Earnings Call: Q3 2019

Oct 29, 2019

Good morning, and welcome to the ConocoPhillips Third Quarter 2019 Earnings Conference Call. My name is Anara, and I'll be the operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question Please note that this conference is being recorded. I will now turn the call over to Ms. Ellen DeSantis. Ellen, you may now begin. Thanks, Anara. Hello, everyone, and welcome to our Q3 earnings call. Today's prepared remarks will be delivered by Dawn Walette, our EVP and CFO and Matt Fox, EVP and our Chief Operating Officer. Our 3 region presidents are also in the room with us today. They are Bill Bullock, the President of our Asia Pacific Middle East region Michael Hatfield, the President of our Alaska, Canada and European Europe region and Dominic Macklin, the President of our Lower forty eight region. Page 2 of today's presentation deck shows our cautionary statement. We will make some forward looking statements during today's call. Actual results could differ due to the factors described on this slide and also in our periodic SEC filings. We will also refer to some non GAAP financial measures today, and reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and also on our website. One final comment before I turn the call over to Don. Given that our November analyst and investor meeting is only a few weeks away, we're going to limit questions to 1 per person and ask that questions address today's earnings release or recent announcements. And with that, I'll turn the call over to Don. Thanks, Ellen, and good morning all. I'll begin with the Q3 highlights on slide 4. Starting on the left with our financial performance, we realized adjusted earnings of $900,000,000 or $0.82 a share. Higher LNG realizations and higher production volumes combined with lower overall costs to mitigate the impacts of reduced marker prices. Cash from operations was 2,600,000,000 resulting in free cash flow of $1,000,000,000 in the quarter and $4,000,000,000 year to date. We ended the quarter with $8,400,000,000 of cash and short term investments, and our strong financial returns continued with a return on capital employed at just under 11% on a trailing 12 month basis. Moving to the middle column, operationally in the quarter, we produced 1.32 1,000,000 barrels of oil equivalent a day, up 7% on an underlying basis compared with the year ago quarter and up 12% on a per share basis. Matt will cover the rest of the operations highlights in a moment. On the strategic side, earlier this month, we announced a 38% increase to our quarterly dividend, which reflects the company's improved underlying financial strength as well as our commitment to peer leading capital returns to shareholders. In addition, we repurchased $750,000,000 of shares in the quarter and announced our plan to buy back $3,000,000,000 of shares in 2020. In both the Q3 and year to date, we've returned over 40% of CFO to our shareholders. We closed the sale of our E and P assets in the UK in September, which generated $2,200,000,000 in proceeds. And as recently announced, we entered into definitive agreements for the sale of our Australia West business. If you turn to slide 5, I'll wrap up with a look at our cash flows for the quarter. We began the quarter with cash and short term investments of $6,900,000,000 Moving to the right, cash from operations was $2,600,000,000 There were a couple of items impacting cash from operations in the quarter that are noted here. 1st, in conjunction with the UK sale, we made a one time top up contribution to the pension plan such that it is now fully funded and essentially self sufficient. That $320,000,000 can be viewed as an acceleration of future pension contributions. And second, as we do each quarter, we note the cash received during the quarter associated with the PDVSA settlement. To date, we received over $750,000,000 related to the $2,000,000,000 settlement agreement reached in the Q3 of last year. Working capital was a $300,000,000 use of cash, and as mentioned, we recognized $2,200,000,000 in proceeds from closing of the UK disposition. Capital spending was $1,700,000,000 resulting in free cash flow of 1,000,000,000 in the quarter. And we distributed 1,100,000,000 or 41 percent of CFO to shareholders during the quarter through dividends and share buybacks, ending the quarter with a cash balance of $8,400,000,000 So as you can see, this past quarter once again continued our trend of consistent strong operational and financial performance. It also demonstrates our unwavering commitment to financial returns, capital discipline, free cash flow generation, and returning capital to shareholders. We firmly believe that ours is a sustainable, distinctive, and compelling value proposition, one that is highly competitive not only within the energy sector but also across the broader market. With that, I'll turn the call over to Matt. Thanks, Don. I'll provide a brief overview of our year to date operational highlights and discuss our outlook for the remainder of the year. Please turn to Slide 7. Across the portfolio, we continue to advance the operational milestones we highlighted at the end of last year. Starting in Alaska, we safely completed our Q3 turnarounds at Prudhoe, the Western North Slope and Kuparuk and closed the Nuna Discovered Resource acquisition. We also continue to progress appraisal of our Willow and Narwhal discoveries. Earlier this month, we spud another horizontal well from an existing Alpine drill site into the Narwhal trend. The well is designed to provide offset injection to the horizontal producer we drilled earlier in the year and help us optimize future development planning. We're also gearing up for the winter exploration, appraisal and project execution season. Moving to Canada, we completed commissioning of our Montney gas plant this quarter. Due to delays in the 3rd party pipeline, we now expect that project to be online in early 2020. At Surmont, our alternative dillion project is on track for start up in the Q4 as planned. In fact, we're actively transitioning to date to start condensate blending for dilbit sales beginning on November 1. This capability will not only reduce the amount of diluent we require, but also provide blend flexibility and consistently improve our netbacks. In the Lower forty eight, Big 3 3rd quarter production by asset was Eagle Ford at 226,000 barrels equivalent per day, Bakken at 102, and Delaware at 51, for a total of 379,000. As we indicated last quarter, we expect Big 3 production to remain relatively flat for the remainder of the year and we're on target to achieve a full year growth rate of about 21%. Lastly, in the Lower forty eight, we now have 3 Vintage 5 multi well pilot pads online in Eagle Ford and you'll hear more about that in a few weeks. Moving over to Europe, the UK disposition closed and we successfully transitioned operatorship. In Norway, partner operated turnarounds were safely completed in the Q3. In Qatar, we've been invited to submit a bid for the North Field expansion project. And in Malaysia, production ramp up at KBB continued through the quarter and we expect to reach full throughput by year end. In addition, Gamussu Phase 2 came online in August. And finally, in Australia, we announced the divestiture of our Australia West assets for 1,400,000,000 dollars which we expect to close in the Q1 of 2020. Meanwhile, we continue to progress Barossa and remain on schedule for FID by early next year. So we've had another strong quarter of execution as well as significant progress across the portfolio. Now I'll discuss the outlook for the remainder of the year on slide 8. As we enter the last quarter of 2019, we're continuing our focus on execution while maintaining capital discipline. Our full year operating plan capital guidance remains unchanged at 6,300,000,000 dollars excluding about $300,000,000 of opportunistic low cost of supply resource additions that we discussed last quarter. On the production side, full year guidance also remains unchanged except for updating for the close of our UK asset divestiture. With that in mind, we now expect the 4th quarter to average between 1.2650000001.305000000 barrels equivalent per day, with a full year guidance between 1,300,000 and 1,310,000 barrels a day. So we remain on track to deliver 5% underlying full year production growth and combined with our buyback program, that results in 10% production growth per share. Finally, we're looking forward to our Analyst and Investor meeting on November 19 in Houston. We'll show a decade long disciplined plan that delivers free cash flow and strong returns. And of course, we'll provide a deep dive into the assets across our diverse portfolio. Our continued strong performance highlights the strength of our portfolio diversity and our ability to generate free cash flow to support distinctive returns to shareholders. Our entire ConocoPhillips team is focused on successfully executing the remainder of our 2019 plan and we look forward to sharing our longer term plans with you in November. Now we'll open up for questions on the quarter. Thank you. Our first question I'm sorry. We will now begin the question and answer session. And our first question comes from Phil Gresh from JPMorgan. Please go ahead. Your line is open. Yes. Hi, good morning. First question here, just as you said on the quarter, As we look ahead here to the Q4 guidance, it looks like from your prepared remarks, the production outlook was just meant to be an adjustment for the closing of the UK transaction. Just wanted to confirm that and if there are any other moving pieces we might want to be thinking about for the quarter? Thanks. Yes, Phil. Yes, it really is just an adjustment for the U. K. Change. It's a bit less of an increase from the 3rd to the 4th quarter than we usually see, but that's mostly because we've had front end loaded production in the Lower 48 in Qatar. And it's also influenced to some extent by the fact that Montney startup has slipped into the Q1 because of this delay in the 3rd party pipeline. But really, primarily just reflecting the change in the U. K. Okay, got it. And then just one for Don. On the cash flow, you've had a decent working capital headwind year to date. And I was just wondering if there are any transitory dynamics there that could reverse some of that in the Q4. And then obviously, I think we're going to get a step up in the APLNG distributions as well, correct? Yes, Phil, on the APLNG distributions, yes, we do expect the even quarters to be high and the odd quarters to be low. So we'll continue that trend. We had 60,000,000 distributed in the 3rd quarter. I would expect that number to grow to about 300,000,000 in the 4th quarter. So still pretty consistent with what I guided to last time, which I think was $750,000,000 for the year on APLNG. On working capital, we had a $300,000,000 use in the quarter. And there, we saw an increase in accounts receivable due to some sales timings on liftings in Norway and Malaysia both and a decrease in accounts payable of about the same about 150,000,000 and that's just normal payment timing. So there's really not a lot going on there. I wouldn't suggest that we have a trend line that we're following. Thank you. Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Please go ahead. Your line is open. Thank you. Good morning, everybody. I wonder, again, trying to stick to the quarter, I guess, with also one of the things you included in your slide today, Matt. Your decision to exit Barossa in the middle of the quarter, but yet prepared to still consider investment in Qatar. Just wonder if you could walk us through your thinking in terms of LNG market outlook, why exiting 1 and still being involved in another might make sense for you guys. And maybe if you could add a kind of Part B to that, just it looks like international gas prices were a little bit better this time. I'm just wondering if you're seeing any improvement or is that just a lag effect on pricing? I'll leave it there. Thank you. Thanks, Doug. We decided to exit the ABUS, not because we're concerned about the cost of supply there. We actually think that is a competitive project, but we concluded that we should monetize those assets and redirect the capital to higher returning projects across the rest of our portfolio. So it was a pretty straightforward allocation of capital decision for us to make the decision that we did ABUS. We are still interested in the Qatar Northfield expansion. We think that will also be a very competitive cost of supply LNG project, and we will continue to progress those discussions with Qatar as we go through the rest of the year and into next year. Thank you. Our next question? Yes. Doug, you had a question about LNG realizations in the Q3. So I just wanted to address that. And you're right, it is the lag effect in pricing, the way these long term contracts work. So for example, in the quarter, Brent, as you know, was down about $7 from the previous quarter, but JCC pricing was up $8 So what you're seeing is just the lag effect on LNG realizations. Go ahead, Zenera. We'll take our next question. Thank you. I apologize about that. Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open. Good morning, team. The first question I had was around Qatar. Can you remind us again, Matt, just around the mechanics of production? To the extent you have a heavy first half weighted production run-in Qatar, does that come up against any caps or restrictions on volumes as you get into the Q4? Yes, so we've already talked as we've gone through the year about the front end loaded nature of the Lower 48. In Qatar, there's an annual limit to total production that we can produce there in Qatar. And we had very strong performance through the 1st 3 quarters. So that means that we choke back in the 4th quarter to meet our limit. That's something that's been in place from the beginning of Qatar, but it's been a bit more pronounced this year because performance has been so strong in the 1st three quarters. Thanks Matt. And then drilling down into the Lower 48, can you just walk us through each of the three regions and what you're seeing from a volume perspective as you go into the Q4? Anything notable that you would call out in terms of how the performance is play by play? Yes. Thanks, Neil. It's Dominic here. I mean, I think in terms of Q4 outlook on the big three, all pretty flat. I think Eagle Ford, pretty flat from Q3 into Q4. Bakken had a good strong quarter in Q3. It's probably relatively flat into Q4. We may see some weather impacts in December up there in North Dakota, of course. We will see a little bit of growth in the Delaware. But overall, our guidance is relatively flat Q4 for the big three versus Q3. We will see continued growth in 2020 in the big three and we look forward to talking about that in November. Thank you. Our next question comes from Doug Terreson from Evercore ISI. Please go ahead. Your line is open. Hi, everybody. Hi, Doug. So my question is about the implications of divestitures in the North Sea and Western Australia on your total corporate retirement obligations and specifically how you expect those to change once those asset sales close? Doug, this is Don. I can give you some guidance around the asset retirement obligations. In the UK, I think we've already published that, but that's 1,800,000,000 dollars of reduction in ARO. And then in, let's say, Australia West, assuming that that completes in the Q1 next year, we would expect that ARO reduction to be about $650,000,000 So combined between the 2 major asset sales, we'd see a $2,500,000,000 reduction, that's about 30% of our balance. Thank you. Our next question comes from Roger Read from Wells Fargo. Please go ahead. Your line is open. Yes. Good morning. Thanks. I was just curious, hearing that the winter program is already pretty set, just kind of curious about an update there, what we may look for in the coming months? Hi, Roger. This is Michael. We're gearing up for our winter drilling program now. In fact, this upcoming winter program will be our largest ever. We'll drill wells in and we're looking forward and we're looking forward to sharing the details of that program at our meeting in November. There's really nothing further to share at this point. All right. I'll leave it there. Thanks. Thank you. Our next question comes from Paul Cheng from Scotia Howard Weil. Please go ahead. Your line is open. Hey, guys. Good morning. Matt, just curious that on Mondi, I think you guys are targeting on the condensate window. What's the API you're targeting? Because one of the push back we heard from people is that, up there that people actually want to have a higher API condensate so that they use lesser of the pipeline space when they brand it with the bitumen. So from that standpoint, I mean that why that you guys think that your condensate, if you get from there, if it is a lower API, you will have a good market? Thanks, Paul. This is Michael again. Our liquids in Montney is about half of our product mix and about 2 thirds of our revenue mix. About over half of that is condensate and it's a fairly light condensate, it's about 40 degrees. It's not linked physically with our Sirmont asset. We'll sell the condensate into the market. And in fact, we're in the process of just waiting on the 3rd party pipeline to start up our gas plant probably early next year. And so we'll start to see production results from this first pad that we'll bring online at that time. So the condensate and other products will all be sold into the market in Canada, which is actually a pretty strong market in terms of condensate. Michael, I'm you say what is the API for your condensate? Yes, it's around it's in the 40 degree range, plus or minus. 40? Okay. That seems pretty low. Okay. Thank you. Thank you. Our next question comes from Paul Sangh from Mizuho Securities USA. Please go ahead. Your line is open. Thank you. Hi, all. We had a question about the maintenance capital levels that will be ongoing after the disposals you made, Matt. So we wanted just to know what the impact is on spending on an ongoing basis from the disposals. And if I could follow-up on the M and A theme, could you talk a little bit about the $300,000,000 of opportunistic add ons, I think you call them? What are the parameters for those deals? And do we assume that the parameters that you're using there would be similarly applied to a bigger deal if you made one? Thank you. Thanks, Paul. The maintenance capital, assume you're referring to the sustaining capital number that we Yeah, exactly. Sustaining is what I should have said. No, that's fine. They're sort of interchangeable, but the that's around $3,800,000,000 and that continues here. In fact, it continues through the next decade. We're going to talk about that some in a few weeks. So there's no significant change there. There's some puts and takes with the acquisitions and growth in the unconventionals, but stays around $3,800,000,000 and that keeps our sustaining price, which is what we're really focused on well below $40 a barrel. On the M and A front, the it was really you referred really to the $300,000,000 we spent this year on acquisition capital. So those were adding positions in Alaska. The Nuna trend is now closed. In the Lower 48, adding for the most part royalty acreage within our existing operated positions. Some smaller additions in the Montney continue to continue coring up there and then entrance into the Vaca Muir AAA in Argentina. And there's nothing new in this quarter in that respect. But you asked what the sort of decision criteria are when we're thinking about those. It's basically, we're focused as we are in all of our capital investments on the cost of supply. So we have to be able to see the acquisition price plus the development cost of supply in aggregate being competitive with other sources of resource additions. And again, that's something that we'll talk about more about in November, just philosophically how we think about all of that in the context of asset or corporate acquisitions. Thank you. Our next question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open. Hi, good afternoon, everyone. Hi. Hi, hello. In terms of Alaska and I think this question qualifies because it's on recent news. Do you see anything changing from an operating perspective now that you have a new partner with BP exiting? And have you had maybe any early conversations? And could there be some upside there? And I guess what we're getting at also is because we've noticed that you spent almost all of the full year budget in Alaska already? Yes, Janine, this is Michael again. So with the transition from Hillcorp sorry, from VP to Hillcorp, it's still early stages. So the we're still pending the successful close of that transaction. But Hillcorp does have a track record in Alaska of rejuvenating mature fields. They've reduced lifting costs, they've increased development activity and increased production in these other fields. And so we expect to see a reduction in operating costs and a renewed focus on investment. Now any capital plans for Prudhoe Bay require the approval of Hillcorp, Exxon and ConocoPhillips. And so while we work very closely today with BP as the operator, we'll continue to work closely with Hillcorp as they come in and Exxon to maximize the value of this legacy asset. So we're excited for this transaction. We see opportunity to unlock more value at Prudhoe Bay. Okay, interesting. We'll stay tuned. Thank you very much. Thank you. Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open. Another Alaska related question. If we think about the Fair Share Act ballot initiative, can you talk about that and perhaps put it in the context of the longer term ebb and flow of tax policy up on the North Slope? Yes, thanks, Bob. This is Michael again. It's a situation that we're monitoring very closely. I'd say this initiative is not in the best long term interest of the Alaskan citizens. We believe the Alaskan citizens will see the benefit that the North Slope Exploration Renaissance has already brought to the state and to its citizens. If you look at the positive changes that have occurred since SB21 went into effect in 2013, ConocoPhillips and others have announced several additional discoveries and projects that could add significant incremental production and revenue to the state. And so we believe that continuing those investments is good for employment, it's good for the Alaskan economy, and it's good for the Alaskan citizens. And so that's for both now and over the long term. And so we feel like it's also worth noting that this sort of initiative has come up in the past, and we've successfully informed voters of the negative consequences of jobs, production and long term revenue. The impact of those sort of initiatives have on the benefits of the citizens would see. So we do have a long history of engagement with the public. We feel that there's a mutually beneficial relationship with the stakeholders. And in short, so it's very much on our radar and something we're monitoring quite closely and we do expect, in fact, we're gearing up now to make our case to the citizens about the benefits of continuing under the fiscal regime that we currently have. Great. Thanks for that. Thank you. Our next question comes from Jeffrey Lambujon from Tudor, Pickering, Holt. Please go ahead. Your line is open. Good morning. My question is just on capital allocation for the remainder of this year, just thinking about the unchanged budget. I would have thought there may have been some downside potential in spending just given the UK close. So just looking for any color on where that unspent CapEx might be allocated to instead for the remainder of the year? Yes. And the this is Matt, Jeffrey. So, so far this year, our run rate has been about $1,600,000,000 a quarter. That's going to drop by $100,000,000 into the Q4, part of it because of the U. K. Disposition, but also just general phasing, primarily associated with completions and refracs and exploration timing. And it's just that those modest sort of plan changes that cause us to go from a run rate of 1.6 to 1.5. Thank you. Thank you. Our next question comes from Michael Hall from Heikkinen Energy. Please go ahead. Your line is open. Thank you. Good morning. Appreciate the time. I guess maybe going back up to Alaska, sorry. Can you guys provide an exit rate on what Alaska production looked like after the turnarounds? Yes, we're producing around the 210,000 to 220 1,000 barrels a day at this point. Great. That's helpful. And then on the Canadian gas plant, can you just remind me what the net capacity on that is to those operations and to you? Yes, the capacity is about 100,000,000 cubic feet a day. One of the benefits that we have of the plant that we've designed here is we can design 1 and build many. So as we're in this appraisal mode and we ramp up to different stair steps of production levels, we'll be able to clone this plant multiple times over. Thank you. Our next question comes from Pavel Molchanov from Raymond James. Please go ahead. Your line is open. Thanks for taking the question. First, just a quick one about gas pricing. You mentioned the lag effect benefiting LNG in the quarter. But in your European gas pricing, it was the lowest number, as far as I can remember on record lower than in 2016 even. I'm curious why North Sea Gas was so depressed in the September quarter? Hey, Pavel, this is Don. Yeah, all of the markers were down during the Q3 Brent to WTI and Henry Hub, of course, here in the U. S, AECO, international gas in Europe. LNG of course is quite different and is priced differently. That's why we saw the increased realizations in the Q3. But now that's just a supply and demand factor in Europe, there's a weakness in the market or there was in the Q3 and it continues in the 4th. Okay, understood. My follow-up, a little more thematic, I may. In your sale of Australia West, did you consider including APLNG as part of the same transaction to simply exit Australia altogether? This is Matt Pavel. No, this was focused on the cash flow characteristics in ABUS and the nature of that asset at the stage of the life cycle. And it wasn't we didn't consider an exit of Australia in its entirety. Thank you. We have a question from Doug Leggate from Bank of America Merrill Lynch. Please go ahead. Your line is open. No, I asked my one question already. I think that's a mistake, but I can ask another one if you like. Well, I have you guys. I actually didn't line up for another question. I feel quite embarrassed, but I had another one written down. Just on your cost guidance, I'm expecting this will come up next week, but the costs look like they've been running a bit late this year. I'm just wondering if there's anything that we should read into that. Are you doing a lot better on both operating costs? And I guess DD and A is a bit low as well, but pretty much on the cash costs. But I'm guessing that's something you will address in a couple of weeks, but any comments you can share, but and I'll extend my gratitude to the operator for giving me a second shot. Thanks. Doug, thanks for your second question. Now the operating costs continue to hold the line. In fact, in the Q3, I think our production and operating costs and SG and A were down about 6% or so from the previous quarter. I wouldn't read a whole lot of that into that. Some of it was we had a bit higher cost in the Q2 because of the turnaround activity and we had, I think, a settlement litigation thing that we settled. So we see operating costs remain essentially flat for this year. And so we're not adjusting the full year production and operating cost guidance at this time. I mean, we can talk more about how we see that outlook going forward next month, but we continue to be aggressive on trying to keep a very efficient operating structure. Thank you. And at this time, we have no further questions. I would like to turn the call back to Ellen. Thank you, Zonara. Thank you to our listeners today. We look forward to seeing you in a few weeks. Appreciate your time and interest in ConocoPhillips. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.