what the cost advantages they're doing. They go back and say, "If we want to fund this next development, this next platform." An example that you'd want to get money for this next platform in Norway, we got to figure out how to make it an unmanned platform because we can't afford to man it. That example sits in the appendix as well. Those are just some examples of how that conversation has progressed inside our company because of those competitive forces. In fact, we'll go back. Take one more.
Looks like we're exhausting our questions, so we'll go back here and call it a day.
Apologies, Ryan. It seems that we might be recycling some of these questions. I just want to make sure I'm not missing what might be a small contradiction in the messaging this morning. Don talked about $7 billion of cash flow at $50 oil, and the CapEx budget is five and a half, and the emphasis is growth per share with buybacks. It would seem then that the buybacks are only really coming from asset sales, and that the residual cash flow is really covering the dividend. Why, again, is five and a half billion the right number? It would seem there's no room for buybacks in the plan that you've laid out, assuming $50 oil.
Well, I think Don showed we're cash flow neutral with respect to what we're doing in 2018. He showed the margin expansion and the production expansion that's going to happen, that's going to drive that free cash flow above and beyond where we're at in 2018 with the plans that we've set aside. The five and a half billion is an average capital over that three-year plan, so we expect the free cash flow to grow, and I think you should expect that distributions will grow along with that as well.
Less significant.
Sorry?
Just in terms of order of magnitude, I think you said in the presentation that categories 4 and 5 would equally compete for capital buybacks and investment. Unless we're looking at material cash flow growth in a flat $50 oil price, it would seem that the space for buybacks is significantly less than the growth capital, if you see what I mean.
Yeah.
too.
The key is that we, as we talked about today, with this plan at $50 and spending $5.5 billion, we have greater than 10%, double-digit compound annual growth rate in our cash flow. That's not a per share metric. That's an absolute cash flow. If you do that math, in the early years of this time, we're covering our capital and our dividends plus some from the cash flow at $50. We're buying back shares with sales proceeds. As you move across that 3-year period, by the time you get to the back end, you can organically fund all of that from cash flow due to the growth.
But you're going-
With additional distributions, if we choose to do that. That's where the four and a half billion dollars of incremental cash that Matt described in his waterfall slide, that's the really penultimate slide. That's the slide that describes our strategy for the next three years in a nutshell. That sources and uses slide, that shows what kind of free cash is generated above and beyond the plan that we have available.
That's what's been in that $1.2 billion to drive that 5% absolute growth and the greater than 10% cash flow growth does for us, gets us into that mode in the back part of that period.
Let me wrap it up there. Just again, thank you all for your participation today. Hopefully, you've seen what plan that we're rolling out, the plan that we're going to execute over the next three years. It delivers superior returns to our shareholders. We do that through reducing the debt, growing the dividend, reducing our shares, and growing our cash flows. All that's in service to growing our returns. It's growing our cash return on capital employed, growing our return on capital employed. We set out clear metrics. We think it's a measurable plan. You can hold our feet to the fire on this plan, and we intend to deliver it and some. Thank you all for sharing with us today.
I think we have some lunch, hopefully not too early, we did want to get through crisply today and not drone on with death by PowerPoint. Hopefully, we've delivered on that a little bit better today than maybe in years past. I think we have a good story, and we appreciate your attention.