Earnings Call: Q4 2015

Feb 4, 2016

Welcome to the 4th Quarter 2015 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 everybody. Today, you'll hear from Ryan Lance, our Chairman and CEO Jeff Sheets, our EVP of Finance and our Chief Financial Officer and Matt Fox, our EVP of Exploration and Production. We will be making some forward looking statements this morning and our cautionary language is shown on Page 2. That information can be found in our periodic filings with the SEC. We do anticipate a lot of questions today, so we'll limit our questions to 1 and a follow-up when we get to Q and A. And now I'm going to turn the call over to Ryan Lance. Thank you, Ellen. I'm going to let Jeff handle the 2015 recap in his upcoming comments and I want to jump right into the news we announced today beginning with Slide 4. With today's announcement regarding reductions in our operating plan and our dividend, we have taken significant actions to reset the company in response to much lower commodity prices and tightening credit markets across the industry. These are two factors that have changed significantly in our view in a short period of time and they have important implications for the sector, especially in 2016 2017. Regarding prices, there are 3 factors that are driving our actions. 1st, current prices are much lower than we expected at the time we announced our 2016 operating plan. This is amid bearish supply demand signals and record levels of inventories. Brent is currently trading 40% lower than 2015 average prices. 2nd, we believe this downturn could last a while longer. Just a few months ago, we thought the market would rebalance by the second half of twenty sixteen. Now it looks like that could stretch into 2017. And 3rd, greater concerns about global growth suggest it could take longer to reach an equilibrium mid cycle price after balancing occurs. Now certainly there's a lot of debate about these factors, but we can't bet on prices turning quickly. Instead, we're taking what we believe are prudent actions to prepare for a weaker price environment and for a longer period of time. Regarding the credit markets, it's no secret that the credit rating agencies also see a likelihood of a weaker, more protracted downturn. Recently, Moody's and S and P have issued significantly lower price decks. The agencies have industry under review for credit rating downgrades. Moody's has stated that multi notch rating downgrades are likely and some have already occurred. The consequences of these downgrades are that debt capacity will shrink across the sector. For ConocoPhillips, the bottom line is this. We're going to take actions to maintain a strong balance sheet. We believe this is critical and will be a key differentiator in this business. So as difficult as these choices are and they were very difficult, we must do the right thing for the company. As we announced, we're taking 2 key actions to respond to these First, we are further reducing our 2016 operating plan capital and operating expense. Now for the past 18 months, we've lowered CapEx and OpEx levels across the company as prices have weakened, and we're doing it again in 2016, and that's shown on Slide 5. This slide summarizes our revised 2016 operating plan. It represents a significant shift compared to last year and an even bigger shift compared to 2014. Now importantly, these reductions we're making will improve net cash flow in 2016 by $2,000,000,000 compared to the plan we laid out in December. On the left side of this chart, you can see we're lowering our 2016 capital expenditures to $6,400,000,000 That's a reduction of $3,700,000,000 compared to 2015 $1,300,000,000 compared to our original 2016 operating plan. We're dropping down to 3 rigs in the Lower forty eight because it doesn't make economic sense to maintain our original level of activity at current prices, and we don't lose acreage or optionality. We're cutting other discretionary programs across the business, which are somewhat offset by anticipated cash calls in our equity affiliates. Our original plan anticipated 1% to 3% production growth in 2016. Now we expect flat production given these capital cuts. We're letting Lower forty eight volumes decline, but these will be offset in the near term from ramp up at APLNG and in the oil sands. Finally, we continue to improve our operating costs. We set an initial budget of $7,700,000,000 for 2016. We're now lowering that to $7,000,000,000 But we don't believe these reductions are sufficient to maintain our strong balance sheet under the lower for longer circumstances I just described. And so, we've taken a second and more difficult step of reducing the dividend. This morning, we announced that reducing the quarterly dividend to $0.25 per share effective with the Q1 2016 dividend payment, and this is discussed on Slide 6. In mid December, we reaffirmed that our dividend is the top priority use of cash. In 2016, this was premised on using up to a couple of $1,000,000,000 of balance sheet capacity based on similar prices to 2015. After making those adjustments to our operating plan that I just reviewed, we analyzed the impact to our balance sheet under conditions where prices stay in the 30s for longer. We came to the conclusion that our balance sheet could get stretched beyond a prudent level. Ultimately, we believe we needed to make a tough choice between protecting the current level of the dividend or maintaining our strong balance sheet through an extended downturn. We made a decision to reduce the dividend. This action combined with the operating plan reductions will improve net cash flow by about $4,400,000,000 in 2016. Once we made that decision, our primary consideration was to set a dividend that will be sustainable through the cycles. We are balancing several objectives, including yield, financial strength and lowering the breakeven cost of our business. We set the dividend at a level that we believe results in a competitive yield. The dividend will continue to be a top priority. It provides important discipline on our investment programs and will remain a core part of our offering. We believe our dividend is at a level that preserves balance sheet strength and provides financial flexibility through the current downturn. These actions also lower our breakeven price to roughly $45 per barrel Brent. And what we mean here is that we can keep production flat and pay our dividend for many years at $45 per barrel without needing to sell assets or increase our debt levels. This significant improvement in our breakeven price will allow us to generate greater profitability and cash flow growth when the cycle turns. And the combined reset of capital, operating costs and the dividend will enable us to generate free cash flow that we can deploy across a range of choices, including increased investment into our low cost of supply resource base, but also including returning capital to shareholders. The reset will allow us to grow our dividend in the future as our cash flows grow and at a much lower mid cycle price. That goes without saying that these were very difficult actions to take, but they will improve our ability to manage through the price weakness the industry is facing. They will improve our medium term outlook by allowing us to accelerate performance as prices turn, and they will help the long term performance of the business by making us more resilient in a world of lower, more volatile prices. So now let me turn it over to Jeff and Matt, and I'll come back at the end to conclude my remarks. Thanks, Ryan. I'll begin my remarks on Slide 8. And as Ryan said, I'll open with some brief comments about 2015, the summary of which are shown on this page. Measured against the standard of delivering the things within our control, it was a strong year. Strategically, we lowered our capital expenditures by more than 40% compared to 2014. We achieved $2,200,000,000 in disposition proceeds from the sale of non core assets, primarily North American gas assets, and announced our intention to begin a phased exit of deepwater exploration. Operationally, we achieved 5% year over year production growth, excluding Libya and downtime and dispositions. That exceeded our initial guidance for the year and came mostly from the development drilling programs and the ramp up of production from our major projects. We also achieved 1st production from Surmont II and 1st LNG from APLNG, which were big milestones for the company. Financially, we had an adjusted net loss of $1,700,000,000 or $1.40 per share. This includes a 4th quarter adjusted net loss of $1,100,000,000 or $0.90 a share. We recognize was a negative $0.64 per share and we believe this difference primarily reflects the $506,000,000 of dry hole expense in the quarter in our adjusted earnings, which we think is about 15% 0 point difference. Finally, we had $7,600,000,000 in cash flow from operations excluding working capital and ended the year with $2,400,000,000 of cash on the balance sheet. I'll now walk through our cash flow waterfall on Slide 9. On this chart, you can see the major buckets of cash sources and uses for the year. We started the year with $5,100,000,000 in cash and generated $7,600,000,000 from operating activities, excluding working capital. Working capital was about $1,000,000,000 use of cash during the year. We captured about $2,200,000,000 of net proceeds from dispositions and took on about $2,400,000,000 of debt. Our 2015 capital expenditures were $10,100,000,000 And after accounting for dividends and some other items, we ended the year with $2,400,000,000 in cash. Turning to Slide 10, I'll cover some thoughts on the balance sheet. A period of low prices highlights the importance of a strong balance sheet in a cyclical business. However, consequence of the price drops has been that the credit rating agencies have become very pessimistic about future prices and they are currently reviewing the industry's credit ratings using much lower forecasted prices. We should see industry wide credit downgrades over the next couple of months with the potential for multi notch downgrades in some cases. Across the industry, this is going to result in reduced debt capacity within given rating bands compared to just a few months ago. We believe the reduction in the dividend and the substantially lower risk of significant borrowings as a result of that decision will help mitigate the credit rating impacts. We are well positioned should we need to acquire additional debt capital. We ended 2015 with over $8,000,000,000 in liquidity comprised of 2 $4,000,000,000 in cash and about $6,000,000,000 of available debt capacity on our revolving credit facilities. We expect to see significant levels of borrowings among our peer companies this year and our liquidity balance will give us the flexibility to access the capital markets at the time of our choosing and avoid a very crowded energy market for energy sector debt this year. In terms of how much debt we will need to raise in 2016, our current estimate is that we will utilize our cash balances and not need significant additional debt if oil prices average around $40 for the year. By making the difficult decision to reduce our dividend, we believe we are positioned to preserve a strong balance sheet in a prolonged period of low prices such as the ones we're seeing today. While we have been successful over the last several years in selling assets at full value, during a period of higher prices and strong demands for assets, another important benefit of making the changes we announced this morning and maintaining balance sheet capacity is that asset sales are not necessary to bridge funding gaps. That concludes my comments. Note that our appendix includes some updated net income sensitivities and some additional 2016 guidance items. Now I'll turn the call over to Matt for his operational comments. Thanks, Jeff. I'll review our operational performance beginning with our 2015 reserves. Final reserve details will be published in our 10 ks in late February, but we don't expect these numbers to change significantly. On Slide 12, you'll see that we started the year with 8,900,000,000 barrels of reserves. We produced 6 10,000,000 barrels and had additions of 523,000,000 excluding market factors. So So, on that basis, our adjusted replacement ratio was 86%. However, because our portfolio 2015. The lower price effect reduced our year end reserves by 353,000,000 BOE. In addition, also due to lower prices, we've reduced our expected capital program for the next several years. This slower pace of development has resulted in a book reserve reduction of $111,000,000 BOE. Now these combined 60464000000 barrels have not gone away because prices have dropped. So, we expect to rebook reserves as prices improve. Adjusting our additions for the price effect and the planned capital reductions, we had organic reserve additions of 59,000,000 barrels, which results in an organic reserve replacement ratio of 10% of 2015 production. Reserves were further reduced by 175,000,000 Boe, primarily as a result of non core asset dispositions. So, our total reserve replacement ratio, including both dispositions and market factors, was negative 19%. As I said, more details will be available on our 10 ks filing. Now, I'll cover our operational priorities for the year on the next slide. The midpoint of our 2016 production range is expected to be essentially flat to 20 15 production when you adjust out the full year effects of asset sales. In the Q1, production is expected to be between 15,401,581,000 BOE per day. Production will be lower in the second and third quarters as we see our usual downtime from major turnarounds. And then in the 4th quarter, zoomed out of turnaround season, we'll see increased production associated with major project ramps at places like Surmont II and APLNG the production associated with development activity across the globe. In Alaska, we're still progressing our GMT-1 project and a winter exploration program around existing infrastructure. In the Lower forty eight, we'll be focused on assessing the results of multiple pilot tests we conducted in 2015. This will allow us to optimize development plans as we prepare for a future ramp up as our price outlook improves. We also expect to complete our Gulf of Mexico exploration programs before year end. In Canada, ramp up continues at Surmont II and we have 2 exploration wells being drilled offshore Nova Scotia. In our Europe and North Africa segment, we'll continue development drilling in the Greater Ekofisk area and we expect first production from Alder in the second half of the year. At APLNG, we're now shipping LNG from Train 1. We've shipped 4 cargoes already and the plant is running well. We also expect up of Train 2 in the second half of the year. Finally, in other international, the second well on our offshore Senegal SNE discovery had very encouraging test rates. We've just finished drilling the 3rd well and are currently preparing to test. It looks like 2016 maybe an even more challenging year for the industry than we experienced in 2015, But we remain focused on what we can control, delivering best in class operational and safety performance, and we are ready to ramp up the development of our diverse flexible low cost of supply resource base when prices recover. Now I'll turn the call back to Ryan to wrap up. Thank you, Matt. Certainly, the journey through this price downturn has been a test for everyone in this industry. The easy moves were made a long time ago. Today, we announced one of the toughest decisions. But we believe it's the right decision given the circumstances facing the industry at this time. We can't count on a quick fix for prices and we're not willing to risk a strong balance sheet on it. These actions will result in immediate benefit to our cash position, create the necessary flexibility to endure a longer downturn and put the company in a better position for strong performance as prices recover. So thank you, and we'll turn it back over to the operator for questions. Thank Maybe if I could just start with, can you talk a little bit more about I know you highlighted some of it in the presentation, but what changed in the last 8 weeks that what were the primary changes that convinced you, one, that we were going to be lower for longer? And does this involve a material change in your view on the mid cycle price as well? I mean, I guess what were the primary changes behind the first priority and cash CapEx to a cut? Yes, Ryan, it was a difficult decision. What drove that is what we talked about in our prepared remarks a bit. The world has been a dramatic drop in prices. So we're seeing and enduring a much lower drop in prices. And as we look at the fundamentals, it looks like balancing probably is shifting till later in 2016 and possibly moving into 2017. So really it was the depth of the drop over the last 8 weeks to 2 months combined with the duration and the inventory doesn't seem to be flattening, let alone starting to drop off. And that combined with the last month of conversations that we've been having with the rating agencies. And clearly, the debt capacity is going to be reduced. So when we came out with our operating plan in December, we talked about using the balance sheet to get through the cycle. And now the capacity is reduced, the cycle has deepened and potentially gotten longer. So we have to prepare for that. And we made the difficult decision of preserving the balance sheet over the dividend at that time. You asked about mid cycle price. That's a tough one. It looks like it's going to be longer to get there and there's some downsides and upsides to that conversation. The downside, the supply has certainly been more resilient than most people expected and we're still building inventory. Certainly, OPEC for now is protecting price or not protecting price and doing that. So they're protecting market share. I think we've seen the resiliency in the unconventional revolutions. It's opened up a new supply source that is more flexible, lower cost of supply than some of the other conventional production like deepwater. And certainly some concerns about economic growth. So those are kind of the things for the downside that would suggest a lower mid cycle price, but there's other factors. Certainly, the capital cuts that the industry is making should result in a supply rebound or a supply shock to the downside. And certainly the Saudis could lead OPEC to a different decision whenever they feel like the point they're trying to make has been made. And certainly the lower prices are stimulating demand. So there's pieces on both sides of this thing that balance out the concern about where mid cycles might be going to. In the past, we've had a view of mid cycle prices in the mid-70s, but we're currently taking a look at that. Great. Thanks. And then maybe I guess as we look beyond 2016, how should we think about your effort to balance cash inputs and outputs? I mean, will you seek to ramp spend in line with cash flow, but covering cash flow and dividend in line with changes in cash flow? And is the first call on any sensitivity around that, is that plus or minus on the lower 48? Yes. We'll manage the free cash flow. We'll set a CapEx budget and the dividend level to manage to make sure we can manage as prices come back. Any free cash flow that we have at that point in time, we can send back as I said, we can send back to shareholders or we can put that back into our deep inventory of low cost to supply capital investment options. So that's granted a very difficult decision that we made, but part of that is setting a lower breakeven cost for the company. And we're convinced in a world of lower, we can debate what the mid cycle price is going to be. It's going to be more volatile and we're going to create flexibility to have free cash flow as the prices recover and be able to react to the volatility we think the market is going to have. Thanks. I appreciate it. Thanks, Ryan. Thank you. Our next question is from Doug Terreson of Evercore ISI. Please go ahead. Hi, everybody. Hi, Doug. Hi, Doug. So my question is on the business model and the value proposition. And specifically for most of the past couple of decades, this company offered lower growth to some degree, but healthy shareholder distributions through share repurchases and a reliable and growing dividend. However, because shareholders are not really offered any of those attributes today and I realize that we could be near the trough of the cycle and this could change. My question is how you would describe your new value proposition and also the business model by which you plan to achieve it in the future, Ryan. So there's 2 questions there. Yes. Thank you, Doug. I appreciate the questions. I think we're spending some time thinking about the value proposition as we go forward. I think fundamentally at the core of that value proposition it hasn't changed. We're committed to providing a competitive dividend. We'll have disciplined growth. We've got a deep inventory of growth options if the free cash flow is there to generate it and we believe in financial strength which is why we need to keep a very strong balance sheet. We're hitting the reset button here a little bit and I can understand that and it was a gut wrenching decision for us to do that. But fundamentally, I don't think that value proposition has changed. We're going to lower the breakeven costs for the company. We'll still provide a competitive dividend and growing as our cash flows grow. And I think fundamentally, we've still the low cost of supply resource base we haven't gone that we have in the company hasn't gone away with this change. It's still there and it still offers a lot of investment choices for the company. Okay. And Ryan, I know it may be too early to ask this question, but my next my follow-up is how does the model that you guys are thinking about today differentiate itself in relation to some of these larger cap E and P companies? And the reason that I ask is because they produce pretty dismal returns for shareholders during the past couple of decades, even with oil prices 2 or 3 times higher than they are today. And I know that you don't outcome, but it may not be a fair question because it's still early, you just got the dividend today, but what's the differentiating feature here? Well, I think for us too, I think we have to look at the portfolio. We'll be able to supply growth that we say could be modest, but we'll still grow. We'll have financial flexibility. We have a strong balance sheet. We'll generate free cash flow at a much lower mid cycle price. And we think the world that we're going into is going to be more volatile and probably drive to a lower mid cycle price as we go forward. So that's the basic value proposition when we spun the company. We recognize that we may be moving down a bit on the competitive dividend that we've been offering in the past. But we think we're making up for that in some of the free cash flow and the choices then we'll have as we lower the breakeven price for the company to reinvest that into the company and or return that to shareholders. I see. Okay. Thanks a lot. Thanks Doug. Thank you Doug. Yes. Leggate of Bank of America. Please go ahead. Good morning, Doug. Thank you, Doug. Thank you. Our next question is from Doug Leggate of Bank of America. Please go ahead. Thanks. Good morning, everyone. Hi, Doug. Ryan, I'd like to follow on from Doug's question, if I may, because at 1,600,000, 1,500,000 barrels a day, any meaningful growth without committing to another round of large scale projects is going to be tough. So in order to be competitive, I mean, with your peers, so I really want to try and understand, you talked about the compelling dividend, not the competitive dividend in the past as making your value proposition unique. So what makes ConocoPhillips unique today? And I'm thinking specifically about how you what your first call on cash would be in the event of any kind of recovery? I've got a follow-up please. Well, again, Doug, yes, thank you for the question. I think at the risk of repeating myself here a little bit, I think it's the we'll differentiate ourselves because of the low cost of supply, deep resource base we have captured in the company today and the exploitation of it. It's shorter cycle time. It will be much more predictable. And it will generate free cash flow at a much, much lower breakeven price for the company. So we'll have choices. We'll have choices to make as we go forward and the recovery occurs and we think we we think we want to generate because we know we have the portfolio to go do that. Now we're not talking about high single and double digit growth rates. That's not what we're talking about with our company. But we have a more predictable low cost supply flexible resource base that we can invest in. And when we generate free cash flow, we can decide what to go do with it. And we're committed to the dividend. It's still a priority, first use of our cash and growing that as our cash flows grow. On a per share basis or on an absolute basis? Both. Okay. My follow-up is on the capital program. So this year, frankly, I'm a little surprised that you didn't cut more, given the challenging economics across the portfolio. So I'm trying to understand what the constraints are as to why you didn't cut more and I'm thinking about long life assets and how those roll off as you go into 2017. I know it's very early to talk about 2017 capital, but you got what $600,000,000 on APLNG this year and the $800,000,000 on exploration. So where what are the constraints in capital? Where do you think that goes next? And I'll leave it there. Thanks. Hey, Douglas. This is Matt. I think I'll take that question. The of the $6,400,000,000 we have about $1,000,000,000 going to maintenance capital and we're never going to cut back on the integrity of our assets. And major projects is about $2,000,000,000 and these are major projects that are well into the execution phase. As you said, there's about $700,000,000 or $800,000,000 going into APLNG, for example, to finish Train 2, that's about $300,000,000 going into Clear Ridge to move that towards completion and about the same going into Malachi in Malaysia. So these are projects that are getting very close to completion. And we've got development capital program of just over $2,000,000,000 $2,200,000,000 And despite the cuts that we're doing in the Lower 48, there's still $800,000,000 of that going into North America. And as we ramp down our rig program. And then we have, as you mentioned, an exploration program going on that has quite a significant this year as we find a lot of finish our deepwater program. That's a total of $1,200,000,000 we're going to be looking to execute all of that at lower costs, execute all that scope at lower costs, but our current expectation is that that will be $6,400,000,000 and that cutting any further would not be prudent, would not be in the best long term interest of value creation for the shareholders. So that's why we stopped cutting capital at this at the $6,400,000,000 I don't want to hog the call here, Matt, but I want to be clear. How much of that rolls off when these major capital projects are finished is what I'm really trying to get at? In other words, where does it this year there seem to be some constraints as you say you got to finish what you started? What happens beyond 'sixteen? As we move into 2017, we see a couple of things changing. First of all, our deepwater exploration program will be complete. That represents about $800,000,000 this year and we should be down 0 by the time we get to 2017. APLNG Train 2 will be complete. In addition to completing APLNG Train 2, we actually need this lower price environment are also having to make contributions into APLNG and FCCL. And so if you look at the total of those contributions to the equity affiliates and Deepwater, that represents about $2,000,000,000 of the 6 $400,000,000 this year. And so that's an indication of how much we'll be rolling off as we move into 2017. Got it. Thanks very much. Thanks, Todd. Thank you. Our next question is from Scott Hanold of RBC Capital Markets. Please go ahead. Yes, thanks guys. Could I ask a question on moving to the 3 rigs in the U. S? And I think you're at what 13 moving to 3. The trajectory in the U. S, I guess, would likely be down, but much that being offset obviously by the major project starts. What is kind of your ability to keep kind of keep production flat in 2017 look like? Where do those new sources of contribution to maintain that say in 'seventeen and 'eighteen and beyond? So as we move from 2016 to 2017, our base decline is about 8%. So that's about 120,000 barrels a day. So we have to deliver 120,000 barrels a day of new production to stay flat. And that's going to be split roughly evenly between our development drilling programs around the world. So places like Alaska, Europe, China and some in the Lower 48, we will still be running some rigs and some in Canada. And the other half is going to come from major projects completing the ramp up APLNG, bringing the KBB project onto production, finishing ramping up Saramontu and the FCCL projects. So it comes from a mixture of a half and half from development programs around the world and major projects. Okay. Then specifically that rig count that you all referred to, do you see that materially changing as you roll into 2017 2018 at this point in time in order to maintain production flat? We would anticipate putting more rigs back to work in the Lower 40 as we move into 2017, but that's a function of the capital level that we decide to spend. Okay. And as my follow-up, when you look at obviously the big cuts you made to both CapEx and the dividend, can you discuss a little bit on how you came to the math on we needed to see a 2 3rd cut here and we need to get down to $6,400,000,000 Was it predicated on a certain price outlook or how did that discussion occur? Yes, Scott, I'll take that. I think it really trying to triangulate on 3 different issues that we kind of have in front of us. And that is, 1, we wanted to continue to maintain a strong balance sheet and minimize the borrowing in 2016 which would lead you in one direction. We certainly had what sort of long term breakeven price do we think is appropriate and provides for a good value proposition going forward. So that factored into it. And then certainly, the desire to keep a competitive dividend as measured by yield or other kinds of factors. So it was really a triangulation around of all those things. And then factoring into that is our capital program and the commitments that Matt talked about and the capital spend that we need to have that we think makes sense for the long term value of the company. So there were those pieces that put us in that box trying to decide and triangulate a bit on what the right level of dividend going forward should be for the company. Okay. Thank you, guys. Thank you. Thank you. Our next question is from Evan Kallio of Morgan Stanley. Please go ahead. Hi, good afternoon. I just wanted to follow-up on the choices that you mentioned earlier. What's your target leverage through the cycle? I'm just trying to quantify the choice to deleverage exiting the cycle, which I presume would be a higher priority? Yes, I'll take that one, Evan. I think whether it's target leverage or target credit rating, particularly on the credit rating side, it's kind of hard to answer any kind of thought about a target credit rating agencies because the rating agencies are going a lot through quite a change in how they assess the industry. We don't know what really right now what debt levels are going to correlate to what credit ratings. So I think the direction of your question is right. It's just how do we think about the level of our debt going forward. And just some general comments about debt. If you think about what we've done over the last several years, we ended 2015 with $24,900,000,000 so essentially $25,000,000,000 worth of debt. And 3 years ago, at 2012, we had $22,000,000,000 worth of debt. So unlike some of the peers that in our company, we've not really added significant amount of debt in the last several years. And really what we've been doing as we've been an independent E and P as we've funded our capital program and our dividends mostly from cash from operations and selling non core assets. And then we've quickly made adjustments to our capital program and our operating cost structure as the circumstances have changed to try to limit our debt borrowing. So but that's history. So but going forward, how do we think about the question of the right level of debt and what makes sense at different mid cycle prices? So last year, we generated $7,500,000,000 of cash flow and kind of what was a $50 ish price environment. 2014, the year before that, we generated $16,000,000,000 of cash flow and what was kind of a $90 price environment. And you could think the mid cycle price is going to be somewhere in that range between $50,000,000 $90,000,000 But it would we can look at $25,000,000,000 of debt though and feel like that's a reasonable amount of debt to have in either of those kind of mid cycle scenarios. So consequently, as prices improve, we don't feel like we're going to be compelled to use cash flows to reduce debt levels. So delevering is not going to be a priority for us. Okay. Thank you. Maybe just that but we're not comfortable and this is what you've heard from us today. So we're not comfortable with having a plan that relies on heavy use of debt financing to fund cash footfalls in a period of really low prices. And that's where we felt like we were going to be if we continued the current dividend and we'd be rapidly using balance sheet capacity while we are waiting on some kind of commodity price improvement. Great. My second question, you mentioned no asset sales are needed to bridge the funding gap under your commodity assumptions. I mean, is that conservative view or does that reflect your view that fair prices may or do not exist in the current environment? Any update there on your current process and what that if that statement means anything about that current process? Well, no, we've said in the past portfolio size to expect $1,000,000,000 to $2,000,000,000 of asset sales. We just don't think relying on a significant number of asset sales to bridge a cash flow gap in this environment is a smart thing to go do. And there's going to be a lot of assets on the market. It's a very weak market and selling into that in a significant and trying to raise a significant amount of money, we just didn't think, 1, could you even do it and 2, is it the prudent thing to do. But we do have some assets on the market. They're one sort of around the fringes of our non core. They're typically in areas that aren't the other gas or North American gas that haven't been subjected to the recent price downturn on the oil side. And so you ought to still expect a little bit of disposition this year, probably less than what we had last year. But we're still marketing our deepwater assets. We have some assets in Indonesia and in Alaska and we're still moving those forward. But I think the point Jeff was trying to make is if you're counting on generating multi $1,000,000,000 of proceeds from an asset sale to bridge some cash flow gap at these lower commodity prices, we just don't think that's smart to rely on. Great. Thank you. Thanks, Evan. Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead. Good morning, guys. Good morning, Neil. Good morning, Neil. So it looks like the reduction in capital spending, the $7,700,000 to $6,400,000 correct me if I'm wrong, but the bulk of it looks like it's coming from the lower 48. So I wanted to be clear there and confirm that. And then the reduction in your 48. So I just wanted to confirm that the delta in both CapEx and the delta in production is primarily coming from the U. S. And then what does the year over year decline look like in your guidance for the U. S. Specifically as it relates to liquids? Yes, Neil, yes, you're right. The majority of the capital reduction is in the U. S. Associated with cutting the rig count and that does result in a reduction in production in the Lower 48. We'd expect year over year Lower 48 production would be about 10% lower as a result of the cuts. And then is the delta was primarily liquids, I would imagine, because you had already assumed that there would be a decline on the gas side? That's correct. Okay. And then the follow-up, I want to explore Ryan's initial question on what specifically changed in the oil outlook. Aside from the price on the screen, I know you guys have a really detailed and thoughtful economic analysis process as you think about the commodity. Was it a function of the demand? Was it a function of non OPEC supply? Was it a function of OPEC? Was it a function of inventories or a combination of all those things? It is a bit of a combination of all those things, but we weren't anticipating a drop from 50 down to 30 like we've seen in the last 7 to 8 months. We would have probably expected to see inventories at this point in time starting to flatten out at least and not continue to build. So that causes us some concern as we go into the latter half of twenty 16 and some concern that this might lower prices would extend through 2016 and the rebalancing may not occur until we get into 2017. And then on the demand side, like everybody, we're following China and the growing markets around the world and trying to see what the economic impact is going to be. The Q4 GDP in the U. S. Was quite low, largely driven by lack of investment in the oil and gas industry driving some of that. But we have some concerns about the demand side starting to loosen a bit as well. All right. Thank you, Brian. Thanks, Neil. Thank you. Our next question is from Guy Baber of Simmons and Company. Please go ahead. Thanks for taking my question. I had a point of clarification on the decline rate that you guys mentioned earlier. But Matt, you had mentioned 8%, I believe. Was that for the total portfolio? And I'm just asking because that seems high relative to the prior guidance that I thought was below 5%. So just want to make sure that that's apples to apples and kind of understand if there's any meaningful decline assuming no capital investment, no new wells to bring assuming no capital investment, no new wells to bring on any new production. So it's an unmitigated base decline. And it's consistent with what we've been seeing for several years is the underlying decline in our base production. I don't think we've ever said 5% and of range of 8% has been what we've consistently said. We haven't seen any acceleration in that. Okay, great. Thanks for clarifying that that was the unmitigated decline. And then my second one was, you all have mentioned a few times that maintaining the flexibility to respond with higher activity levels, if oil prices improve. Can you talk about how despite cutting the rig count from 13 down to 3, you have worked or have made plans in place to really preserve that capability and those efficiencies and the ability to quickly respond to the appropriate oil price signals. And with the lower dividend, has that price at which you would ramp up the capital allocation to the U. S. On conventional, has that changed at all relative to the prior view? So we are maintaining the capacity to ramp up quickly, both in terms of preparing all the payments that we need to do that and retaining the talent that we need to do that. That's an important part of how we're managing through this downturn is retaining that capacity. In terms of the price that it would take us to want to put rights back to work again, it's really not a function of any specific price, it's more a view of our price outlook as to when it would make sense. But having said that, I mean, within our Eagle Ford and Bakken portfolio, there are definitely attractive investment opportunities that have a strong rate of return at $45 a barrel or more. So we although we haven't set a specific price in mind, we do have a lot of flexibility as prices recover and a lot of good places to put the capital and the talent available to make sure we do that wisely. Our next question is from Blake Fernandez of Howard Weil. Please go ahead. Good morning. Ryan, I know you've tackled the dividend pretty extensively, but I guess my angle was a little bit different on it. I'm not surprised at the need to go ahead and cut and preserve the balance sheet. I guess what I'm a little surprised about is why even maintaining it at all with $45 breakeven and the current prices around $30 I guess I'm just a little bit concerned we're not setting up for another potential cut down the road if current prices persist. Can you maybe just talk a little bit about how we should think about the ongoing evaluation of the dividend sustainability if $30 were to maintain for the next, say, 6 to 12 months? Yes. I mean, I'll jump in a little bit on that one. And part of the thought process here is that we recognize that prices could stay in the 30s for an extended period of time. And what we've done as we've set the dividend and set the capital program and looked at our balance sheet capacity is we set things to a point where we are comfortable that we're going to have the balance sheet capacity to maintain the capital program and maintain the dividend even if prices that persist at today's level for a prolonged period of time. Yes. So you asked, why not earlier, Blake? And I mean, we've been following this for a long time. We had a view even as much as a year ago that we would see more lower volatile prices. We've been moving the portfolio of the company into more flexibility, shorter cycle time, lower cost of supply. So it's been a view that we've been concerned about really back to the spin, but we've also seen that we didn't anticipate that it would go this low and the potential will be here for this long. So we were surprised probably by the resiliency of the North American, the efficiencies, the economies that we've been able to drive as an industry that has kept supply going. We've surprised that OpEx held on for as long as they have to keep their decision going. So it's been a confluence of factors. We felt like the dividend was certainly manageable at a $75 mid cycle price. We have concerns about now how long it's going to get there. And that combined with the reduction of capacity on the balance sheet. We still have capacity on the balance sheet. We'll use that if we need to through this lower price cycle. We just wanted to protect that and make sure we had a plan in place for a lower for longer outlook. It's prudent to plan for the downside case. We're going to do what's right for the company both in the short, medium and long term. Got it. Okay. The next question, I just want to kind of clarify. I think you already went through the capital flexibility moving into 2017, which if I got correct was $2,000,000,000 plus $800,000,000 on deepwater. So that pushes you toward about $3,500,000,000 I'm just curious how does that Blake, that was $2,000,000,000 including deepwater. $2,000,000,000 including deepwater. Okay. Okay. Well, the question is how does that compare to Slide 6 where you kind of give a capital for flat production in the $45 world? I'm just trying to understand what basically what that number is? So, what we'd expect in a $45 world is to maintain flat production over many years would take about $5,500,000,000 of capital. So that's what's shown on Slide 6. $5,500,000,000 got it. Okay. Thank you, Matt. Thanks. Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead. Hey, guys. Good afternoon. Good morning, Paul. Well, before I ask my question, I just want to make a comment. Even though that you may not share by Mandy and probably may not be totally right, but I actually want to complement management and the firm making the right choices when the market condition change and I actually think that you will improve your long term competitive position. Anyway, Jeff, I think that you talk about that you still have financial flexibility, you surely do. So I guess that to maybe eliminate a lot of concern in the marketplace, can you tell us that what is your that capacity you can raise under a BBB rating from the current platform? That's the first question. Yes. Paul, I don't know that we feel like we can answer that question until we kind of get through a process with the rating agencies. They have both of them have significantly reduced their price decks and talked about needing to change perhaps how they view the industry. And I don't know where we're going to settle out in the credit rating bands. The points like I made earlier that we are not uncomfortable with the debt levels we have. We don't feel like it's a debt level that is going to require us to do any delevering in the future. And we do feel like we're going to have balance sheet capacity in whatever credit rating range we end up with to handle a prolonged period of lower prices like what we're seeing right now. Jeff, do you have that minimum that what you think that you may have that capacity? I mean, we may not know for exact, but is there a minimum level you think that BBB you can raise by the debt by XYZ amount? I don't know that we can really give you that kind of number currently. I mean, we do have $8,000,000,000 of liquidity. So regardless of what our rating is, we can access that capacity. I think you're asking a different question, but if you're just thinking about how you're going to get through any kind of near term move, we are not in a position where we have to be concerned with our access to a credit market. We're going to end up in this with a strong investment grade credit rating with the balance sheet capacity to be able to continue to with a continuation of the current price environment. That's where we're talking about now with a continuation of the current price environment. That's where we're that's the statement we are confident about making. And the second question is for Ryan. Just a little bit of the curve ball. You decided to exit the deepwater program, but with the cut in the dividend, should we be look at that decision whether that with your improved financial and operational flexibility, you should be able to maintain your deepwater program for the long haul? No, Paul. We made a decision and the decision to exit the deepwater was based on a look at our portfolio, look at the cost of supply and how competitive that growth engine would be relative to what we were seeing with our unconventional portfolio and the rest of the global portfolio that we have. So we think regardless what sort of mid cycle price you return to that we've got more deepwater as a growth engine won't compete against that in the portfolio. Our next question is from Roger Read of Wells Fargo. Just to take a look, I guess, maybe at some of the incoming cash flows, thinking APLNG, the Canadian oil sands as well. As you think about current prices versus at 45, can you give us an idea of kind of the impact of those cash flows kind of now to the end of this year to maybe end of 'seventeen? So at the current prices, we're making capital contribution We expect to make capital contributions to both. And at $45 a barrel, we would make capital contributions to NIDA. We in fact would be taking proceeds out of the joint ventures and at those prices. Okay, great. Thanks. And then, as a follow-up, well, it's not a cash flow, it's a net income driven adjustment for the change in oil prices to the change in net income. Just a quick back of the envelope look at it, and I'm talking about the slide here towards the end. It looks like about a $5 difference in oil is how you cover the dividend if I assume net income is a good proxy for cash flow. So at roughly $40 you're having to lean on the balance sheet for the dividend and at $45 is the way we should think about the company being balanced along with that $5,500,000,000 CapEx number? Yes, I think maybe just we'll repeat a couple of things that we said today is kind of some calibration points for you on that. So if you just look at 2016, where we said we will be balanced in terms of not needing to have additional debt with a price that's kind of in the low 40s, but that assumes that we reduce our cash balances. So that's kind of that's one point. The other point we're making there is, as we look longer term at the company in more of a steady state is with the changes we're making in a $45 Brent environment, we're going to be able to have enough capital to keep flat production kind of around the $5,500,000,000 that Matt referenced earlier and cover our dividend and not have any borrowings, not have any use of cash, not have any asset sales come into that. So you can just that and then every dollar that the price moves above that gives us additional flexibility as Ryan's mentioned to either think about increasing shareholder divisions or think about increasing capital to create growth. Okay. And just the last question, Certainly, you're positioning yourself for a much more, let's say, challenging market if it hadn't been challenging enough already. Bid ask spread on assets, you're saying it's a bad time to be a seller. Is it at least worth now considering to be a buyer and with the dividend, let's say, reduced to a more reasonable size for this oil price environment, not being a headwind and slowing you down and thoughts of capital allocation? Well, yes, that answer Roger really hasn't changed for the company. We watch the market. We know what we like, what we don't like. And really the bottom line, like we've said for quite some time is that for anything like that it has to be competitive and substituted in the portfolio today and we've got a lot of low cost to supply opportunities to invest in our own portfolio that are already captured. So we watch it. We watch it closely to make sure that there isn't anything out there that we want to slip by, but it's a pretty high competitive hurdle in the captured portfolio that we have today. So, it's not been a big part, it is not a big part of our capital plans right now. Okay, great. Thank you. Thanks, Troy. Thank you. Our next question is from Paul Sankey of Wolfe Research. Please go ahead. Hi, everyone. Good afternoon. You've outlined the dividend was a differentiating factor for you guys, which was why we liked it so much and it sort of installed a level of capital discipline. I understand that prices are now too low for that to be sustained over the long term. But I'm just wondering why didn't you tough it out for another year? Why didn't you just have a look for 1 more year? Because my concern now is that the stuff that you're talking Was that a consideration? And couldn't we have seen you just go one more year? Thanks. Yes. I think, Was that a consideration? And couldn't we have seen you just go one more year? Thanks. Yes. Thank you, Paul. I mean, as I said, it was a very, very difficult decision. We looked at all those kinds of aspects. How long should we how long do we write it? When do we think the market is going to turn. And I think it's informed by a view that we had to plan for a downside case of this lower prices persist and we're going to have a longer downturn. And that combined with reduced capacity on the balance sheet, we've been prepared to use the balance sheet and are still prepared to use the balance sheet, but we didn't think it was appropriate to take it up to the edge and destroy it or put it in a place where we no longer had a strong balance sheet in case the worst case happened and this was prolonged for a longer period of time. So it's informed by where we think the market is today that and the changes that we've seen with respect to the capacity we have on the balance sheet to remain investment grade. Yes. I think I'll add to one price environment like what we're seeing today, I think there's a question of what Ryan has said. As you get to a really low price environment like what we're seeing today, I think there's a question of what your balance sheet capacity is and there's just a question of how quickly you use up balance sheet capacity. If you stay in the $30 price environment. I think what you're going to see across the industry is people are either going to have to be dramatically reducing their capital or they're going to be borrowing extreme amounts of debt relative to their current debt levels. And we don't think that that was an appropriate way for us to run the company. Yes, or they're going to have to sell a bunch of assets, a bunch of money in a very down market or they're going to have to permanently destroy shareholder value and float equity? Yes, but that's my point. I mean, these are other companies that are weaker than you. I just think that you possibly could have applied pressure, if you like, across the less strong companies, if you had somewhat kept going with the policy. And I'm just trying to get my arms around the decision. And frankly, you've outlined it pretty clearly why you've done what you've done. I just feel that it might be a bit pro cyclical to do it right here right now just before debt markets get really bad. No, I take your point, Paul. That's great. Could you just talk a little bit about staying flat as opposed to any other volume outlook? I mean, is that again, people have talked a lot about this, but I'm just wondering is the idea now that as we go forward, you're going to try to grow at a level at which you would grow the dividend or just anything about the volume, the specific volume of being flat, what's magical about being flat? Thanks. Yes, I'd say, Paul, we're not trying to manage right now to a certain production level. We're trying to manage to the capital program that makes sense for the long term value of the company, maintain our options, maintain the ability to ramp back up when it does production and production falls out of that production is what production is. I've said numerous times we're not going to drill into this headwind. Deferral makes sense. It makes economic sense. We're just trying to set an appropriate capital level to meet the commitments that we have, manage the short, medium and long term for the company and production falls out of that. Yes. And we weren't trying to say that our expectation or our aspiration is to be flat. We were just illustrating the point that the $45 a barrel, we can maintain flat production and cover the capital and the that was really to illustrate a point rather than to express an aspiration. Got it. And just finally, I've been a big fan of your analyst meetings and your disclosure. Could I just ask you, I think it's too much to ask you right here on the spot, but the slide that you have showing the breakeven of your resources obviously looks a bit scary now because the lowest end of your band of economic resources is $45 Much of it is really set on $75 But if I could ask you to update that over the course of the next few weeks, it would be very helpful to us. Thank you. We'll take that on, Paul. Thank you. Our next Actually just kind of picking up on that last question, I was going Actually just kind of picking up on that last question, I was going to look at that same pie chart myself. And you guys had talked a couple of times in giving answers about what's going to differentiate COP going forward. You guys have talked about the low cost of supply in the resource base as that future differentiating factor. Can you characterize, I guess, how much of what the opportunity is, I guess, within that resource base, whether it's PUDs or just resource for margin accretion. I mean, there were 3 legs of the investment case originally, moderate growth, moderate margin accretion. And the dividends, we're not going to have growth, we're not going to have dividend, but margin accretion is possible as you replace barrels. So what's the opportunity there, especially as obviously we're seeing a cyclical decline in the cost basis here? Yes. So we're going through a process just now, James, of updating our cost of supply. And you're right, what we would expect to see is that the cost of supply of a lot of this resource base, all of it in fact is going to be declining and as a result of the deflation that we've seen across the sector. So the we'll get that update sometime later in the year. We'll be ready to talk about that. But the amount of resource that's available below $45 a barrel or below $60 or below $75 is growing. And as we improve our technology and as we see deflation, so we would expect to see that picture improve. And with a lot of diverse opportunities to deploy capital to give us both production growth and margin growth. Yes, I would add to that, James. The basic premise when we launched as an independent company around the growth and margin and production, This reset allows us to grow off a much lower breakeven base and make decisions around that. The investments that we're going to make into that resource base, the basic premise that again that hasn't changed. That resource base is still there and it's going to represent higher margins and what the average of the total portfolio is today. So we'll see margin growth, we'll see absolute growth and yes, we've reset the dividend a bit, but as we said along with a lower breakeven cost, we've got choices about how we allocate free cash flow and we'll have free cash flow at a much lower breakeven cost. Okay, guys. Great. Thanks very much. I'll wait for that update. Thank you. Thanks. Thank you. And our last question is from Phil Gresh of JPMorgan. Please go ahead. Hey, good afternoon. Thanks for squeezing me in. One question I have is just a clarification on the sustaining capital requirements. I think 2 months ago, the number was around $6,300,000,000 and now it's $5,500,000,000 So I was wondering what drove the reduction? And related to that, you're basically keeping production flat this year at around $6,400,000 So I was just trying to square those two numbers. Yes, as we so what that the $5,500,000,000 represents is essentially an adjustment of the $6,000,000,000 for the lower price environment. We said it was going to take $6,000,000,000 or $60 a barrel. And when we look at our supply chain models, you can execute that same amount of scope and for $5,500,000,000 of prices of $45 a barrel. So it's a combination of that and the efficiencies that we've seen as we've been executing our programs through 2015. Got it. Okay. And my second question is just a question around cash from operations. Deferred taxes have been a big swing factor over time. And I was just wondering, Jeff, how you would suggest we should think about that variable with the strict pricing where it is in 2016? I know there's a number of different moving pieces there. And you gave us some color on the equity earnings line, but I was wondering if you could talk about deferred taxes. Sure, Phil. The situation in the industry, I think, is generally in right now is as we don't find ourselves in cash tax paying positions in most of the jurisdictions in which we operate. So in the past, you would have thought of deferred tax as being driven primarily between timing differences on depreciation between book and tax. But now it's really driven by the fact that when you have financial book losses, you're not able to you don't get any cash benefit for those tax losses. So I would think the guidance I'd give people to think about deferred taxes is that as you do your modeling, if you're coming to a negative number for taxes when you do your income modeling, that's going to be a negative on deferred taxes as well because we're not going to be seeing a cash benefit from that negative tax number. So is there a rough level of like $35 or $40 that you would think about generally? No, I think it's just going to be progressive as prices improve. As you can see from when you look at results across the industry, you'll see negatives on the cash flow statement related to deferred taxes because everybody's been in these tax these financial loss positions. As prices improve, those losses will get smaller and deferred tax will swing around first to being less negative than 0 and then being a positive again for us in the future as prices rise. But I can't give you just exact cutoffs in prices as far as when that will occur. Okay. All right. Thanks a lot. I appreciate it. Thanks, Phil. Christine, let's wrap it up here. Okay. Thank you. And thank you, ladies and gentlemen. This