Welcome to the first quarter 2023 ConocoPhillips earnings conference call. My name is Michelle, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star one one on your touchtone phone. I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.
Thank you, Michelle, and welcome to everyone to our 1st quarter 2023 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO, Bill Bullock, Executive Vice President and Chief Financial Officer, Dominic Macklon, Executive Vice President of Strategy, Sustainability and Technology, Nick Olds, Executive Vice President of Lower Forty-eight, Andy O'Brien, Senior Vice President of Global Operations, and Tim Leach, Advisor to the CEO. Ryan and Bill will kick off the call with opening remarks, after which the team will be available for your questions. A few quick reminders. Along with today's release, we publish supplemental financial materials and a slide presentation, which you can find on the investor relations website. During this call, we will be making forward-looking statements based on current expectations.
Actual results may differ due to factors noted in today's release and in our periodic SEC filings. Finally, we will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release and on our website. With that, I will turn the call over to Ryan.
Thanks, Phil. Thank you to everyone for joining our first quarter 2023 earnings conference call. Since we just hosted our Analyst & Investor Meeting in New York a few weeks ago, we are going to keep our prepared remarks fairly brief today. ConocoPhillips delivered a strong first quarter result, setting a new production record for the company as well as in the Lower Forty-eight. Underlying production growth was 4% year-over-year, including 8% year-over-year growth in the Lower Forty-eight. We are confident in our outlook for the rest of the year, and we are increasing the midpoint of our full year production guidance. We're keeping our full year capital and operating guidance unchanged. Shifting to returns on and of capital, we continue to demonstrate our returns-focused value proposition in the first quarter.
Our return on capital employed once again exceeded our goal of being top quartile in the S&P 500. As we highlighted at the recent Analyst & Investor Meeting, we remain confident in our ability to achieve this objective in a mid-cycle price environment over the course of our 10-year plan. On return of capital, we are on track to deliver on our planned $11 billion for 2023, which represents greater than 50% of our projected CFO and is highly competitive with peers. We are able to achieve all of this while investing in our attractive mid and long-term opportunities. Our first quarter was also quite busy from a strategic perspective. At Port Arthur LNG, we acquired a 30% equity interest in the joint venture upon final investment decision on phase I.
At Willow, we are pleased to receive a positive record of decision and began road construction. At APLNG, we announced plans to become upstream operator following the closing of EIG's transaction with Origin and to purchase up to an additional 2.49% in the project. We also accelerated our 2030 greenhouse gas emissions intensity reduction target to 50%-60% versus a 2016 baseline as we further advance our net zero operational emissions ambition. I know everyone has the question on Surmont, so let me address that right now. We acknowledge that we received our right of first refusal notice, and we're certainly reviewing it carefully. In conclusion, as we shared at our Analyst & Investor Meeting last month, our deep, durable and diversified asset base is well positioned to generate solid returns and cash flow for decades to come.
As I said then, we challenge any other E&P company to show you a plan with this kind of duration. Let me turn the call over to Bill to cover our first quarter performance in more detail.
Thanks, Ryan. In the first quarter of 2023, we generated $2.38 per share in adjusted earnings. First quarter production was a record for the company at 1,792,000 barrels of oil equivalent per day, driven by solid execution across the entire portfolio. Eagle Ford stabilizer expansion and QatarGas 3 plant turnarounds were both successfully completed, and Lower Forty-eight production was also a record, averaging 1,036,000 barrels of oil equivalent a day, including 694,000 from the Permian, 227,000 from the Eagle Ford, 98,000 from the Bakken, and Lower Forty-eight underlying production grew 8% year-on-year, with new wells online and strong well performance relative to our expectations across our asset base. Moving to cash flows.
First quarter CFO was $5.7 billion, excluding working capital at an average WTI price of $76 per barrel. This included APLNG distributions of $764 million. First quarter capital expenditures were $2.9 billion, including $400 million for Port Arthur phase I and $100 million in Lower Forty-eight acquisitions. Regarding Port Arthur, as you will recall from our fourth quarter call, we said we plan to spend about $1.1 billion in 2023. First quarter spending was fairly front-end loaded relative to the full year. In the first quarter, we also received $200 million in disposition proceeds. Regarding capital allocation, we returned $3.2 billion back to shareholders, and this was via $1.7 billion in share buybacks and $1.5 billion in ordinary dividends in VROC payments.
Turning to guidance, we forecast second quarter production to be in a range of 1.77 million-1.81 million barrels of oil equivalent per day. This includes 10,000-15,000 of planned seasonal turnarounds. We have also increased the midpoint of our full-year production guidance by 10,000 barrels a day. Our new range is 1.78 million-1.8 million barrels of oil equivalent, up from 1.7 million-1.8 million previously. For APLNG, we expect distributions of $350 million-$400 million in the second quarter. For the full year, we expect APLNG distributions of $1.8 billion. All other guidance items remain unchanged. To wrap up, we had a strong first quarter.
We remain confident in our outlook, leading to our increase in full-year production guidance, and we expect to return $11 billion to our shareholders this year. We're well-positioned to deliver on our commitments throughout this year. That concludes our prepared remarks, and now I'll turn the call back over to Phil.
Great. Thanks, Bill. Before we move to Q&A, just a quick reminder here that we are sticking to one question per caller this quarter since we just hosted the Analyst Day a few weeks ago, and it's obviously quite a busy earnings day for everybody. With that, Michelle, let's move to the Q&A.
Thank you. We will now begin the question-and-answer session. If you have a question, please press star one one on your touch-tone phone. If you wish to be removed from the queue, please press star one one. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one one on your touch-tone phone. Please stand by while we compile the Q&A roster. The first question comes from Stephen Richardson with Evercore. Your line is open.
Great. Thank you. Ryan, I was wondering if you could talk, I mean, on the return of capital. You know, obviously outperforming, you know, 50% of cash flow from ops, and setting up, you know, really strongly versus the $11 billion target. Just wondering if you could address, you know, the environment is not straightforward. There's a lot of volatility out there. Just from a shareholder's perspective, how do you think about balancing, you know, VROC, buyback, and just the general flexibility as people consider kind of the volatility in the commodity environment?
Yeah. Thanks, Stephen. I think, let's start just by recognizing the volatility that's currently in the market. Even with that, as we look at the first quarter average prices were, you know, in the mid-70s WTI, quarter to date in the second quarter, and they're in the high 70s. That's close enough to our planning framework that we set out early in the year that close enough to 80 and delivering the $22 billion in cash for the year. We're not gonna overreact to kind of what we're seeing in the volatility right now. We're on track, and hopefully you see that with the VROC that we set for the third quarter on track to deliver the $11 billion distributions that we set out at the beginning of the year.
We're comfortable with that. We have the balance sheet to support it if prices turn out a little bit lower as well. You know, it would take a structural change, and we certainly don't view this volatility we're seeing right now as a structural change in the marketplace. In terms of the mix and the balance, you know, we said we'd do about 50% shares. We leaned in a little bit in the first quarter on the shares. Through the year, we expect to be about 50/50 between our VROC and the shares to deliver the $11 billion of returns back to the shareholder. Hopefully, you see that with the third quarter setting of the VROC at $0.60 a share.
That should give you comfort that we're on track to deliver that.
Thank you so much.
Great. Thanks, Steve. Next question.
The next question comes from Neil Mehta with Goldman Sachs. Your line is open.
Yeah. Thank you so much, and congrats on a really good Lower 48 quarter in particular. Ryan, I think you sorta headed this question off, but I'd love you to comment to the extent you can on Surmont recognizing it's an active situation. You know, as you think about that asset, first of all, it seems from the Analyst Day that it is a core position for you guys. Just any thoughts on, you know, whether it makes sense to be a bigger part of the portfolio to the extent you can comment at all?
Neal, thanks. No, I can let Andy maybe make a few comments about the asset, which would be kind of reiterating of what we said at the Analyst & Investor Meeting. We're in receipt of the notice on the transaction between Total and Suncor. We, we have, we have a right on the Surmont asset, which we know really well because we own 50% and operate it. We're in the process of taking a pretty serious look at that. I can maybe have Andy reiterate some of our thoughts about the asset that we described in the Analyst & Investor Meeting.
Morning, Neal. Yes, as we said in the, you know, the Analyst meeting, you know, we do like Surmont. It's a nice sort of long life, low capital intensity asset for us. You know, as we covered in the Analyst meeting, you know, that low capital intensity is an important part of our portfolio. Just to sort of reiterate that, sort of the maintenance capital on Surmont, you know, I'm referring now to our 50% share of Surmont, you know, has been in the $20 million-$30 million a year range, you know, for the last, you know, four or five years. You'll recall I mentioned that we're, you know, we're drilling our first new pad since 2016.
You know, that pad, for example, is, it will be in the $40 million-$50 million. It's a very low capital intensity asset for us, you know, with that sort of, basically flat production profile. As you know, sort of all, you know, pretty much all of our other driver information we disclose in terms of our production data, you know, our bitumen realizations, you know, our operating costs. You know, that's all out there. You know, you can form your own view on the asset, but it's, you know, it's an asset that, is a core asset in our portfolio. Probably just stop there.
Great, great color. Thanks, guys.
Thank you, Neil. Next question.
The next question comes from Roger Read with Wells Fargo. Your line is open.
Yeah, thanks. Good morning. Guess I'd like to follow up on Port Arthur LNG. Obviously, the phase one was covered. There's always a possibility of greater expansion in LNG. Just what would be the things we would watch, coming up in terms of the second phase?
Yeah, sure, Roger, this is Bill. As we talked about at the Analyst & Investor Meeting, we're currently really satisfied with 30% for phase one and our 5 million ton equity offtake, and we're prioritizing market development over any additional offtake and equity right now. We really think we've got sufficient capital allocation to Port Arthur, and we're looking for ways to optimize our current investment. Our plate's pretty full, and we don't see a need to allocate significant additional capital in the near term. There'd need to be some pretty unique reasons to make it attractive.
All right, clear enough. I'll stick to the one. Thanks.
Thank you, Roger.
The next question comes from Doug Leggate with Bank of America. Your line is open.
Good morning, guys. This is actually Kaleem Asghar for Doug Leggate, thanks for taking the question. My question is the follow-up on Surmont. Our understanding is that Suncor could receive certain tax benefits as part of their deal, I'm wondering if those tax benefits would be available to you if you exercise your right of first refusal. I'm asking the question because I think yours would look more like an asset deal, while theirs is more of a corporate deal.
Well, as we said, Kaleem, that, you know, we're currently reviewing the proposal that we got and the terms and the conditions, so it's a bit early to comment on tax pools.
Okay. I'll leave it there. Thanks.
The next question comes from Sam Margolin with Wolfe Research. Your line's open.
Hello. Thanks for taking the question. you know, the capital efficiency looks like it's going in the right direction with the production guidance and the, and the capital plan in line. At the Analyst Day, you made some comments where you thought it was at least possible that you could start to see inflation ease, you know, if not reverse. The question is just, you know, as you think about this production result, is that an outcome of, you know, maybe an opportunity to press activity a little bit as costs are easing, or is it more of a well results driven outcome? Thank you.
Yeah, thanks. It's Dominic here. Just to talk to inflation a little bit first. I think, you know, overall, our capital inflation for the company, we still expect to be in the mid-single digits year-over-year. We certainly see that leveling off. As you mentioned before, you know, we're certainly seeing deflationary trends in steel tubulars or price-related commodities such as fuel and chemicals. Beyond that, on the rig frack and other services, they've certainly leveled off. We may be trending towards some reductions. We have seen rig counts peak and begin to decline. That's led by the gas basins. Our teams are very focused on costs, and they're working with our many service providers on that. We still expect around the mid-single digits at this stage on inflation.
Having said that, you know, we certainly see capital efficiency coming through. I think that's really on an execution front. We've had a strong start, particularly in the Lower Forty-Eight. Our full year production guidance, as we've said, is up at the midpoint. We do expect low to mid-single-digit growth for the year. That's pretty consistent with the long-term 4%-5% CAGR we presented at our Analyst & Investor Meeting. Yet we're holding our capital range the same with $11 billion at the midpoint. You know, we're definitely seeing some execution efficiency. We're pleased about that. Nick, you may wanna talk a little bit more about the Lower Forty-Eight on that.
All right. Yeah, thanks, Tom. Yeah, Sam, just take you back to the analyst call when we talked about drilling and completions efficiency. If you recall, we had from 2019 to 2022, we had a 50% improvement in drilling, 60% in improvement in completion that stages per day. We continue to see that in Q1, you know, very promising results. That's the use of, you know, technology like SimFrac, E FRAC . We're testing out some remote FRAC as well, where we keep a FRAC spread on pad 1, we FRAC pad 2, pad 3, pad 4. Very promising results there. As well on the drilling front, you know, we continue to use data analytics and rig automation, all it's coming together, really promising.
That did lead to some accelerated places on production of wells in Q1, driving some of the overperformance.
Thank you so much.
Thanks, Sam. Next question.
The next question comes from John Royall with JPMorgan. Your line is open.
Hi. Thanks for taking my question. My question is just on Willow. Are there any updates there to how the lawsuits are progressing, and are you any closer to a resolution there and getting to FID than when we last saw you a few weeks ago at the AIM?
Hey, John, this is Andy. Yeah, there's really not too much new to comment on over the last few weeks. The only incremental news we've had, you know, has all been positive. The Ninth Circuit Court of Appeals denied motions attempting to stop our construction work. We've been progressing with the winter season, and we've, you know, we've had gravel extraction and road construction underway. It's pretty much going as we expected it would. Yeah, in the last two, three weeks, not much more to add than we talked about at the Analyst Investor Day.
Thank you.
Next question.
The next question comes from Ryan Todd with Piper Sandler. Your line is open.
Good. Thanks. Ryan, maybe one for you following up on the Analyst day. You know, what impact, if any, does. You increased your view of the mid-cycle oil price from $50-$60. You know, what impact, if any, does that have on the way in which you think about the business? I mean, you're still focused on low cost of supply assets well below this price. Does the view that oil prices would be structurally higher over time have any impact on the way you think about managing the business over the long term, your balance sheet, allocation of capital or anything else?
Thanks, Ryan. It, you know, in terms of how we're running the company day to day and the allocation of capital that we put in each year, it really, really doesn't. We're only investing in things that have a cost of supply less than $40 WTI in the portfolio. What would a mid-cycle price change? Our chief economist's office, our commercial team, we go through a process every year where we take a current view of the macro and have a long-range view of what we think is happening.
As we've gone through a lot of turmoil in the business, the Russian invasion of Ukraine, just the lack of investment going into the business these days, we stepped back and did our own bottoms up, which we do every year, but important this year, we did our own bottoms up work to try to understand where we think the mid-cycle price is moving to and what it was it staying at kind of that $50 level. Our assessment of the price required to generate that incremental barrel to meet that incremental demand, our assessment put it at around $60 today.
The implications of that are really just how much cash flow we think we're gonna be generating as we interrogate the portfolio, as we invest in the growth and development of the company, and we put capital into the company. The way it manifests itself is just how much cash flow are we gonna de-deliver at that kind of a mid-cycle price, which is obviously a little bit more than what we would deliver at the lower price. It goes to sort of how we think about cash on the balance sheet, how we think about the debt that we're carrying, how we think about distributions and how much capacity there is to distribute a bunch of our cash, which our commitment's about 30%.
When we get above mid-cycle price, in our case like we are today, obviously, we're generating a lot more cash, and we're returning a lot more cash to the shareholder, you know, now something, you know, in excess of 50% today. That's driven by the low reinvestment rate that we have in the company and our commitment to only invest in the lowest cost supply things we have in the portfolio.
Yes. Thanks, Ryan.
Thank you. Operator, next question.
The next question comes from Devin McDermott with Morgan Stanley. Your line is open.
Hey, thanks for taking my question. I wanted to go back to the Lower Forty-eight. It was helpful detail before on some of the efficiencies that you're seeing there. I think one of the other drivers of the strength and production that you called out in the prepared remarks was well performance beating your expectations. Can you talk a little bit more explicitly about what you're seeing there, and if there's any development changes that you've made driving that uplift?
Yeah, Devin, this is Nick. You're right. The strong well performance was definitely a contributing factor for Q1. You know, if I take you back to the Q4 call, I had mentioned that our well performance was meeting or exceeding type curve expectations, and we continue to see that trend into Q1. That's very encouraging. You know, no overall development changes. We're just seeing very promising results across all assets. This is just not the Permian, as well. As I mentioned earlier, you know, the completion in drilling efficiency has allowed us to accelerate some wells earlier into Q1, so we're seeing that production come into play.
On the Eagle Ford stabilization plant that we've upgraded, the team just did a remarkable job in sheltering the amount of downtime in Q1, so we had less DT. Overall, very strong quarter.
Thank you.
Thanks, Devin.
The next question comes from Josh Silverstein with UBS. Your line is open.
Hey, thanks, guys. Just some questions around, you know, potential LNG, you know, opportunities in the future. You mentioned at the Analyst Day that you have, you know, options around Port Arthur phase II, III, and IV, and even at Costa Azul as well. Can you just give some more details around the options? You know, does it need to be at the 30% like you did in phase I of Port Arthur? Could it be 10% or some other agreement there? Could it be before or after FID as well? Just along the same lines, because there will already be some infrastructure in the ground for phase I, you know, will the capital outlay for, you know, phase II or III be less because of that? Thanks.
You know, we I think we laid this out pretty well at our Analyst Meeting. For Port Arthur, we've got options on both equity and offtake for future phases. Those can be executed either for equity, offtake, or both as they present themselves through time. We also have some options on the West Coast of Mexico at Energía Costa Azul on phase II. Those are long-dated options that we continue to look at. You know, talked a bit about phase II earlier in the call, and it need to be some pretty unique opportunities on that as we think about that right now.
As we think about future phases, we have structured our investment in phase I such that we benefit from the economies of scale for future phases on our phase I investment. Future phases, actually benefit, phase I.
Great. Thanks, guys.
Thanks, Josh.
The next question comes from Paul Cheng with Scotiabank. Your line is open.
Thank you. Good morning, gentlemen. Maybe this is for Nick. Nick, in the United States, the eye for looks like, you are talking about 2023, the shale oil, production around 1 million barrel per day, and in the first quarter, you're already there. If that means that, for the rest of the year, that the Lower 48, the shale oil and money together will be pretty stretched or that number is, somewhat conservative now?
Paul, this is Nick. You're right. I mean, we had a very strong performance in Q1, as we just described. As you look at the future quarters of this year, we've got some larger pad projects, longer horizontal wells. To kind of put that in context, we got 80% of our 2023 Permian wells are two miles or greater, and we've got, you know, a fairly large portion that are the three miles. You're gonna see kind of just small variations. Overall, that's gonna be relatively flat. I'll leave you with this, pause. Our plan will deliver at least mid-single digits for Lower Forty-eight.
Right. Okay.
Thanks, Paul.
The next question comes from Scott Hanold with RBC Capital Markets. Your line is open.
Hey, thanks. I just wonder if you could provide some updated commentary, if you have any, on Venezuela. You know, about a month ago, there was some talks about, you know, kind of easing oil sanctions there. You know, you all have a potential big asset, you know, or at least value that at one point in time, were looking to extract. Is there any update on that, or is there any kind of color you can talk about, like the progress and remind us of the value there?
Yeah. Scott, we're right in the middle of all those conversations, as you might imagine, including the most recent conversations around the Citgo refining assets. You know, we're in the queue. We're right in the middle of anything that would happen there. We have a, as a reminder, an ICC judgment of $2 billion. We've collected about $700 million on that judgment to date, so we have an outstanding what they owe us on that particular judgment. We're in an appeal process with ICSID, which is the other Tribunal, and that's an $8 billion potential award coming. There's some overlap between the two, so you can't necessarily add the two together.
I guess the point is, they owe us a lot of money, and we're hard at trying to get some resolution of that. The recent news out of the judge and the U.S. government around Citgo is certainly helpful in that regard. It looks like, you know, despite the sanctions that are on the Venezuelans and on U.S. companies for doing work in Venezuela, so some light developing at the end of that tunnel, and we're right in the middle of it all.
All right. Good to hear. Thanks.
Thanks, Scott.
The next question comes from Alastair Syme with Citi. Your line is now open.
Hello, everybody. In, in your remarks at the beginning on the Lower Forty-eight, you mentioned about infrastructure build. I was really just interested to try and understand across the Lower Forty-eight, but I guess especially in the Permian, what's the sort of ratio of capital that's going into infrastructure versus drilling? You know, I guess, I guess this changes over the life of the asset, so just kind of intrigued at what sort of point of asset life are we in terms of that ratio.
Yeah. I'm not sure the exact ratio. Maybe Nick might have some numbers. I think, you know, most of what we're doing is large pad development with, you know, not single well facilities, but central facilities supporting those large pads. I don't know what the split between drilling and infrastructure spend is. I can let Nick have a comment, but I don't think it's much different than what we've been doing for the past few years.
Yeah. Alastair, it's very limited as far as on the infrastructure spend. Most of your expenditures is on drilling and completions, in the Permian as example.
Okay. Thank you very much.
Thanks, Alastair Syme.
The next question comes from Raphaël Dubois with Société Générale . Your line is open.
Hello. Thank you for taking my question. I just have 1 question about the working capital deterioration in 1Q. I was wondering if you could tell us how much of it is due to some Norwegian cash tax catch up, and what is it to expect for the rest of the year?
Yeah, sure. Happy to talk about working capital. If you look at working capital for Q1, you can see that in the supplementary documents we put out on our website, Q1 was about a $100 million use of working capital. For Q2, we'd expect that to be just over $1 billion. As you rightly noted, that's associated with Norwegian tax payments, which is normal for operators in Norway. We accrued those in 2022. They're payable in the second quarter of 2023. Looking for the rest of the year, assuming we don't see FX rates move materially for the remainder year, we wouldn't really expect any material working capital movements across Q3 or Q4. Hope that helps for kind of full year view.
Thank you.
Thank you.
The next question comes from Neal Dingman with Truist Securities. Your line is open.
Good morning, all. My question is on shareholder return, plan specifically. What do you all view sort of in broad terms as an optimal quarterly payout given, you know, I guess now how even more volatile the commodity market continues to be? You know, looking at your most recent, I guess, the payout was, you know, a bit over 100%.
Yeah. Well, I think, Neal, you have to kind of go back to how we set the VROC in the first quarter. That was actually set in the third quarter of last year at a $100 price environment. We probably had a, an irratable a little bit higher distribution in the first quarter, and then it gets more ratable as we go through second, third and fourth quarter as we deliver the $11 billion that we've targeted for this year. That's evidenced by how we set the VROC for the third quarter at $0.60 a share.
Thank you.
Thank you, Neal.
Our last question comes from Leo Mariani with Roth MKM. Your line is open.
Hi. Obviously, strong results out of COP today. I think you enumerated a couple reasons for the first quarter production beat. Sounds like some wells came on early and well results continue to be, you know, very strong. Just wanted to dive in a little bit on the maintenance side. I know you guys kind of talked about 35,000 BOE per day of maintenance, you know, in the quarter. Did it actually come to fruition? Maybe that number was a little bit different. Can you talk about maintenance for the rest of the year? I see you had 10,000-15,000 expected in two Q, any expectations for three Q or four Q?
Yeah. Thanks. It's Dominic here. You're right, we did anticipate about 35,000 barrels a day of turnaround and maintenance impact in the first quarter. That actually came in at 25,000, so 10,000 lower. That was partly because of the efficiency that Nick talked about at the Lower Forty-Eight. The Eagle Ford Sugarloaf stabilizer expansion went really well. The team did a great job sheltering some of that. There was a little bit of timing there around Qatar turnarounds as well. We had 25,000 barrels a day impact in the first quarter. We still expect a full year average impact from our turnarounds of about 15,000 barrels a day equivalent. Bill said second quarter, I think as you mentioned, expect to be 10-15.
There'll also be some standard sort of seasonal downtime in the second and third quarter we typically see in Norway and Alaska and APLNG. All of that's reflected in our new guidance, 1.78 million-1.8 million barrels a day for the full year.
Okay. Thank you.
Thanks, Leo.
We have no-
Thanks, everyone for being here today. We appreciate it.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.