Welcome to the Q2 2017 ConocoPhillips Earnings Conference Call. My name is Christine, 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. Please note that this conference is being recorded. I will now turn the call over to Ellen DeSanctis, VP, Investor Relations and Communications. You may begin.
Thanks, Christine. Good morning to our participants. Welcome to this quarter's earnings call. Today's presenters will be Don Wallette, our EVP of Finance, Commercial, and our Chief Financial Officer, and Al Hirshberg, our EVP of Production, Drilling, and Projects. Our cautionary statement is shown on page two of today's presentation deck. We will make some forward-looking statements during today's call that refer to estimates and plans. Actual results could differ due to the factors noted on this slide and described in our periodic SEC filings. In addition, we will refer to some non-GAAP financial measures in today's call. These measures help facilitate comparisons across periods and with our peers. Reconciliations of non-GAAP measures to the nearest corresponding GAAP measure can be found in this morning's press release and also on our website. Finally, during today's Q&A, we will limit questions to one plus a follow-up.
I'll turn the call over to Don.
Thank you, Ellen. Good morning. I'll start on slide four, which summarizes the progress we've made during the second quarter on our key strategic, financial, and operational objectives. These highlights underscore the magnitude of the transformation we've made as a company in a short period of time. Starting on the left side of the chart, the key catalyst that has accelerated our transformation is the success of our asset sales program this year. During the second quarter, we closed the previously announced Canadian transaction and announced the sales of our San Juan Basin and Barnett Shale assets. We're on track to close these transactions in the third quarter. Earlier this week, we also entered into an agreement for the sale of our Panhandle assets, and we're progressing the sale of our Anadarko position. In total, we expect to achieve asset sales of over $16 billion this year.
Earlier this year, we described plans to use most of the proceeds from these asset sales to enhance and accelerate both our debt reduction plans and shareholder distributions. During the second quarter, we reduced debt by $3 billion, and we expect the balance sheet debt to be under $20 billion by year-end. We also announced a doubling of our 3-year share buyback program. We expect to repurchase $3 billion of shares in 2017 and another $3 billion over the course of 2018 and 2019. We repurchased $1 billion of shares during the second quarter, a pace that we expect to maintain through the remainder of the year. Moving to the middle column, our second quarter financial results were also notable.
On an adjusted basis, we realized profit of $178 million or $0.14 per share, and that's at Brent prices of about $50 a barrel. We also generated over $1.6 billion operating cash flow, right in line with our published sensitivities. This was the fourth consecutive quarter where operating cash flow more than covered our capital spending and dividend. We've consistently demonstrated that we're able to generate free cash flow at oil prices in the $45-$50 barrel range, and we continue to focus on further reducing our cash flow break-even point. To be clear, when we talk about free cash flow, we're including only operational cash flows. We're not relying on an assist from asset sales. This provides the clearest view of the sustainability of our spending and our resilience to commodity price movements.
Moving to operations, we continued to run well during the quarter. Production exceeded the high end of our guidance, and we achieved 3% year-over-year underlying growth when adjusted for Libya and the impact of closed and contracted dispositions. Given strong year-to-date performance, we're increasing our 2017 underlying production guidance by 25,000 barrels a day. We now expect our underlying full-year production growth rate to be 2%-4%. At the midpoint of the updated production guidance, that would be about 8% growth on a per share basis. Finally, while we're increasing our production outlook, we're also lowering capital spending guidance to $4.8 billion. Let me recap the rapid progress we've made on executing our strategy. We've exceeded our asset sale, debt reduction, and share repurchase targets. We've demonstrated the ability to generate both free cash flow and profits at $50 Brent.
We've improved our outlook for high margin per share growth, and we're doing it for less capital. We're exceeding every expectation that was communicated at last year's November Investor Day. We believe we're strongly positioned to continue executing this differential strategy, one that is focused on discipline through the cycles, financial strength, free cash flow generation, and high return per share growth. If you turn to slide five, I'll review the quarter financials in more detail. With Brent averaging just under $50 a barrel and Henry Hub about $3.20 in Mcf, our realized price was around $36 a barrel equivalent. Strong operational performance drove positive earnings of $178 million. Compared to the prior quarter, adjusted earnings improved about $350 million. With most of the improvement coming from lower depreciation and lower exploration expenses.
Compared to the year-ago quarter, adjusted earnings improved by about $1.2 billion, with the improvement being driven by higher commodity prices and lower depreciation and exploration expenses. I should note that we are lowering our guidance on depreciation expense by $1 billion, which reflects the impact of the asset sales as well as price and performance-related reserves increases. Al will cover each of our guidance changes later. Second quarter adjusted earnings by segment are shown in the lower right. Four of the five producing segments were profitable this quarter. The supplemental data on our website provides additional segment financial detail. If you turn to slide six, I'll now cover our cash flows during the quarter. We began the quarter with $3.4 billion of cash and short-term investments. We generated $1.64 billion of cash from operations, which exceeded spending on capital and dividends by about $300 million.
We received cash proceeds from the sale of assets of $10.7 billion. We used $3.2 billion to retire debt, bringing our debt balance to $23.5 billion. You can see from the ending cash figure of $10.3 billion that net debt at quarter's end was down to about $13 billion. I'll also note that after the quarter closed, we paid off our 2019 term loan and issued notice for additional bond redemptions. As a result, we expect to record a further $2.5 billion reduction in debt during the third quarter. Our balance sheet debt will stand at less than $20 billion by year-end. The combination of dividend payments and share buybacks represented a return of capital to the shareholders of $1.3 billion during the quarter. We ended the second quarter with $10.3 billion in cash and short-term investments.
The majority of this cash is earmarked for future debt reduction and share repurchases. We consider that the success we've had with the disposition program has pre-funded these strategic priorities. Let me turn it over to Al to review the quarter's operations in more detail.
Thanks, Don. We've had another strong operational quarter. If you turn to slide eight, I'll cover the highlights. For the quarter, production excluding Libya was 1.43 million barrels oil equivalent per day. That exceeded the high end of guidance and beat the midpoint by 40,000 barrels per day. Once you adjust for the impact of closed and signed asset sales, we had underlying production growth of 3% compared to our second quarter production last year. We accomplished this production increase while continuing to maintain our discipline on capital and operating costs. We completed all our planned second quarter turnaround safely on or ahead of schedule. Lower 48 unconventional production averaged 226,000 barrels per day for the quarter. Eagle Ford was at 128, Bakken at 69, and Permian at 16,000 barrels per day, with the balance in Barnett and Niobrara.
As I forecast last quarter, the low point for unconventional production was the first quarter, so the inflection point is now behind us as production increased 2% quarter-over-quarter. During the quarter, we ran 12 development rigs, five in Eagle Ford, four in Bakken, and three in the Permian, with one of these Permian rigs drilling conventional zones. We've recently added a sixth rig in the Eagle Ford, taking us to 13 development rigs. This was an opportunistic addition based on attractive contracting terms. We expect to average about 12 rigs in the big three plays for 2017. In Alaska, through the winter construction season, the key infrastructure components at Greater Mooses Tooth 1 were completed. This keeps us on track for first oil by the end of 2018.
The 1H NEWS drill site facilities are also complete, and first oil is expected by the end of this year. Excellent execution performance has led to lower costs on both of these Alaskan projects, and that increased efficiency is contributing to the lower capital spending that we've announced. If you'll turn to slide nine, I'll cover some operational highlights from the rest of the portfolio. In Australia, the APLNG plant continues to perform well above expectations, and 60 LNG cargoes were loaded from APLNG during the first half. We just concluded the 90-day operational phase of the two-train lenders test in July, with the LNG plant operating at more than 10% above nameplate capacity and running with very high thermal efficiency and minimal downtime.
We expect the remainder of the completion certification process to be finalized in the third quarter, which will release the remaining $1.3 billion of our loan guarantees for the project financing. In Western Australia, the Barossa-6 appraisal well was completed. The well tested at a robust rate of 55 million cubic feet per day, even though it was choked back due to facility constraints. The results from the Barossa-5 and 6 appraisal wells confirm the commerciality of the project, allowing us to progress our plans to develop Barossa as the backfill for the Darwin LNG plant. In Malaysia, Malikai continues to deliver strong performance from the initial wells. Drilling operations for the second batch of Malikai wells began in June. This followed the successful shutdown of the Kebabangan and Malikai fields for maintenance work. In Norway, the Aasta Hansteen spar arrived in June and has been floated.
The project is on track. First production is expected by the end of 2018. Those were just a few of the operational highlights from the first quarter. Let's move to slide 10 to discuss the remainder of the year. On the left side of the slide, you can see our updated guidance. Bottom line, our strong performance continues across the company. We're increasing full-year underlying production guidance by 25,000 barrels a day, and at midpoint adjusted for dispositions, that's 3% production growth and 8% per-share production growth. We've also reduced capital guidance by $200 million to $4.8 billion. Even with lower capital, we were able to opportunistically add a sixth rig to Eagle Ford and extend attractive terms for two rigs in the Permian. This activity will allow us to expand cash flows while maintaining our investment discipline.
Several slides in the appendix give more granularity on all the guidance updates. Finally, as a reminder, please save the date for our 2017 Analyst Investor Meeting. This year's meeting will be held in New York on November eighth. You can expect to hear about our strategy in action, a deeper dive into the portfolio, and a path to a lower breakeven and higher returns. Now I'll turn the call over to Q&A.
Thank you. Ladies and gentlemen, if you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. 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 on your phone now. Our first question is from Phil Gresh of J.P. Morgan. Please go ahead.
Hi, good afternoon. Congratulations on a strong quarter. First question I wanted to ask about was this production outlook, the 2%-4% growth on an underlying basis on $4.8 billion of capital spending. I guess what I'm wondering is if I go back to last year's Analyst Day and the four and a half billion of sustaining CapEx at the time and adjusted for all these divestitures, et cetera, how do you think about that sustaining capital number moving forward given the growth you're able to achieve?
Okay, Phil, I'll take that one. I think that's a good question that obviously at the Analyst Meeting, we'll dive into a fairly detailed analysis comparing to that four and a half that we quoted before. I think you can make some observations from our performance so far. What we said at last year's Analyst Meeting was four and a half billion dollars is about what it would take to hold us flat to maybe a little small amount of growth. What you can observe happening this year is that that number did not include exploration, so that we add another half billion or so to get to the $5 billion that was in our budget. If you look at our $4.8 billion number that we're using for CapEx this year, about 0.6 of that we think will be exploration.
It's about $4.2 billion that we plan to spend this year and grow at the midpoint around 3%. From that, it's obvious that the new number, the new state flat CapEx is lower than $4.5 billion. We're in some analysis right now, and we'll talk about that more in detail at the Analyst Meeting.
Okay, got it. My second question would be given there's been so many moving pieces in the portfolio off of this new base that you talk about in the appendix, as we look ahead to 2018, could you just remind us where you feel you are with the ramp of certain projects and how much growth do you see in 2018 just coming from projects that are already underway? Maybe if you could just elaborate generally on the portfolio, how you're thinking about it right now.
Yeah. The project is becoming a smaller piece of our growth as we move forward from the past few years where we've been into 2018. That's another item that we're going to cover in the Analyst Day and show you all the detail for most forward projects. We do have as we finish the two mega projects that we were working on, Surmont II and APLNG, what we now have in front of us is a pretty significant stable of smaller to medium-sized projects that have more flexibility to them. We'll be laying all that out in some detail, including the volumes that we'll expect from 2018. Really, if you look at what's driving our volume momentum going forward 2027 into 2018 and 2019, it really comes from our unconventional resource plays.
Got it. Okay. Thank you.
Thank you. Our next question is from Doug Terreson of Evercore ISI. Please go ahead.
Hi, everybody
Morning, Doug.
Hey, Doug.
ConocoPhillips and the super majors too have increased their investment in U.S. shale over the last several years as understanding of the subsurface has grown, which seems pretty prudent to me. In contrast, there are a lot of public and private E&P companies that seem to be determined to drill many of their best prospects, even at low commodity prices, which seems kind of curious given the NPV profile of these wells. I have three questions. The first for Al. Do you agree with this broad characterization? Second, where do you think we are in the subsurface learning process? You guys have talked about that a lot in the past.
Also maybe for Don, when you think about acquisitions, do you think that some entities have effectively disqualified themselves from strategic action due to operating or financial practices, or is this theme not really relevant to the decision-making process? First two questions for Al, third question for Don.
Okay.
You remember all that, Al?
I'm not sure I can remember all of that. The first part, let me see. The first one was, do I agree with your characterization that a lot of E&Ps are over-drilling, I guess.
Well, yeah.
Okay.
Where are we in the learning process?
Yeah.
Yeah.
That's the second question.
Yeah.
On the first question, I think you already know the answer to our views on that is that, yes, we think that you can drill too fast in these unconventional plays. We like to make sure that we've progressed sufficiently in our technical understanding and down the learning curve before we go into full manufacturing mode and really drill things up. We think we get ultimately much better recoveries and avoid causing damage to an area that you can't go back and fix very easily once you've changed the subsurface pressures. We think that has stood us in good stead and allows us to maximize the value that we get from our acreage.
With regard to where we are in the learning curve, so far, despite the reports sometimes of early demise, I haven't seen any slowdown in the pace of improvement in our unconventional. It still feels to me like we're in the relatively early innings. Maybe we've advanced getting toward the halftime, to mix metaphors between different sports. I haven't seen any slowdown. I've seen the tools that we've used to continue to make progress have shifted over time, but the pace of progress has stayed pretty consistent. I haven't seen a slowdown.
Okay.
I still think we have a long ways to go.
Okay. Thanks for the sanity check. Don, do you remember your question?
I think I do, Doug. Yeah. I think I would agree that financial weakness or operational capability limitations should disqualify companies from being acquirers. That should be the strong buying the weak rather than the weak buying the strong. In practice, I'm not sure that they do serve as limitations. I guess I would throw into your mix there strategic shortsightedness.
Sure
as well.
Okay. Thanks a lot, guys.
Thanks, Doug.
Thanks.
Thank you. Our next question is from Doug Leggate of Bank of America. Please go ahead.
Thanks. Good afternoon, everybody, or good morning still, I guess, in Texas. Guys, one of the comments in your earnings release was on inflation or the lack thereof as one of the reasons you were able to keep lowering operating costs and I guess come under spending. Kind of curious if you could elaborate on which parts of your business you're seeing that and why you think it's not coming through, and I guess how sustainable you think that might be. I've got a follow-up, please.
Okay. Well, Doug, I'll address the inflation question, but I should just mention on the front end that some of our lower spending on both the CapEx and OpEx side is not just due to the deflation capture we've had. There's been other savings that are driven by more efficient operations. That's certainly a significant piece of the puzzle as well. On deflation, we are still seeing net deflation as a company worldwide, 2017 versus 2016. I would say for every $1 of inflation we've seen in certain areas of the Lower 48 related to the unconventional side, we've seen $2 to $3 of deflation elsewhere in the U.S. or around the world. To give you some examples of some of the places where we're still seeing deflation year-over-year, Lower 48 chemicals and some of our construction work in Lower 48.
OCTG internationally, not in the Lower 48, but outside the Lower 48, OCTG. Alaska, construction costs in Alaska. Subsea, the cost for subsea equipment in the North Sea. Those are all down year-over-year. Another area you see people talking about in the U.S. is sand. We've seen a pretty stable sand cost this year. Sand really hasn't been a big issue for us. I was looking at some data the other day comparing with some of the inflation we've seen in some of the areas in the Lower 48, normalizing our cost. The cost per pound of proppant pumped, which is one way to normalize our cost over time since the jobs have gotten bigger.
Compared to the peak that we were seeing, say, back in 2014, we're still down about two-thirds in our cost per pound of pumped proppant from where we were at the peak, where we stand today, even with some of the increases we've seen.
That's true. I guess the proportion of your spend U.S. versus international, I'm guessing that on an aggregate basis, you're still seeing deflation across your portfolio, Al?
Yeah. That's what I'm saying.
Okay.
When you add it all up, it's substantially still deflation for us overall, and it's a mix of the same kinds of things that we've been talking about. Some of it is resistance to the Lower 48 inflation because we've got some contracts that we're locking things in. Really it's that inflation, so more than half our spending being international and still seeing deflation there.
Appreciate that. Don, my follow-up is for you, hopefully. Obviously tremendous progress on the debt now that you've locked down those debt reductions. I think you had suggested previously that you might want to get down to about $15 billion. I guess where I'm going with my question is, your cash break even continues to drop. Oil prices appear to have kind of stabilized somewhat. How do you see the balance between buybacks, even though you're early in the process, versus your continued commitment to drop that debt level? Is $15 billion still the right number? I'll leave it there. Thanks.
Yeah. Thanks, Doug. Well, we fully intend to do both. Continue with the debt reduction beyond 2017 and to continue with our buyback programs. The question as to whether $15 billion is the right number, you point out that the cash flows from the company are very strong, and we continue to look at that. Of course, our plans to expand cash flow as we go forward will factor into our thinking. Right now, $15 billion is our target, and we'll stay on that course.
Appreciate it. Thanks, everybody.
Thank you. Our next question is from Blake Fernandez of Scotiabank Howard Weil. Please go ahead.
Folks, good morning.
Morning. Hey, Blake.
I wanted First question is really just clarity on the buyback commentary for $3 billion over 2018 and 2019. I just wanted to make sure I understood. Is that supposed to be $1.5 billion per year, or is that actually $3 billion per year?
No, it's $3 billion over a two-year period.
Got it. Okay. Secondly, I think in the past you had addressed deferred taxes, and the commentary, I believe, was something around $60 a barrel at that point. You would really start to see kind of a reversal or a benefit of what has been a drag on cash flow over time. Is that still a good number, or are there any changes as kind of your efficiencies and costs are coming down?
No. Yeah, it's a great question. It continues to evolve. I don't think it's a good number anymore. If you look at this quarter, of course, we had a large use of deferred taxes, and that was driven by a lot of the inorganic stuff, the acquisition or the dispositions. If we normalize out for that and a few other minor discrete items, we would've had deferred taxes probably as maybe a couple hundred million use of cash, which signifies that we're pretty darn close. That's in a $50 environment. A year ago, we would've said we needed $60 better prices to break even. Today, we're really breaking even right around $50 on profit break even, not cash break even. I think that flip point, Blake, is probably closer to $50 today rather than the previous $60.
Okay. That's helpful. Thank you so much.
Thank you. Our next question is from Paul Sankey of Wolfe Research. Please go ahead.
Good morning, everyone. Two from me, please. Al, you guys differentiated yourselves initially in the Eagle Ford and subsequently have pursued growth there quite specifically to avoid cost inflation in the Permian. Can you update us on where those costs are as regards how the strategy's playing out, how you see the differentiation between cost inflation in the Permian versus the Eagle Ford, please? My second follow-up is for Don. Don, could you just address, it's a bit of a modeling question, I apologize, but could you just address the issue of shareholders' equity? That's moving quite fast, and I just wondered if you could talk a little bit about the dynamics of what's changing it. Thank you.
Okay, on the first question, we do continue to see ourselves advantaged in the Eagle Ford. You notice that when we had an opportunity to add another rig here a few weeks ago, we chose to add it in the Eagle Ford, where we had a good opportunity to add at an attractive contract cost. Remember also for us that the Eagle Ford is also where we have our infrastructure already fully developed and can add rigs and add production there without a significant infrastructure bill, unlike in the Permian, where we have to make additional significant commitments to infrastructure in order to expand there. Those are kind of the things that are driving us there. We still have a long list of good, very low cost of supply opportunities in the Eagle Ford.
You'll see us continuing to have that be our sort of favorite area to invest in the U.S.
I guess you're going to hold the Permian position then sort of static?
No. I also mentioned that we're running three rigs there in the Permian now, two in the unconventional, one in the conventional. One of the scope adds that I mentioned in my prepared remarks is that we not only added an additional rig in the Eagle Ford here a few weeks ago, but we've also taken the decision to You've heard me talk about our being a little bit up and down as the year moving across Niobrara, et cetera. We've decided on those three rigs to extend the contracts all the way through the end of the year. That's going to effectively add about another six rig months of drilling to the Permian this year versus what our original $5 billion budget had been based on. We are putting a little more money into the Permian than our original plan.
Not a little more money, a little more scope activity. It's actually costing us less money.
Got it. From your point of view, the cost inflation is not dramatically worse, if at all, in the Permian than the Eagle Ford.
We have seen some things being tighter in the Permian versus the Eagle Ford just because there's a bigger frenzy there. We're still down dramatically. We still only have about a third of the number of rigs running in the Eagle Ford as there were at the peak. It is an easier place to work. Our Permian acreage is attractive also, and we're continuing to pursue that development as well.
Thanks, Al.
Paul, yeah, this is Don. On your question regarding shareholder equity. Of course, we've seen some reductions over the last few years for a number of reasons. Part of that is related to some rather large impairments that we've taken. You hope that a lot of that is behind you. Of course, we exited the Deepwater program, so we feel like our exposure is essentially eliminated from that area. You saw the recent write-down of APLNG as well. Of course, shareholders' equity has been reduced as we've taken the portfolio actions that we have through our asset sales over an extended period of time. We believe that we've created value from those asset sales, so that's not at all troubling to us. Our buyback program, we think is a good use of cash, which is also bringing shareholder equity down as we use that cash.
It's a good use of cash, I think. Of course, we've been in this period of low prices for a number of years, which has resulted in losses to earnings. As we look forward, we can see equity growing as we become profitable going forward.
Yeah. Would that be write-backs as well? Would you need a lot higher prices?
Write-backs?
Yeah. I mean for the write-downs.
Yeah. We're not-
I don't know what the opposite of a write-back is.
We're not European, so we don't get to do that. It's under U.S. rules.
Okay. The dynamic would be retained earnings and buyback, I guess.
Right.
Yeah. Okay, thanks.
Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead.
Hey, guys. Good morning.
Hey, Paul.
Hi, Paul.
Two questions. I think first is for Al, the second one may be either Al or for Don. Al, for Permian, the two unconventional rig, I think you are still sort of doing ad hoc and not in manufacturing commercial development. The question is that, do you have a timeline when that you guys are ready to do it, or that what will be the criteria before you reach that timeline?
Really, it's crystal clear to us that the cost of supply that we need to have it compete in our portfolio to move into manufacturing mode is definitely there. Really what we're doing right now is just phasing our way into the offtake commitments and the infrastructure commitments that we need to make, and the time it takes to build those that is really driving the timing of how fast we start to drill up that acreage and move more into manufacturing mode across our acreage in the Permian unconventional.
Any kind of timeline?
Well, I think you'll see it happening steadily over the next couple of years. You can't move to manufacturing mode till you have the infrastructure and the takeaway capacity to allow you to do it. We've already contracted for the first phases of that infrastructure, and it's moving forward to be built. A lot of it won't be online until 2019.
Mm-hmm. Okay. We should assume 2019 or 2020 then?
Yeah. I think in 2019 you'll see something that will probably start to look to you like manufacturing mode as that infrastructure becomes available to us.
Okay. The second question is for Don. Don, APLNG in the second quarter, are they positive free cash flow by now? That they are still just paying off The project financing. In the $1.6 billion of the cash flow this quarter, what is the cash flow associated with the asset to be sold or that you already sold?
Let's see, Paul. On APLNG, they had good production through the second quarter as they were conducting their performance test for part of the lenders' test. Their cash flow breakeven is somewhere between $45 and $50 Brent, so they would've been probably generating some free cash flow and building cash balances within the joint venture. As far as what part of the $1.6 billion was associated with divestitures, I'm not sure I have that figure at hand.
Yeah
We may have to get back with you on that. Of course, we had the FCCL. Your cash flow associated with that would've been whatever we anticipated for distributions. They wouldn't have had any in the second quarter, so that would've been a zero. We had about half of a quarter of Western Canada that contributed to second quarter, and that's a very small number of maybe $30 or $40 million.
Yeah.
San Juan is in the second quarter, and that's about $200 million a year, or so $50 million a quarter or something like that.
That we should call it somewhere on a pro forma basis that $50 is more like in the 1.45, 1.5?
No.
In the cash flow?
I wouldn't do that. The reason I wouldn't do that is because a couple of reasons, but one thing that you need to keep in mind is that a lot of these proceeds that we're using are going to retire debt. Our interest expense is coming down, and that's serving to offset a good portion of that lost operating cash flow. At $50 oil, I'm not anticipating that we're going to see a significant degradation of our operating cash flows. Previously, I've talked to you guys about, at $50, company's able to generate about $6.5 billion. You've heard me talk about that before. I think when all these dispositions are said and done, we might have lost $100 or $200 million out of that, but it's really not a significant amount at $50.
Of course, the cash flow impacts will increase as the oil price increases. You go to $60, it's going to be more material. At $50, it's not a big loss.
Okay. Thank you.
Thanks, Paul.
Thank you. Our next question is from Ryan Todd of Deutsche Bank. Please go ahead.
Great. Thanks. Maybe one, I know the oil price certainly feels a bit more stable now, but if we were to see a potentially lower oil price into 2018, how should we think about the response to ConocoPhillips? How much flexibility is there in that kind of $4.8 billion run rate into 2018? What type of environment would prompt you to reduce the activity levels from the 12 rigs you're currently running in the U.S.?
Ryan, I'll take that. We'll talk more, obviously, in November about our outlooks and our plans for 2018, I think we'll be in a better position to talk about how we would react to different potential outcomes and scenarios in 2018. I think it's important to note how resilient the company has become to lower oil prices. Our cash breakevens continue to decline. Our profit breakevens continue to decline. We've pretty much preloaded on the balance sheet with $10 billion. We've got more assets to close as we go forward into the third quarter. Like I said, we've basically pre-funded our plans for the next couple of years there. You'd have to get down to some pretty low scenarios before we thought about significant changes to our strategy.
With regard to our flexibility, if you did get into that kind of scenario, we haven't set our 2018 capital plans yet, obviously. We'll be talking about that later in the year. But I expect that on the order of half of our CapEx plans for 2018 will be fairly flexible and the sort of thing that you could ramp down if you needed to in a very low price scenario.
Great, thanks. Maybe, I guess just one very specific one. You mentioned the additional asset disposal, Panhandle asset agreement in the release today. Could you give any details in terms of how much production is associated with that asset and maybe what the potential proceeds would be?
Yeah, I can do that, Ryan. I think the sales price on that is right around $200 million. Let me just check my facts here. But we're looking at a 2017 pro forma, so for the full year, a rate of 8,000 barrel equivalent a day. That's mostly gas.
Okay. I appreciate it. Thanks.
Yep.
Thank you. Our next question is from Roger Read of Wells Fargo. Please go ahead.
Yeah, good morning.
Morning, Roger.
Roger.
I guess maybe just real quick on Alaska, given that things are going well up there and on the cost side, there's been some movements inside the state there to raise taxes more so on idle than active projects. I was just wondering if you could give us sort of an update on the kind of political tax outlook in that area.
If you look at what's happened so far, the tax changes that have been made really don't have any significant impact on us and haven't had an impact on our plans in Alaska with what's happened so far.
Any prospects for anything we need to keep our eye on or anything you're watching there?
I think the tax and spending situation in Alaska is still difficult in today's environment, we continue to watch it closely to see what happens. In terms of our level of investment activity in Alaska, we're pretty sensitive to the fiscal regime up there. In the handful of years since SB21 was passed that's made things more attractive for investment, we've been able to increase our production there. We've been spending about $1 billion a year of capital, on the order of 20% of the whole company's CapEx going into Alaska. If the tax regime changes, we would, of course, have to reevaluate that. We have forward projects where we have control of the pace.
Okay. Appreciate that. If I missed it in your discussions earlier, I apologize for asking this question, the improvement on the depreciation, I understand a portion of it related to asset sales, the part related to production performance, kind of where is that and maybe the magnitude of that in the $1 billion?
Yeah, I think it's about $0.3 billion is from performance, and it's really driven by the biggest thing driving is the Lower 48 and some in Alaska as well. Really kind of U.S. driven.
All right, great. Thank you.
In the Lower 48, we have a lot of restrictions on the way we book our reserves there, as we've gotten more and more experience and more time and more confidence in our type curves there, you're able to book more of the EUR that you're expecting to get in the base case you can actually book, that improves your unit depreciation rate.
Well, you've always said you were conservative on your initial bookings, I guess that's pretty consistent.
Yeah. I think we still are, but we're catching up a little bit on that, and that's helping.
Okay, thanks.
Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead.
Good morning, team.
Morning, Neil.
Just want to connect with you guys on second quarter production. You exceeded the top end of production guidance. Relative to your expectations, where'd you see that outperformance? Just relative to our forecast, it was Norway, Malaysia, and it felt like a little bit in Alaska, but curious where you saw that outperformance.
Okay, Neil, I'll give you the rundown of that and kind of some of the reasons behind it. We beat the midpoint by 40,000 barrels a day. 14 of that was actually in Alaska. That was the single biggest place, and that was really driven by better uptime and some better well performance. We were plus 10 in Malaysia. That was driven by a shorter turnaround time for the Kebabangan turnaround and also better than expected Malikai well performance. Norway was plus seven. Again, we had better uptime and well performance, but also some increased gas offtake in the summer. Australia was plus five. We had better performance at both APLNG and Darwin LNG. The U.K. was plus five. We had better uptime in the J Block area and some better well performance.
When you look at all those, you wonder, how can that be that you had all those pluses all at the same time? I guess the observation I would make from my travels around the world visiting our operating groups is it seems to me that in this period where we've been spending less CapEx, our operating groups have had more time to focus on our base operations. What's really driving this is better than expected performance out of our base.
That brings me to my follow-up, which is just how do you think about that decline rate on the base, both mitigated and unmitigated? Tying it to a bigger picture question, I know you guys have built the business to be sustainable in any type of oil price environment, you do as good of modeling on oil macro as anyone we've seen. Just where do you guys think we are in terms of the oil market rebalancing right now?
I would say no significant change. To move the decline rate at the corporate level takes big shifts. I still think we're in that kind of 8%-10% range over time that we've talked about. If we continue to have this sustained improved performance out of our base, we may have to do some more analysis on that. It could be that there's a shift there over time. As far as the macro goes, I think what's interesting for us is that the recent weakness that we've had and then a little bit of kind of, has not been a surprise for us. I think the macro environment we've found ourselves in is the exact one you've heard us talking about since last year's analyst meeting and the one that we've prepared ourselves for.
We've said that we're going to be prepared to have free cash flow that covers our CapEx and dividends in this $45-$50 environment, and that we're going to be ready to thrive in that environment over an indefinite period of time. This matches up well with the way we've prepared ourselves.
Thanks, guys.
Thank you. Our next question is from Scott Hanold of RBC Capital Markets. Please go ahead.
Thanks. Good afternoon, guys. Hey, Al, if I could just follow up on that question on the quarterly production outperformances. As you guys forecasted, obviously higher production by on average 25 a day this year. That implies that still a pretty healthy increase in 3Q, 4Q. In your second quarter commentary there, you used the word uptime a lot as far as the outperformance. What is really driving the higher production outlook? By my numbers, it looks about 30,000 BOE per day in the back half of the year.
Yeah. I'm not sure what your 30,000 is. Are you saying 30,000 up from 3Q to 4Q?
Well, yeah. If you're increasing your full year number by 25K-
Yeah. Okay. I got you.
Outperform by 40 in two, yeah.
Yeah. The only problem with that, you got to be careful with that math about same store sales and taking out the dispositions because if you look at our underlying growth, same store sales, 3Q to 4Q, it's in the 7%-8% range of what we expect to grow from the third quarter of this year to the fourth quarter this year once you take out the dispositions. Between 4% and 5% year-over-year. If you compare what we expect this year's fourth quarter with last year's fourth quarter, same store sales 4%-5% range. Part of that is our normal bathtub shape that we get every year because we tend to have our turnarounds in the second and third quarter, and we do have some very significant turnaround load planned in the third quarter.
Also, with the timing of some of our rig additions in the Lower 48 unconventional, and then the completions coming in behind that and the timing of getting the completion crews out there, we're expecting to have pretty strong production in the fourth quarter from our Lower 48 unconventional.
Got it. Understood. That's helpful. Also, there's been some news that Tokyo Gas is looking to renegotiate some of its LNG pricing agreements, and obviously you discussed the write down at APLNG due to weaker pricing. Can you give us a sense of what that market looks like and what kind of conversations you all are having with some of your counterparties?
Yeah, this is Don. Our APLNG is really sold out under 20-year long-term contracts, both to Sinopec and Kansai in Japan. I'm not familiar with what you're reporting with respect to Tokyo Gas. We do sell gas from our Darwin LNG to Tokyo Gas. I'm not aware of any discussions we've had about renegotiating contracts.
Okay. There was just something out in the news within the last week, so I can follow up with that.
Okay.
Thanks, Scott.
Thank you. Our next question is from Pavel Molchanov of Raymond James. Please go ahead.
Thanks for taking the question, guys. Once the asset sales wrap up, you'll be one of the few North American companies to have about as high gas exposure in Europe as you are in North America. I would ask, given the magnitude of your European gas portfolio, is that something that you expect to grow over time, or is it a non-core asset that you would be potentially looking to monetize as you've done in North America?
Well, I'll try to take that one. You're pointing to the comparability of our European gas sales to our North American, but I'd have to remind you that after the asset sales in North America, North America gas represents less than 10% of our total portfolio. These aren't the largest positions that we've got from a commodity perspective. With respect to the strategic nature of our European gas sales, that's coming primarily from Norway and as well as the U.K. Yeah, I think that we consider the North Sea assets, which are primarily oil-producing assets, to be strategic to the company.
Okay. Let me ask a quick one on exploration expense. Less than $100 million in Q2, the lowest I think on record. Is that a run rate that can be sustained given your CapEx plans, or was that a bit of an outlier?
Well, the exploration expense tends to be a bit lumpy with specific events that occur, things like lease acquisition that'll happen at one time. We did have, in the first quarter, the last vestiges of some of our deepwater drilling costs and exploration that are completely done now. I wouldn't call $100 million a run rate necessarily, but it's not too far off. I think we're expecting to be around $600 million for the year this year. $100 million a quarter is not too far off.
All right. Appreciate it.
Thank you. Our next question is from Jason Gammel of Jefferies. Please go ahead.
Thanks very much. I just had a two-parter on APLNG. First of all, can you make any comments about what the domestic gas situation on the east coast of Australia is potentially going to have on the operations of APLNG, especially given that it appears to be the project that is producing the most feedstock gas at the current time? I guess the second question is, given that you're very close to achieving completion and getting certification from the lenders and lifting of the loan guarantees gives you quite a bit more flexibility in the role of that asset in the portfolio. I guess the question really is: would you still consider APLNG a core asset that you want to hold for the long term, or would this potentially be another candidate for divestiture, and then you could potentially redeploy the proceeds elsewhere?
Okay. Let's start on the export licensing. You've seen some material in the press lately where the government is starting their process for 2018 to think about what they want to do there. Remember that the key to the regulations, the way they've been written, is that the test is whether you're a net domestic gas contributor or not. APLNG has always been, and our plans going all the way as far as you can see into the future, are for us to always be a significant domestic gas contributor, which just means that as we buy and sell in the domestic market, we're selling much more of our own production into the domestic market than we're buying. We're a very significant supplier. We supply about 20% of the domestic gas in the East Coast market in Australia as APLNG.
Given that that's the case, we don't expect any impact on APLNG's operations from the export licensing process that's ongoing. With regard to our view of how APLNG sits in our portfolio, I guess I could say that we don't have any plans to market or sell APLNG. We've got all the CapEx behind us and are now in the flat production mode. As Don mentioned earlier, when you include the debt service, we do need $45-$50 to get to breakeven. If you exclude the debt service, just to give you an idea of where the operations sit, it's $30-$35. You need $30-$35 Brent to break even cash, excluding the debt service. At the kind of levels we're at today, we're able to cover that debt service as well. We're very pleased with the way that the facility has operated.
It's really been better than expected and continues to get better. We had 72 cargos that we shipped all last year from APLNG, and we've already done 60 in the first half of this year.
Very helpful. Thanks, Al.
Christine, we're at top of the hour, so we'll take our final question, please.
Thank you. Our last question is from Michael Hall of Heikkinen Energy. Please go ahead.
Hi. Thanks for squeezing me in. Quick one on my end. Just curious, on a similar front to some of the questions earlier around if you're seeing any varying inflation pressures across the different Lower 48 focus areas. Taking that on the learning curve side, you mentioned you're still seeing a lot of progress on that front. Just curious how, if any, those learning curves differ across those different, Eagle Ford, Williston, and Permian. On a related angle, have you had any success bringing technologies from the offshore and other conventional areas into your onshore unconventional projects?
Okay. There's a number of different questions there. I guess I would say that we don't see any huge differences in terms of learning curve from our different areas. There's some difference with maturity. Even in the Eagle Ford, where we're the most mature, we still continue to get very significant improvements in both recoveries and in how many days it takes to drill and complete our wells from year to year. Even where we're mature, we're still continuing to see a significant pace of improvement. The bigger differences for us come around infrastructure and how that impacts our ability to get things done and have good netbacks. I think that that's really You also asked about the knowledge transfer from the offshore to the onshore.
I talked about this on the last quarter call, that the big thing for us has really been around data analytics and our integrated operations, which really started many years ago in the North Sea for us in Norway, and then spread across the company and served as the foundation years ago for our data analytics effort in places like the unconventional. That's a good example of some of the offshore coming to the onshore. I think that's a good place for us to wrap up, and that's a good topic that I'm sure we'll be talking more about at the Analyst Day that we have coming up in November. We hope to see everybody there.
Thanks, folks. Christine, we'll go ahead and wrap it up. Obviously, if anybody has any follow-up questions, feel free to ring IR. We'll be glad to help you out. Thank you for your interest and participation. Thanks.
Thank you. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.