Earnings Call: Q2 2016

Jul 28, 2016

Welcome to the Second Quarter 2016 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, ConocoPhillips. You may begin. Thanks, Christine, and good morning to everyone. Welcome to the Q2 earnings call. With me today are Ryan Lance, our Chairman and CEO Don Wallett, our EVP of Finance, Commercial and our Chief Financial Officer and Al Hirschberg, our EVP of Production, Drilling and Projects. Our cautionary statement is shown on Page 2 of our presentation. We'll make some forward looking statements on today's call that refer to estimates and plans. Actual results could differ due to the factors noted on this slide and in our SEC filings. We may also refer to some non GAAP financial measures, which help facilitate comparisons across periods and with peers. For any non GAAP measures we use, a reconciliation to the nearest corresponding GAAP measure can be found on our website. So with those administrative details out of the way, it's my pleasure to turn the call over to Ryan. Thanks, Ellen, and good morning. I'll be again on Slide 4. This is a recap of our 2Q results and Don and Al will provide more detail in a moment. But the key messages are, we delivered strong operational performance, our financial performance is improving, and we're making progress strategically to position ourselves for a world of lower and more volatile prices. Let me quickly go through this slide. Production grew year over year by 3%. Our 2nd quarter performance exceeded guidance despite a busy season of turnarounds and over a month of downtime at Surmont due to the wildfires. Based on our strong year to date performance, we're raising the midpoint of our 2016 production guidance by 2%. We're also lowering our 2016 CapEx from $5,700,000,000 to $5,500,000,000 based on efficiency improvements really across all business lines. Our major projects across our portfolio are on track for start up as planned and Al will talk about these projects in more detail. Our financial performance was challenged like the rest of industry, but did improve sequentially in line with prices. 3 of 5 of our producing segments were profitable this quarter, and I think this highlights the benefit of having a high quality legacy assets in our portfolio. Cash flows were in line with expectations and we ended the quarter with over $4,000,000,000 of cash and short term investments on hand. We're continuing to make progress on our asset sale program and expect to achieve our goal of about $1,000,000,000 of proceeds this year. We reduced debt by $800,000,000 in the second quarter, so we're making progress on improving our balance sheet. On the strategic front, we continued our phased exit of deepwater exploration. We signed an agreement to sell our position in Senegal in July and expensed our remaining deepwater position in the Gibson and Tiber wells in the Gulf of Mexico and we drilled a successful appraisal well at Shenandoah. Our adjusted operating costs continue to improve across the business and we're lowering our full year guidance there as well. This will create additional cash flow momentum as prices improve. And finally, we continue to spend a lot of time analyzing important aspect of our value proposition and very much on the minds of investors. We set priorities and targets that will guide our allocation decisions. By following these priorities, we can create value as prices recover and through future price cycles. So before I turn it over to Don and Al, I want to step through our allocation priorities and targets on the next slide. The way to create value in this business is through disciplined capital allocation. On last quarter's call, I outlined the principles of our capital allocation approach, which are shown on the left side of this slide. And as a reminder, they were that the dividend will remain a core part of our offering and we're targeting real annual growth in that dividend. Another principle is to maintain a strong balance sheet. The recent downturn has emphasized the importance of this principle. For us, that means having debt of less than $25,000,000,000 And finally, we'll focus on disciplined growth, where per share growth will compete with absolute growth. We have positioned the company to compete on returns. So while we have a large low cost of supply portfolio, we'll be disciplined about allocating cash to volume growth. Targets that will guide our incremental allocation decisions and these are shown on the right hand side of this slide. Let me step through them. The first use of cash is to pay our existing dividend and invest capital to maintain our production base. Now let me be clear that flat production is not our goal, but at a minimum we want to sustain our existing production. Because of our low decline base production, we can keep production flat for over a decade with CapEx of $5,000,000,000 to $6,000,000,000 And we believe our capital intensity is now one of the lowest among our competitors and that's a real advantage. After our cash from operations exceeds the level required to cover our dividend in CapEx for flat volumes, the next use of cash will be to grow our quarterly dividend our dividend annually at a real rate. We think this is a prudent and sustainable target. Our next priority is to reduce our debt to below $25,000,000,000 Our target is to reduce debt as it matures, but we might accelerate some of that reduction with asset sales. Our target is to have an A rated balance sheet, which we think is a competitive advantage. Next, we have a target to achieve 20% to 30% total shareholder payout of cash flow from operations through a combination of our ordinary dividend and flexible share repurchases. We don't believe our ordinary dividend represents enough return of capital to shareholders through the cycles for a company our size of maturity. So when we have available cash flows, we expect to return additional capital through share buybacks. We believe this will be a differential aspect of our offering. It will also force discipline on the system, while giving us a more flexible means of returning capital to our owners. And our final priority cash flows will be to invest in our large, low cost of supply captured resource base. We'll allocate capital to the lowest cost of supply opportunities while maintaining an appropriate balance between short and medium cycle programs and we have that inventory to grow. So what I've laid out should give you a clear sense of how we plan to create value through disciplined capital allocation. You should not think of our priorities and targets as a precise formula, but rather as a relative ranking of the choices we can exercise through the cycles. In some parts of the cycles, we can envision pulling on all these levers. At other times, we may be hunkered down. But in all parts of the cycle, we'll be disciplined. So let me stop here. We'll have some more time for your questions on this call. We'll also provide a lot more detail on our strategy at our Analyst and Investor Meeting in November. But what you should take away from my comments is that we know where we're headed and we have a strategy that is distinctive and will differentiate ConocoPhillips from our competitors. So let me turn it over to Don for a few comments on our financial results. Thanks, Ryan. I'll provide a quick overview of the 2nd quarter financials, starting with adjusted earnings on Slide 7. The business is performing well operationally and we grew production 3%, but the low commodity price environment continues to impact financial results. For the Q2, with an average realized price of around $28 per BOE, we reported an adjusted net loss of roughly $1,000,000,000 or $0.79 per share. A couple of items to note that negatively impacted earnings in the quarter. We expensed our remaining position in the Keyclade Canyon area of the Deepwater Gulf of Mexico and with respect to adjusted earnings, recognize the Gibson and Tybur wells as dry holes. We also saw higher DD and A in the quarter, and we're increasing our guidance for the year from $8,500,000,000 to $9,200,000,000 This increase is due in part to stronger production performance, but it's also related to an increase in the DD and A rate, primarily a result of price related reserve revisions. We continue to reduce costs across the business and achieved an 18% reduction in adjusted operating costs compared to the year ago quarter. 2nd quarter adjusted earnings by segment are shown in the lower right side of the slide. While Lower 48 was impacted sequentially by higher DD and A and dry hole expenses, the remaining segments are roughly in line with expectations. As a reminder, the supplemental data on our website provides additional financial detail. Turning to Slide 8, I'll cover production. Our 2nd quarter production averaged 1.546 1,000,000 BOE per day, which exceeded our guidance despite the wildfires in Canada. Last year's 2nd quarter volumes were 1,595,000 BOE per day or 1,523,000 when adjusted for dispositions. Adjusting for the impact of incremental downtime, production increased by 46,000 BOE a day, representing 3% growth year over year. Increases in LNG and liquids volumes were partially offset by lower natural gas volumes, mostly in North America. This gets you to our 1,546,000 BOE per day production for the quarter. If you turn now to Slide 9, I'll cover the cash flow waterfall for the first half of the year. We started the year with $2,400,000,000 in cash and have generated $1,900,000,000 from operating activities, excluding operating working capital changes. Total working capital was a use of cash of $600,000,000 in the first half of the year. This was largely driven by reduced capital spending and lower decommissioning activity in Europe. Since we don't expect a significant reversal of our spending trends for the remainder of 2016, we believe working capital will be a use of cash for the full year. Proceeds from asset sales, mostly North America Gas properties, were $400,000,000 in the first half. Through the 1st 6 months, debt increased by 3,800,000,000 dollars This reflects the $4,600,000,000 debt raised in the Q1, offset by $800,000,000 of commercial paper retired in the 2nd quarter. Capital spending for the first half of the year was $3,000,000,000 And after dividend payments of $600,000,000 and some other small items, we ended June with $4,200,000,000 in cash and short term investments. Now I'll turn it over to Al to run through our operational performance. Thanks, Don. I'll go through our operations by segment and then provide a brief overview of what's left to watch for in the second half of the year, and then we can take your questions. If you turn to Slide 11, I'll start with the Lower 48 and Canada segments. In the Lower 48, our production in the 2nd quarter was 503,000 barrels per day. Once you adjust for asset sales, that's an underlying decrease of 17,000 barrels a day compared to this time last year. The unconventionals produced 262,000 barrels per day or down 4% from Q2 of 2015. That's better performance than we had expected driven primarily by a better well performance in the Eagle Ford and the Bakken, but also by the lag effects from our ramp down and rig activity. Now that we're running with 3 rigs, we expect decline in the unconventionals to steepen somewhat in the second half of the year. In the Gulf of Mexico, we saw successful results at the latest Shenandoah 5 appraisal well, which encountered over 1,000 feet of net pay. Moving to Canada, our production was 279,000 barrels per day. Adjusted for dispositions, we saw growth compared to the Q2 of last year, even including the wildfire impact at Surmont. That's the result of ongoing ramp up of our oil sands projects, which provided a 16% increase in bitumen production compared to this time last year. We expect growth to continue as Sirmonte II ramps up to full capacity through 2017 and we bring additional phases online at FCCL. We also achieved 1st production with the commissioning of the Foster Creek Phase G during the Q2 and we're progressing toward 1st production at Christina Lake Phase F. Moving to Slide 12, I'll cover the Alaska and Europe and North Africa segments. In Alaska, we saw growth compared to the same time last year with 2nd quarter production of 179,000 barrels per day. This came from ongoing strong production at CD5 and Drill Site 2S. In the quarter, we also approved an expansion phase of CD5, which will add an additional 16 wells and bring CD5 to its full design capacity. We have significant turnaround activity planned in Alaska for the Q3 at both Coparac and Alpine. And finally, we completed the sale of our Beluga River asset and the Cook Inlet during the quarter. In Europe and North Africa, production of 187,000 barrels per day was down 20,000 barrels per day compared to the same period last year. That decrease is primarily the result of increased turnaround activity in this year's Q2. In the U. K, at Clare Ridge, the drilling and production modules were successfully installed and progress is also continuing at Alder, where we expect to achieve 1st production in the Q4. Moving to slide 13, I'll cover the Asia Pacific and Middle East and other international segments. In APME, production was 398,000 barrels per day, up 14% year over year. The increase was primarily due to the ongoing ramp up at APLNG. Train 1 is continuing to run ahead of expectations with 27 cargoes loaded in the first half of the year, including our first cargo to Kansai Electric in Japan. We're on track to deliver the first cargo from Train 2 in the Q4 of 2016. In Malaysia, Gamut Soup is continuing to produce at a high level and third party pipeline commissioning is underway at KBB. So we're beginning to see increased production volumes there as well. And the sale away of the Malachi TLP was completed this month with start up expected next year. In the other international segment, the key milestone was signing the SPA for the sale of our exploration blocks in Senegal in July. This sale is expected to generate proceeds of $400,000,000 to $450,000,000 If you turn to slide 14, I'll provide a few comments about our outlook for the rest of the year. As Ryan and Don mentioned, the business has performed well through the first half of the year. We're updating our full year production guidance to 1.54 to 1,570,000 barrels per day. That's an increase of 35,000 barrels per day or about 2% over prior guidance. While at the same time we're lowering both our capital and our operating cost guidance. For the 3rd quarter, we expect production to be between $511,000,000 and 1,550,000 barrels per day, which reflects ongoing turnaround activity in Europe and Alaska. Our project activity is on track. We're continuing to ramp up at our Surmont and FCCL projects and are progressing several other projects in Alaska, Europe and Asia Pacific. We expect to complete our Senegal sale before the end of the year and we're continuing to market our remaining deepwater exploration positions in Eastern Canada and the Gulf of Mexico. And then finally, just a reminder that we will host our 2016 Analyst and Investor Meeting in New York on November 10. At that meeting, we'll provide more details on our cash flow priorities, our low cost of supply portfolio and our future investment plans. So we look forward to seeing all of you at that update. And now I'll turn it over for Q and A. Thank you. And our first question is from Paul Cheng of Barclays. Please go ahead. Hey guys, good morning. Good morning Paul. Actually good afternoon all. Well anyway, Ryan just curious, your partner in Canada was saying that they are ready to restart Christina Lake. Given that your portfolio is different than theirs, is there any maybe scheduling differences in opinion between you and your partner? Bro scheduling what? Scheduling differences Paul? Yes. In terms of the expectation given that I think the first set of offset that you're going to go back and reinvest, I don't believe it's going to be in Noi San. I assume that it's going to be in Eagle Ford and Bakken and Permian. So how is that we reconcile there? Yes. No, we well, we spend quite a bit of time with our partner up in Canada talking about our plans. We've been fairly well aligned in terms of what the performance and the opportunity set looks like. Ramp up some of their spending, get back to work on some of the projects within the ramp up some of their spending, get back to work on some of the project with increased oil prices. But we've got that accommodated in our plans as well and we work really close with them to make sure that we're doing the right things and that the projects make sense economically and have a competitive cost of supply. Okay. And just a real quick one for me. Maybe that do you have a production number for Eagle Ford, Bakken and Permian in the second quarter? Yes, I can quote you those numbers. It's actually production is actually up in the Eagle Ford versus from the Q1 to the second quarter. I got to hear if you want. So you asked the same question in the Q1 about Eagle Ford and we were at 168,000. We're up to 171,000 in the second quarter. Bakken was 65,000 in the 1st quarter, 64,000 in the 2nd quarter. So actually, if you add Eagle Ford and Bakken together, we're up a few 1,000 barrels a day in the Q2 versus the Q1. Okay. Very good. Thank you. Thanks, Paul. Thank you. Our next question is from Doug Leggate of Bank of America. Please go ahead. Thanks. Good morning, everybody. I think it's still morning, Justin. So Ryan, I think is it Slide number 5, the 20% to 30% cash flow shareholder payout, I think that's a new number on the slide deck this quarter. I just wanted to get clarification as to what make sure we're interpreting this properly. That includes the dividend I assume? Yes, it does Paul or Dave, Doug. So different accent. Okay. So basically, can you just on that basis end, can you just give us some ideas to what kind of thresholds you're thinking about? Because I imagine $70 oil, that would imply a much bigger number than $60 obviously $50 oil. So can you give us some idea, is it a limit to the level that you would put on that? Or should we just take that as a kind of blanket guidance going forward? Well, Doug, I think the way to think about that is we recognize that as prices recover that the dividend payout that we have today doesn't represent probably enough return to shareholders in a recovered price scenario where we're starting to free cash flow above our requirements of the current dividend and to keep our production flat at a minimum. So we recognize that as prices recover, that's not enough payout to the shareholders. Even when we spun the company, we were talking about these kinds of payout levels. We were doing that with the just the ordinary dividend at the time. So we set a pretty broad range 20% to 30%. And clearly, we'll take a look at that as the circumstances warrant. And then compare really as you get down to those 4th and 5th priorities, it's about what kind of investments do we have with the shareholders would want us to be making in the portfolio, what kind of returns do they have, what kind of cost of supply do they have and how does that compare to where our stock is trading at the time and the value that we see in the shares and compare those 2 and make those decisions as we go down the road. Okay, okay. Thanks for that. My follow-up is kind of related, I guess, and it's a clarification on your debt targets because again, number 3 on that list is pay down debt. You're already at a net debt number below $25,000,000,000 and you're talking about paying debt as it matures. So are you now at the debt level you're comfortable with? Or do you still want the absolute debt to be below $25,000,000 And I'll leave it there. Thanks. Yes, Doug, this is Don. I think we want to be real clear, we talk about balance sheet debt. We could be talking about net debt too, but we didn't want there to be any ambiguity. What we're looking at is balance sheet debt that at the end of the Q1 was approaching $30,000,000,000 or so. And that's when we set our target and said we want to bring that down to a number less than 25,000,000,000 dollars Okay. But Don, to be clear, if you're paying maturities as you come due, I assume that's from cash on the balance sheet. So isn't that essentially a net debt number? Well, we'll see how the environment the macro environment turns out, but we would hope that, that would come not just from cash on the balance sheet, but also from organic cash flow. Thank you. Our next question is from Pavel Molchanov of Raymond James. Please go ahead. Thanks for taking the question guys. You've clearly had a lot of success ramping at APLNG. Is there a point with Train 1 or getting into Train 2 where the project in aggregate begins to be a net cash generator? Yes. This is Al. I'll take that one. It as we we're still spending a lot of capital in on construction on Train 2, of course. But once both trains have ramped up, the project, if you include even the financing, the cost of that throws off cash when you get to around a $45 barrel kind of number. $45 barrel at JCC? Yes. Pricing? Okay. And just second quick one on the Senegal sale. Woodside threw out some numbers on the underlying resource. Were any of those included in your proved reserves at last year end? No. That's a recent discovery that's a long ways from any of proved reserves. So our proved reserves for Senegal on our books would be 0. Okay. Appreciate it guys. Thanks. Thank you. Our next question is from Ryan Todd of Deutsche Bank. Please go ahead. Thanks. Good results, gentlemen. Maybe if I could talk about your free cash flow generation, Jason, a little bit. We see you guys, I mean, you were near a free cash flow breakeven even at $45 a barrel in the quarter here in 2016, which is probably a little ahead of what our anticipated pace was in terms of you guys getting there in the medium term. Are you ahead of pace on cost reduction and cost structure optimization? And could you talk about maybe continued momentum that you have in that regard going your kind of potential $45 barrel target in terms of covering CapEx and dividend? Yes. Ryan, I think we really got in terms of the progress there, we've got 3 things all working in our favor. We're higher on volumes, we're lower on CapEx and we're lower on OpEx. And so all those things are moving in the right direction to help drive down our breakeven cost of capital. So we've trimmed back our guidance on CapEx and OpEx to reflect that. But we And Ryan, we And Ryan, we're not satisfied with where the numbers are at today and we've got a lot of effort to continue to drive them down to get the same scope done for less capital and less cost as well because we got to continue to attack that breakeven and make sure we get the breakeven for the company down as low as we possibly can and be as competitive as we can in this business because we believe this world of low and a lot of volatility in prices is here to stay. So we've got to thrive in the down cycle. Great. Thanks. And maybe as a follow-up to that question, I mean, there seems to be a common concern amongst at least part of the market in terms of your confidence in your ability to deliver on the medium term outlook, in terms of your ability to sustain volumes longer term at the stated levels of capital spend or the capital intensity that you mentioned in your comments. Can you maybe talk a little bit about how you think your portfolio has evolved over the years and how it's positioned to sustain that free cash flow generation? And is there maybe some additional granularity on the portfolio that you might be able to provide going forward that could help increase investor confidence in this? Yes. So I mean you've heard a lot from us over the last few years about the shift that we've had from mega projects, longer cycle to shorter cycle, more flexible investment that's really standing us in good stead now. But if you look if you just look at our near term performance on volumes, take start out with 2nd quarter volumes, we beat the midpoint of our guidance by 26,000 barrels a day and we're even above the high end of our range. And that was despite being having about a negative 15 at Surmont due to the wildfires. So you can see there that there are a lot of parts of our business that are really performing well, and the single biggest area that drove that outperformance on volumes was the unconventionals as you kind of see from some of the numbers we were quoting to Paul's question earlier. The decline even running just 3 rigs in Lower forty on the volume side and on the cost side in our Lower 48 unconventional. So that's a key driver. And then as you look toward the end of the year at the strong momentum that we're going to have on volumes, we'll have Alder starting up, APLNG Train 2, Surmont 2 will be continuing to ramp, KBB volumes are moving up, FCCL. So we have a lot of different projects that will be adding volumes that give us a lot of confidence that we can continue to drive that volume performance of at least flat or even growth if we want to at these lower kind of capital levels that we've been talking about. And of course, we're going to show you a lot more detail on that in November at our Analyst Day. Great. Thanks, Ryan. Thank you. Our next question is from Phil Gresh of JPMorgan. Please go ahead. Hi there. Good afternoon. First question is just to follow-up to Doug's question on the leverage level, the $25,000,000,000 target. So you have $1,250,000,000 coming due in the Q3, dollars 1,000,000,000 in 2017. You talked about maybe accelerating some pay downs if you have asset sales. But I guess it would seem to imply that the $25,000,000,000 target on a gross basis wouldn't be reached until maybe late 2017 perhaps. But I'm guessing you're probably thinking faster than that based the cash you might have coming in and the cash on the balance sheet. So maybe you could just clarify that for us in terms of when you think you could reach that target? Yes. Phil, we're we thought it was important to throw out an absolute gross target of debt. So as Don talked about below $25,000,000,000 And then we've been I think some of the questions we've had since that time is saying, well, you're not going to do anything else until you get to that point. So you're going to spend all this $4,000,000,000 required to get from $29,000,000,000 down to 20 $5,000,000,000 will be at the expense of everything else. And what we wanted to try to tell folks is, we feel comfortable with paying off the debt as it matures with the cash flow. So as we get some recovery in price and we're generating cash flow above what it takes to hold production flat and pay the dividend, we'll go ahead and put that to the balance sheet, but we're not going to spend $4,000,000,000 before we do anything else, because we think we can get there over time over the next couple of years, as you say, with the natural maturities that we have on the balance sheet. And then and we know that we want to get back into the market with some asset sales when the market starts recovering. So we know that we'll be selling some more of our non core assets and we'll always have that to help us accelerate that debt repayment. But the main message is it's manageable. We think we have a plan. We can get there with just through the natural maturities and we can get to a point that we think is solidly investment grade in the 8 credit rated band. Got it. Okay. So you're comfortable with the next couple of years. Okay. So the second question was just on the production beat. I believe maybe it was earlier this year you gave kind of outlooks for each region from a production standpoint. And I think Lower forty 8 at the time was down 3% or so, if I have my numbers right. Maybe you could just give us your revised thoughts on the production outlook for different regions? It sounds like Lower 40 is the key driver of the beat in the race. Yes. I think the biggest change in our production outlook, when I was asked in the Q1 call with coming down to 3 rigs and holding that 3 rig level for the rest of the year, how much did we think our Lower 48 unconventional would decline on the year? And my answer was 10%. At that time, it looked our projection was we would drop about 10% on our Lower 48 unconventionals. With this update and with the performance we've had in the Q2, that number has been cut roughly in half, about 6% now is what we think will be down on lower 48 unconventional. So I mean that's a big change holding that same flat 3 rig rate. We've also got some improved production in Europe and in Malaysia. And so really, if you think about it, those are all above average margin barrels for us. So that's part of the other good news in our production beat is that it's coming from places where we have higher margin barrels. Got it. That's helpful. Thanks. Thanks, Phil. Thank you. Our next question is from Guy Baber of Simmons and Company. Please go ahead. Thanks everybody for taking my question. Ryan, you mentioned you have one of the lowest capital intensity portfolios and I want to just explore that a little bit more and follow-up on the earlier question. But at $5,000,000,000 to $6,000,000,000 you've noted you could keep your production profile flat. I believe that translates to CapEx on a per barrel basis in the low teens. Is that the type of F and D you believe you can achieve with this with your current portfolio? And can you talk about what gives you that confidence? And I'm really trying to understand if the $5,000,000,000 to $6,000,000,000 of spin cannot only hold production flat, but also replace reserves or if you're comfortable drawing down your proved reserve life to a certain extent given the strength of your resource base? Yes. There's quite a lot in that, Guy. Let me just start kind of at your first question sort of. Yes, we have a lot of confidence as I said in my remarks, dollars 5,000,000,000 to $6,000,000,000 of capital. It's kind of today's inflationary rates and what's going on in the market today. We can see with our portfolio a decade of flat production at that kind of level. So with the opportunities that we have to invest in the portfolio even at the lower capital level, yes, we're pretty clear about what we can do over a long period of time at that kind of a level. And while that's driven by the fact that after we get APLNG up and running second train and we get Surmod II ramped up, we've got 500,000 we got a third of our production base that's virtually no decline for the next 20 years. And I think that's what's unique about our company and that's what helps us drive down this maintenance capital level or this capital to hold our production flat to the kind of level that we're seeing. Now as that translates to F and D, it's a little bit tougher question because now you bring in the vagaries of reserves and bookings and all that kind of stuff. And that gets to be a little bit more tougher question. But generally, you're right, it has to drive F and D down from where we've been at over the last few years. But in our portfolio, we do have a pretty high R2P. So we are willing to let that moderate some because the bookings will not necessarily exactly follow the capital as we go forward. So reserve bookings end up being lumpy, but over time, over 3 5 year periods, yes, the F and D should follow. And as you're starting to book all the resources that you're developing, typically in the unconventionals, we're even in the Eagle Ford, we're booked to a small percentage of what we think the total resource potential will ultimately be out of Eagle Ford. So F and D is lumpy, but generally over time that should happen, but there is probably some drift in R2P. That's very helpful. Thank you. And then my follow-up is, as CapEx continues to be revised lower here, I just want to make sure that we stay on top of the latest view in terms of the level and the amount of longer cycle committed CapEx that rolls off the books from 2016 to 2017? I think you've previously talked about $1,500,000,000 or so. Is that still the case? Yes. That story hasn't changed much from last quarter where you're right. We were talking about $1,500,000,000 Remember that about $1,000,000,000 of that was from APLNG and FCCL joint ventures and about $500,000,000 from Deepwater roll off. The APLNG, both because of a bit lower spending and a bit higher revenues because the Train 1 is running above expectations, is using a little less. So it may the 1 point 5 may be down a 10th or so, but it's still in that same kind of range. And that roll off does provide room for us should we choose to increase rigs in the Lower 48 next year. That roll off money is where some of that can come from and still keep us down at these same capital levels next year. Some of that money will also be used with some of our medium cycle size projects that are in a phase of execution where some of their CapEx is going up from 2016 to 2017. Thank you very much. Thank you. Our next question is from Roger Read of Wells Fargo. Please go ahead. Thank you. Good morning. Good morning, Roger. I guess, two questions I have. 1, as you described the decline in the OpEx, can you give us an idea what you see is sustainable there or are there further goals to reduce it? Just trying to get an idea how much of that is internal and how much of that might be external as activity recovers prices go up and some of those costs have to go up? Yes. Good question, Roger. I think you've seen us continue to drive our OpEx down. I think our organization has really continued to outperform versus the targets that we've set. We just remind ourselves, we're down $1,200,000,000 of OpEx with this new 6.8 target versus where we were last year. That's 15% from last year and we're down $2,900,000,000 from 2014, 30%. So we've driven our operating costs down about 30% from this year versus 2014, but we're not done. We've got a lot of very firm plans and work that's been underway this year to continue driving those costs down next year substantially. And so we'll do the reveal on that at the November Analyst Day, but there's more to come on our operating costs. And of course, the second part of your question, we are very focused on trying to do this in a sustainable way with structural cost reductions and not just the cyclical deflation. Of course, the deflation is a piece of this and we're trying to hang on to that get as much of that as we can along the way and hang on to it for as long as we can. But we recognize that there will be reflation if prices ever come back one day and we'll give some of that back. But we're dominated here by the structural side real significant changes we've made in the way we're running our business. Okay. Thanks. That's helpful. And then kind of a cash flow question here. As we looked at the data that came through on the spreadsheet, saw a big hit on the deferred taxes side. And I just was hoping to get maybe a little bit of a feel for what that is and then maybe an idea of how to think about cash taxes when prices do recover and the company is generating profitability again? Yes, Roger, this is Don. Yes, we continue to see deferred tax as a use of cash being in a non taxpaying position in several of the key jurisdictions that we're in. I think that probably the way to think about it going forward is that we can we take a look at the price decks that the analyst community is using. And I think that on the basis of those, it's really unlikely that we're going to be in a tax paying position in North America and in the U. S. And Canada for probably the next 2 or 3 years at least under those types of price environment. So it's going to be a while before that deferred tax flips from a use to a source. Okay. Thank you. Thank you. Our next question is from Alastair Syme of Citi. Please go ahead. Hi, thanks for taking the question. Really the question back on Senegal. I mean, you look at the equity performance of some of the partners and the asset and it did suggest the market sort of sales price is fairly low. Can you maybe comment on that and why you think the deal was done? We think we got fair value for the asset based on our assessment of the resource and the cost to develop it. Can you as a follow-up, can you maybe talk about where you're at regarding the rest of the asset sales? And again, what the environment is like for those sort of transactions? Specifically referring to the deepwater. Yes. No, we so we've been told telegraphing that we think we're on track for $1,000,000,000 of asset sales this year and that's we're on track to do that. So we'll deliver that. We've said we've taken a number of producing oily assets off the market because we just don't think the market is there for a fair value with respect to that. So we're not going to sell assets into that kind of a headwind. We have done some North American dry gas assets and we continue to look at those in the portfolio and see if we can get what we believe is fair value relative to how we view the assets. That's certainly what we felt like with the Senegal transaction. And then specifically on the deepwater, we've signaled to you what we think about Keithley Canyon is there's something there, but the development probably is smaller and doesn't compete for capital in our portfolio. So we'll be looking at what we can do about that particular area going forward as well. Senegal, we'll look at it. We got a I mean Shenandoah, we've had a successful appraisal well there. So we're really encouraged about what that looks like. We'll think about putting that back on the market as well. But again, if the market is not there for what we think is full value, we'll continue to be a part of that development. Okay. Thank you very much. Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead. Good morning. Good afternoon, guys. I want to ask a couple of high level questions. And Ryan, it goes back to your slide on the unique value proposition. And I know one of the pushbacks that you often get from investors is that Conoco is kind of stuck in the middle. For some who look at you as a major, they'll say you have a low yield and for some that are looking at you as an E and P, they'll be more focused on growth. Is the message on that slide and going into the Analyst Day that the most powerful differentiating factor is the free cash flow. Is that what you see as that most powerful unique value proposition point? Well, I think that the leverage to the price has a point there where you can start to generate free cash flow with sort of modest increases in the prices. And we've tried to tell you what we're going to do with that free cash flow. And a big a certain prevalent piece of that is a recognition that we need to return more to the shareholders as prices start to recover relative to where the ordinary dividend is. But I'd tell you, I think there's a lot of differentiating factors in the portfolio. The maintenance capital to keep flat production, the quality of the investment cases we have, the low cost of supply we have in the portfolio. We'll show you that in quite a lot of detail in November. But I think there's space in this E and P world for a company like ours that is focused on returns. We know given our size that we can't compete against the growth. There will be a pure play smaller growth companies. So but we're going into a world of lower and high volatile prices and having some predictability, which I think we've shown through the execution since we spun the company. We've delivered on everything we said. We know how to run the company. We know how to run this business. We know what we're doing. And as we think about that, there's space in the E and P space for a company that is differential on returns and that can be more predictable through the cycles and do that both on the low and the upper end. And finally, we ever since we spun the company, we've been saying that we'll give returns back to our shareholders right off the top. And that's what we're trying to tell you here is an important part of our offering. The 20%, 30%, we recognize needs to go to the shareholders, create discipline within the company. And that combined with our flexible investments and what the portfolio looks like, we think will differentiate ourselves. No, I appreciate that, Ryan. And just as a follow-up, I always appreciate your perspective on the oil macro as you operate in a lot of countries that we have less visibility on. And you took, I think, a little bit more of a cautious view earlier this year, partly driving the dividend reduction. Where do you see we are in the rebalancing process? And what do you think is the biggest upside and downside risk to the base case? Yes. I think, yes, we're concerned about it, Neil. I think the guys we've been talking and pretty sure for quite a while. We need to be prepared for lower prices and volatility. And I think we're in that and we're seeing that in spades right now. So in our outlook, we did our guys did predict that, yes, we would see refinery start to cut run rates and we'd see gasoline inventory start to build because we were a little bit surprised to even see the crude oil inventory build in the last week like it did. So we think we're in while the supply and demand are closely balanced, it doesn't take a lot of movement on either end to create the kind of volatility that we're seeing. So as we think about it going forward, it's kind of be really, really cautious as we go through 2016 and it's going to take well into 2017 before we see any real increases in the price. So we're we continue as Al said, we're batting down the hatches. We're focused on lowering the capital required to deliver the scope and we're focused on reducing the cost and trying to get our breakeven down as low as it can possibly get because we're going to be in this world for periods of time over the next year, year and a half. Appreciate it, Randy. Thanks, Neil. Thank you. Our next question is from Blake Fernandez of Howard Weil. Please go ahead. Folks, good morning. Both of my questions are on Slide 5, so maybe I can just ask them both. I'm really just trying to get a point of clarity here on number 2, the annual dividend growth being a real dividend target with inflation trending around say 1% or so. Is that to say that that's literally what you're trying to achieve is just maintaining pace with inflation? I don't mean to be pedantic with it, but I just wanted to clarify that. And then the second piece is the 20% to 30% target on cash flow being paid out to shareholders, that's being put above growth capital. So is it fair to think that the buybacks are going to take priority over reinvesting? In other words, CapEx will remain at the $5,000,000,000 to $6,000,000,000 dollars level until you've begun doing some buybacks? Thanks. Yes, Blake. I guess a couple of things on the dividend. We say targeting real annual returns. We're not trying to I'm not trying to put a percentage. I realize the inflation rate is quite low today, but we're what we're trying to say is we're not going to be trying to increase the dividend annually to get back to somewhere like we were before we cut the dividend. So we're recognizing through the pain and the agony of the dividend decision to reset the fixed cost of the company at the lower end of the cycle. And we recognize as we go through the middle part of the trough into the upper end of the cycle, that's not enough return to the shareholders. So we're going to augment that with a variable distribution plan around share buyback. And while we say a lot of the can you be countercyclic in that kind of world, we're going to look at that pretty judiciously. We'll have a view of commodity prices today and where we think they're going over the few years. We'll look at how our shares are trading in the marketplace and we'll make a decision on what the level of share buyback is. Certainly, at a minimum, we'd like to offset the dilution that our stock programs to our employees provide. So that would sort of set a floor on the share buyback. But again, I don't think there's bright lines between all of these. And as I tried to say in my comments, as the prices start to recover, we can envision doing a little bit of everything. We're going to be doing some share buyback, but we're also going to be investing in the portfolio as well. But certainly, we view giving making sure that we hit the 20% to 30% return to our shareholders is an important hurdle for us to make before we start investing in the portfolio. Got it. Thank you. Thanks, Mike. Thank you. Our next question is from Ed Westlake of Credit Suisse. Please go ahead. Yes. My first question is, obviously, congrats on the well recoveries driving the surprise in Lower 48 volumes. I mean, obviously, that's probably lowered the breakevens as well. So but at the same time, you've got global inventory position still high. Maybe talk a bit about where the breakevens are now in the core shale assets in North America. And then what you'd need to see maybe on the macro side or maybe just in terms of the well performance to start to increase activity levels? Because it does feel as if you've got this following wind from your projects, so you don't necessarily have to rush. [SPEAKER J. PATRICK O'SHAUGHNESSY:] Patrick Gallagher, Jr.:] Yeah. I think that's right. I mean, we're our answer to that same question really hasn't changed from what we said in the Q1. We don't have some set price that's going to drive us out to add rigs in Lower forty eight. We do have the volume momentum that I was talking about earlier and the better volume performance we're getting from just the rigs we're running. But we're not going to get excited and rush out there and add rigs every time the price bumps up. The price since the last call, last quarter has been up, it's been down. Did the same thing this time last year. And so we're not on a hair trigger to go out and add rigs in that kind of situation, even though we do have a very high quality opportunity set to invest in. So I would say we're ready, but we're patient. And when we do add rigs, we're going to be very mindful about it. The macro situation will have to be solid and we're going to have to have the right costs that we'll have to be able to make sure we can get the right contracting to be able to go back at the kind of cost level that we need to maintain that low cost of supply that we have from those assets. And some idea of where that breakeven has fallen given the well performance improvements, say, Barker and Eagle Ford? I mean those numbers are very low. It's really not what's driving us. Those we could drill like crazy right now in both the Bakken and the Eagle Ford and make a lot of money at today's prices. Those have got cost of supplies down in the 30s. So but that's not really what's driving us. We've got to we don't want to go run out and add rigs too quickly before we get to a clear macro environment that's going to be supportive of that. I would add, Ed, we all can show 40%, 50%, 70% internal rates of return on an incremental well. And we've all got that. Anybody that's got a large North American position has got that in their portfolio today. We've got it a go go. But as Al said, we're not going to drill into the face of $40 headwinds. It's not going anywhere. It just doesn't make any sense. My second question is maybe esoteric and maybe we'll have to leave it to the Analyst Day. But I don't know if you've done any work on just how large a noncore asset disposal program could be, if investors were still unhappy even with the $25,000,000,000 debt target that you've laid out if they felt that really the right gearing for a sort of a volatile oil market is actually lower than the gearing targets that you've laid out. I presume there's lots of tax impacts on old assets and a whole load of things that you'd have to think about, but I'm just trying to get a sense of the size of the hopper that's available for disposals if you did want to reduce debt through that volatile period? Yes. We'll probably speak to that more a little bit in November, Ed. We're just we continue to watch the macro and continue to look at what competes for investment in the portfolio. And then as you say, there's other considerations. Can we get the value? Can we get the value we think we have withholding? We know our assets really well and we have a view on the macro and we have a view what's full value being paid for the assets. So we're we've demonstrated that we'll sell things that don't compete in the portfolio. We're going to continue to do that and we'll provide you more in November. Thank you. Our next question is from Paul Sankey of Wolfe Research. Please go ahead. Hi, everyone. You got us in a little bit of a spin as to whether it's morning or afternoon here, but hello. Ryan, thinking of the November analyst meeting, it seems fairly clear to us that shareholders really want you to do what you're doing in terms of lowering costs and breakevens, but really commit to no growth and all buyback as an overriding strategy. You're kind of referencing it, but you're keeping the growth option open. Can you just talk a little bit about why you don't just go down the route that I believe and maybe I'm wrong most shareholders would prefer you to? Thank you. Yes. Thanks, Paul. We do get that question from you and maybe 2 others. It's a good way when we look at it. Again, we recognize that through an up cycle or through the as this commodity price recovers a little bit, we'll start generating a fair amount of free cash flow. So what do we do with it? And how much of that should go to the shareholder and how much should go to the portfolio? I'd say shareholders in the company and we'll you know what our portfolio looks like. We'll show you more of that in November. And not only have we reduced the breakeven cost within the company, we've made some fairly substantial progress reducing the cost of supply in the portfolio within the company as well. So when you look at those opportunities to invest in the portfolio that are going to move our returns, they're going to add margin and create more cash flow growth for the company even at a flat fairly low price deck, we think those are things that we ought to be investing at in the company. And we've got to demonstrate to that to you. We got to show you. And that's our plan to go do that. But I will say we're not trying to compete on growth. Investors have a better they may have different places to go with their investment if that's what they want. We're going to show you why we can compete on returns, why that makes sense, yet we're not going to forget about the shareholder and make sure an appropriate amount is going to them off the top. Thank you, Brian. That's reasonable. You guys are really helpful on the macro. Can you observe globally why decline rates haven't been as high given your global portfolio? It'd be just interesting to hear given your own portfolio hasn't been declining as fast as we thought. What's your perspective on what's going on while we aren't seeing more declines than we anticipate? And I'll leave it there. Thank you. Well, I think that certainly if you look at U. S. Production, we have seen a big decline. The U. S. Is off over 1,000,000 barrels a day from the peak last year. But I think that particularly in the unconventional, the surprise factor is that some people kind of pronounced about a year ago that there was an asymptote coming and the technology had kind of reached its end in the unconventional. And I think we're proving once again that that's not the case, that there's still more cost to be driven out and there's still more increased recoveries to be found through new ideas from new technologies. And so that I think we're still got a long ways to go there, and so you'll continue to see that. In terms of the rest of the world, I think in our case, there are some better reservoir performance that we've experienced in various places. We've had better facility performance in places like APLNG. We've had timing of a pipeline commissioning KBB. So it's been a variety of different things that have been driven the timing for us. But the main real performance surprise, the biggest single item for us is in the Lower forty 8 unconventional. I would add Paul to that. Our experience is they're not lagging on schedule anymore. And our experience is they're not lagging on schedule anymore. They're coming on and they're coming on usually at better performance than what we're predicting. We're seeing that in our portfolio whether it's drilling in the U. K. Or Norway or projects in Malaysia or as Al said, Alaska, we're seeing better performance there. And then, APLNG, our train at APLNG and the rest of the trains frankly that are using our technology on Curtis Island are well outperforming their nameplate capacity and they're running really well. So we're seeing those pockets that are happening and it's a bit more of a lag in the international space. But the capital investment I think will catch up internationally. We're just seeing some of those projects come online. Thanks. Thanks, Paul. We're folks, we're at the top of the hour. We'll take one more question and then by all means, feel free to follow-up with IR after the fact. Christine, one more. Our last question is from James Sullivan of Alembic Global Advisors. Please go ahead. Hey, good afternoon now decisively guys. Just wanted to kind of ask a question kind of melding your view on the macro. And it's not another cut at the kind of the same question about growth and share buybacks. But do you guys have a threshold of materiality given that we're not necessarily going to be looking at that oodles of free cash flow necessarily, but maybe smaller tranches of free cash flow for at $50 or $55 in a year or 2. Do you guys have a threshold of materiality for a shareholder buyback or how do you think about that? Well, yes, I mean, as I tried to say, I think as we generate free cash flow, we'd like to lease at a minimum do some anti dilutionary share buybacks to offset the cost of our employee based stock ownership plans. So that kind of sets a bit of a floor. And then depending on where what level of free cash flow we have available, we'll start delivering that to the shareholder and then we'd like to be in that range of 20% to 30% of our cash flow going to the shareholders. So we'll target that range and look at where we're trading in the marketplace to make sure it makes sense relative to the other options we have. Okay, great. So first that anti dilution, but really you don't necessarily have I mean it's got to be $250,000,000 or anything like that in terms of No, we're at 20% to 30%. So that's what we've tried to tell everybody and signal that that's the range we'd like to be in, in terms of total returns to the shareholder, including our ordinary dividend. Great. All right. Thanks, guys. Thanks. Thank you. And we'll now turn the call back over to Ellen DeSanctis, VP, Investor Relations and Communications, for final remarks. Great. Thank you, Christine. Thanks to our listeners. I appreciate your time and attention and look forward to seeing you in November. And by all means, if you have questions at all during the rest of the day, feel free to ring IR. Thanks a ton and talk to you soon. Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.