Earnings Call: Q2 2015

Jul 30, 2015

Welcome to the Second Quarter 2015 ConocoPhillips Earnings Conference Call. My name is Christine and I will be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Ellen DeSanctis, VP, Investor Relations and Communications, ConocoPhillips. Thank you, Christine, and hello to all of our participants today. With me on the call are Ryan Lance, our Chairman and CEO Jeff Sheets, our EVP of Finance and our Chief Financial Officer and Matt Fox, our EVP of E&P. Ryan is going to open the call this morning with some comments about the general business environment and then we'll turn the call over to Jeff and Matt for their customary second quarter comments. Q and A will follow that and we are going to ask that people limit their questions to 1 plus one follow-up. We will make some forward looking statements this morning. And obviously, our future performance could differ from our projections due to risks and uncertainties. Those are described on Page 2 of this morning's material and in our periodic filings with the SEC. This information as well as our GAAP to non GAAP reconciliations and other supplemental information can be found on our website. And now it's my pleasure to turn the call over to Ryan. Thank you, Ellen, and thank you all for joining the call today. As Ellen said, before we dive into the Q2 results, I want to take the opportunity to provide some broad comments about our approach to the business environment. So let me give you the punch line of these comments. The dividend is safe. Let me repeat that, the dividend is safe. The business is running well. We have increasing flexibility and can achieve cash flow neutrality in 2017 and beyond at today's strip price of roughly $60 per barrel Brent. And we have a unique formula for sustainable performance and a portfolio that can deliver. Now let me put a little bit of meat on the bones. Weak prices have certainly dealt us in the industry a significant headwind, but the reality is we don't control prices. That said, there are many things we do control, like how much capital we return to the shareholders, how much and where we spend the capital and the cost of running the business. And rest assured ConocoPhillips is laser focused on the things we can control. We cut our capital early in the cycle not just for this year, but for 3 years. We took a $1,000,000,000 cost challenge cost cutting challenge and we recently reduced spending for new deepwater opportunities. And we did this while continuing to meet our operational targets, raising our dividend modestly to continue to meet our commitment to our shareholders. Our ability to make these decisions is not accidental. Over the past few years, we've built a sizable portfolio and resource base, flexibility, options and choices. That's a huge advantage at times like these. Just as importantly, we're navigating this sharp downturn with a focus not just on the short term measures, but also a focus on the medium and the long term horizons. This is really important and frankly it's hard to do. So if you turn to slide 4, let me provide some perspective on how we're simultaneously managing across these three time horizons. First, the short term is all about safely executing the business. That means delivering on our current performance targets. As Jeff and Matt will cover, we're meeting or exceeding our short term goals. And as you saw in this morning's announcement, we're lowering our guidance on operating costs and reducing our capital guidance for 2015. That represents a significant benefit to net cash flow for the year. We also recently increased our quarterly dividend. The increase was very modest, representing about $25,000,000 impact in 2015. While every dollar matters, we believe this was an important message for our shareholders. At the same time, we're also paying close attention to the medium term. And the medium term for us is all about managing the path to cash flow neutrality in 2017. In addition to the short term items I just mentioned, we continue to focus on ways to increase our capital flexibility. If the current price environment persists, we have the flexibility to reduce our near term capital spend below $11,500,000,000 and still achieve modest growth. Now stay tuned for more on this as we see where the commodity prices head later in the year. Also we're focused on maintaining our balance sheet strength. We have additional capacity and ample access to liquidity. And as we've continuously said, we expect a company of our size would generate about $1,000,000,000 of asset sales annually from pruning the portfolio. That's an additional source of cash and good business. Finally, we announced a $1,000,000,000 operating cost reduction challenge for 2016 and we're on track to meet or exceed that target. These actions will help our medium term performance, but also drive sustainable improvements beyond 2017. And that brings me to the long term. The actions we are taking to ensure long term success recent decision to reduce our deepwater spending, which Matt will discuss in more detail. So that's how we're managing the business through this period by simultaneously focusing on the short, medium and long term horizons. And we're doing it in a way that I believe meets our commitments to our shareholders and honors our priorities of a growing dividend, a strong balance sheet and growth that we can afford. Now ultimately, our goal is to position the company for sustainable performance and this point is demonstrated on the next slide. Now we know what's on everybody's mind. What if prices stay lower for longer? Well, the left side of this chart lays out our answer. We believe we can achieve cash flow neutrality in 2017 and beyond through exercising capital flexibility even at $60 barrel Brent. We can exercise additional capital flexibility from various sources deflation capture, efficiency improvements, discretion in development programs, uncommitted major projects, deepwater reductions and the additional program efficiencies. And we believe we could achieve our 2017 production target, given the ramp from our major projects between now and then, the majority of which is from capital we've already invested and this is all before tactical asset sales. Finally, the right side of the chart shows a graphic from our April analyst meeting. At that meeting, we discussed the quality and cost of supply of our captured resource base. Today, we have over 44,000,000,000 barrels of identified resource, over half of which has a very attractive cost of supply. 16,000,000,000 barrels is either proven reserves or has a cost of supply that's less than $60 per barrel. That's almost 30 years of resource at current production rates. So we have the opportunities to invest capital in captured economic programs with little resource risk. This should accelerate value for shareholders, while increasing the predictability of our business. That's how we can sustain our success for the long term. Now I hope these comments provided some perspective on our approach to the business in this environment. The bottom line, we're very solid it's a very solid and disciplined plan. So I'm going to come back with some closing comments, but let me turn it now over to Jeff. Thanks, Ryan. So I'll walk through our results for the quarter and then provide some updates on our 2015 guidance. I'll start with our Q2 financial performance. So that's on slide 7. As Ryan mentioned, we operated well this quarter with production hitting the high end of guidance. We reported adjusted earnings of $81,000,000 or $0.07 a share and these results included 4% volume growth and 14% lower operating costs compared to this quarter last year after adjusting for special items. The story for the company and the sector this year continues to be low commodity prices. We did see a slight increase in total realized prices in the Q2 compared to the Q1, which improved our sequential earnings. But year over year, our realized price is down nearly 45%. 2nd quarter adjusted earnings by segment are shown on the lower right side of this chart. Segment adjusted earnings are roughly in line with our sensitivities and the financial details for each segment can be found in the supplemental data on our website. Now if you turn to slide 8, I'll review our production results. Our 2nd quarter production averaged nearly 1 point 6,000,000 BOE per day compared to 1,560,000 BOE per day in the Q2 of 2014. That's growth of 4% or 69,000 BOE per day, which came primarily from liquids and from domestic gas sales at APLNG, which will turn to LNG over time. The waterfall also shows the difference between downtime and dispositions in the Q2 of this year versus the same period last year, which was 30,000 barrels per day. That reflects mostly downtime in Canada from forest fires near Foster Creek and in Malaysia as a result of the Camusa turnaround. Now if you turn to the next slide, I'll cover our cash flow waterfall for the first half of the year. This chart provides a summary of our sources of and uses of cash through the first half of the year. We started the year with $5,100,000,000 in cash. Through the end of June, we generated $4,400,000,000 from operating activities excluding working capital. Total working capital in half of the year was a $1,100,000,000 use of cash with the largest impact related to lower payables associated with the reductions in our capital spending. We do not expect to see significant additional working capital changes associated with investing activities through the remainder of 2015. In the first half of the year, we received $600,000,000 in disposition proceeds. As we've previously said with a portfolio of our size, you could see about $1,000,000,000 of asset sales every year as we continually high grade the portfolio. We increased debt by 2,400,000,000 The debt included fixed and floating rate bond tranches with an average maturity of 5.6 years and an average interest rate 1.9%. For the first half of the year, we spent $5,700,000,000 in capital that was comprised of $3,300,000,000 in the first quarter, reducing down to $2,400,000,000 in the second quarter. And as we'll point on the next slide, we're lowering our capital guidance for 2015 from $11,500,000,000 to $11,000,000,000 So that puts us at $5,300,000,000 of capital for the second half of the year. After paying our dividend, we ended the quarter with $3,800,000,000 of cash on the balance sheet. So we remain in a strong balance sheet position with cash on hand, access to ample liquidity as well as the potential for incremental cash from tactical asset sales. I'll wrap up my comments on slide 10 with some guidance for the rest of the year. We are on track to achieve the high end of our 2% to 3% production growth for the year. Our 3rd quarter production guidance is 1.51 to 1.550000000 BOE per day, which reflects significant turnaround activity in the quarter. We are also providing an update on several of our financial guidance items, which in the aggregate will provide approximately $900,000,000 in benefit to net cash flow in 2015. We now expect full year 2015 capital expenses of around $11,000,000,000 compared to our previous guidance of $11,500,000,000 This reflects lower capital that's roughly equal parts program efficiencies, deflation and FX and some activity deferral. We're also making good progress on our operating cost targets, which are mostly coming from changes to the way we run our business. We still expect our operating costs to increase in the second half of the year as we continue our turnaround work and bring projects online. But given our run rate through the first half of the year, we are lowering our operating cost guidance for the year from $9,200,000,000 to 8,900,000,000 dollars That puts us ahead of schedule as we work towards our $1,000,000,000 cost reduction target in 2016. Our corporate segment benefited from LNG licensing revenues during the Q2 and we're changing our full year guidance to a net expense of $900,000,000 from $1,000,000,000 And there's no change to our DD and A or exploration dry hole and impairment update on our operations. Thanks, Jeff. As Jeff and Ryan mentioned, we've had another strong quarter operationally and the business is performing well. I'll quickly run through our segment results and then turn it back to Ryan for some closing thoughts. In the Lower forty eight, 2nd quarter production averaged 5 156,000 BOE per day. That's a 3% increase from the same period last year and represents a 9% increase in crude oil production over the same period. We're now running 13 rigs, 6 in Eagle Ford, 4 in the Bakken and 3 in the Permian. That's down from 32 rigs at the end of 2014. And we believe this is the right pace of activity in this environment. We'll reassess these levels later in the year taking into consideration market conditions, pilot test information and the price outlook. With our reduced capital program, our growth in this region has started to slow and we expect production to see modest declines through the rest of the year consistent with our prior guidance. Looking at the Gulf of Mexico, our appraisal work is continuing with activity in the quarter at Gila, Shenandoah and Tiber. And next I want to provide a quick update on the rest of our Gulf of Mexico program following our Deepwater announcement earlier this month. As Ryan mentioned, we recently announced a plan to reduce spending in deepwater, notably in the Gulf of Mexico. We've taken the step of terminating our agreement for a drillship and we expect to take a charge of up to $400,000,000 as a special item in the Q3. The drillship wasn't scheduled for delivery to the Gulf until later this year, so not a lot has changed for our 2015 drilling program. 2 exploration wells are expected to spud in the Q3 at Melmar and Vernachia. After Melmar, we will have 2 remaining slots on the Maersk Valiant drillship. We expect to drill a Socoto prospect with 1 of these slots and we're currently evaluating and high grading our drilling prospects to fill the final operated slot. We're going through our budgeting process for next year and we'll provide more detail on expected capital and operating cost savings for 2016 when we announce our capital budget later in the year. Next, I'll cover our Canada and Alaska segments on Slide 13. We produced 306,000 BOE per day in our Canada segment, an 8% year over year increase. The growth came from our new wells in Western Canada as well as strong performance from our oil sands assets. In May, we achieved a major milestone with first steam at Surmont 2. We're on track to start producing in the 3rd quarter and expect production to ramp up through 2017. Our other oil sands assets continue to perform well and we're seeing ongoing ramp up at Foster Creek Phase F despite the 11 day shutdown at the end of May due to forest fires. Alaska's average production was 174,000 BOE per day. We're continuing to make project on our CD5 and Drill Site 2S projects where the first wells both projects during the quarter and both are on track for 1st oil during the Q4. As we mentioned on the Q1 call, we resumed exports from Kenai LNG in April. So far, we've delivered 2 cargoes and we expect to deliver 4 more by the end of the year. And our seasonal turnaround activity started at both Prudhoe and Cuparic in June and will continue into the Q3. Now let's review our Europe and Asia Pacific and Middle East segments on Slide 14. In Europe, Q2 production averaged 206,000 BOE per day. We achieved start up of our Inukdu project slightly ahead of schedule. We're also making progress on our Alder project, which is expected to come online in late 2016. Elth Fisk 2 and Ekofisk South production is continuing to ramp up as we bring additional wells online. And we've safely completed our turnaround activity in the J area and the Eco Fisk area ahead of schedule. However, we still have a significant amount of turnaround activity planned in the region during the Q3. In the APME segment, we produced 349,000 BOE per day in the second quarter. That's an 8% increase compared to the Q2 of last year, primarily as a result of new production from major project startups in Malaysia. APLNG Train 1 is nearing completion. We achieved another milestone this week when we started loading refrigerants to the LNG facility and we remain on track for 1st cargo in the Q4. In China, we completed our Bohai appraisal program with encouraging results. And in Malaysia, Gamussive began a major turnaround in June, which was just completed in the past few days. So to wrap up my comments, the business is continuing to perform well. We're hitting our production targets, lowering our costs and maintaining our focus on safety. We have a few more major projects and turnarounds to complete this year, but we're on track to deliver on our commitments. Now I'll turn the call back to Ryan for his closing remarks. Thanks, Matt. And that wraps up our Q2 review. So here's the summary. The dividend is safe. The business is running extremely well. We can achieve cash flow neutrality in 2017 and beyond at today's strip roughly $60 per barrel Brent and we have a unique formula for sustainable performance in a portfolio that can deliver. Now clearly the environment today is challenging for the industry. But we believe we're entering a new reality for the business. The winners will be those companies with a rational vision, high quality asset base and a strong workforce and a commitment to shareholders. The winners will be those companies who can manage short, medium and long term goals simultaneously and we're setting plans and delivering on the things that we can control in the short term paying close attention to the drivers of medium and long term performance. We believe this broad perspective will serve us well and make us an even stronger company in the future. So thank you for listening to the opening remarks and I'd be happy to turn it back over to the operator for your questions and our answers. Thank you. And our first question is from Guy Baber of Simmons and Company. Please go ahead. Thanks very much for taking my question. I had a couple. First, I was just hoping to discuss the decision making progress around determining whether to increase or decrease unconventional activity levels later this year and into 2016. You mentioned the development program discretion. So we just wanted to dive a bit deeper into I think the prior view was to begin increasing the rig count at the back half of this year, but oil prices have obviously weakened. And you obviously have a lot of flexibility next year with $2,000,000,000 in major projects rolling off. So could you just help us understand the framework for determining unconventional activity spending levels as we go into next year? Yes, Guy thanks. As we relayed out in April, we saw some modest increases in the prices over the next couple of years in our path to sort of our working the medium term in 2017. And if we see the and in that plan we had some ramping up of our unconventional activity assumed in that plan as our capital flexibility increased and our project capital was rolling off Surmont and APLNG, we're going to direct that to the unconventionals which are shorter cycle and just better opportunities for the company. Now I would say if prices that we're seeing today sub-sixty dollars Brent, high 40s and low $50 we don't have plans to increase the capital and ramp up in the unconventionals if these kind of prices persist. So we're watching this space pretty closely. As Matt said, we'll announce our capital later this year, but that's going to be informed by where we think the commodity prices are and where we think they'll be in 2016 and that's going to then dictate how much we ramp up in the unconventionals. Thanks, Ryan. And then my follow-up was, could you just discuss a little bit more some of the assumptions implicit in the comment that you could achieve cash flow neutrality by 2017 at $60 a barrel Brent. So more specifically, could you perhaps elaborate on what deflation capture would be implicit in those assumptions? And just any more detail that you could give there, I think would be helpful as I think that's a pretty important assertion. Yes. I think what we're saying right now is that when we came out in April, we talked about the capital required to kind of generate a flat production profile for a long period of time for the company. We thought that was about $9,000,000,000 I think the deflation that we've seen to date and the additional deflation that would happen in a lower price world that you're describing, our flat capital goes down something closer to $8,000,000,000 And if that and if this price were to persist for a period of time, we would expect additional deflation and more efficiencies going forward. We haven't factored that into the analysis necessarily, but it is a recognition that we can achieve flat production for a long period of time at an $8,000,000,000 capital level. Thank you. Our next question is from Doug Terreson of Evercore. Please go ahead. Good morning, everybody. Good morning, Doug. Rod, I wanted to continue on Guy's question about the downward revisions to operating capital cost. And specifically, you highlighted on slide 5, 4 different categories and you just touched on deflation capture. But also wanted to see if you could comment on or give a little bit more insight on what you mean by discretion development programs, deepwater reductions, program efficiencies. Just a few more specifics there if you have any. Yes, Doug, be happy to. So we described sort of the deflation capture and efficiency that we're seeing in the portfolio to lower the capital required to keep flat production over time. And that's clearly something that we would dial in if we saw these kinds of prices persist. We talk about something we don't talk about is asset sales. We think in the portfolio of our size, we have an ongoing rationalization program that keeps eliminating the bottom end of the portfolio and that's certainly there. We've got a lot of flexibility. The unconventionals are shorter cycle time and we can ramp those up we find ourselves in. So as we try to describe the actions, the levers and the tools, those are some of them. You mentioned the deepwater exploration. We're working through that as well, but would expect that to be incremental in terms of capital savings and operating cost savings as we look forward at this kind of price level. Okay. And then finally on cash flow, when using consensus estimates divestitures and borrowings in the quarter, it seems like your dividend is covered for 2015. And on this point, I wanted to see where your after tax borrowing costs were on the recent borrowings in the period? And then also the status of any other funding sources such as a revolver, commercial paper or whatever you deem relevant. So maybe a question for Jeff. Yes, sure Doug. As we mentioned in our brief remarks there, we were out in the debt market in the Q2 and we issued $2,500,000,000 worth of debt. That was a mix of fixed and floating. And on average that was a 1.8%, 1.9% interest rate on a pre tax basis. So you could tax effect that. So we ended the Q2 at $3,800,000,000 in cash on the balance sheet. It probably takes $800,000,000 to $1,000,000,000 to operate our business. And then in addition to that, we have about a $6,000,000,000 liquidity line that's undrawn currently. Okay, great. Thanks a lot. Thanks, Doug. Thanks, Doug. Thank you. Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead. Thanks. Good afternoon, everybody. I guess, Ryan, first of all, thank you for your remarks at the beginning of the call with the dividend. I think that's pretty clear. But I've got a couple of questions around the strategy, how that changes in a low oil price environment. First one is really on exploration. So you've cut a rig obviously this year you had a fairly large commitment. What does this say about the exploration strategy going forward given the resource depth that you have and given that that's a key area of discretionary spending? Are you backing away from exploration post 2015? And I've got a follow-up please. Doug, I think I'll take that. So the specific announcement we made earlier this month is only related to canceling the ENSCO drillship. And that's got that by itself is going to result in a decrease in our deepwater exploration capital by $300,000,000 to $500,000,000 a year for the next 3 years as a function of what spread rate and the equity position would be. We're still going to be conducting deepwater exploration through 2015 and into 2016. We have been appraising our existing discoveries in the Gulf of Mexico and West Africa and high grading the portfolio to fulfill the remaining portfolio and considering alternatives for that portfolio. But anything that we do is going to have to preserve value from the discoveries that we've made in the portfolio that we've built up over the last few years. So there is still a strategic question on the long term position of Deepwater. We have a very strong position in the unconventionals and as you mentioned a very strong position across the resource base as a whole. So the strategic emphasis would be moving more towards developing the existing resource base. But still is a significant role for exploration to play and bringing new resources into the portfolio. So there'll be more to come in this over time Doug as we firm up those longer term strategic implications of the Deepwater decision. I appreciate the answer, Matt. I guess the follow-up is probably for you as well, I'm guessing, because there has been I think when you and I had some time together earlier this year, there was some talk about 80,000 barrels a day of potential non core production. But your comments about what one has to imagine that there's disposal potential in some of your existing undeveloped discoveries, How should we think about the scale of what you've envisaged to be your disposal backlog, if that's the right way to ask a question? And how would that capital be redeployed? Would it buyback stock? Would it show up the balance sheet? How would you use the spending? And then I'll leave it there. Thank you. Yes. So we as Jeff and Ryan both mentioned, I mean, we expect to be some form of dispositions going on sort of continuously in the going to market our Kook Inlet position in Alaska. And I think it's quite well known that we've had a package out there in Canada for non strategic assets and gas assets. And we have some assets in the Lower 48 that fit the same criteria. So we do have some tactical dispositions that we're currently marketing at the moment. So I mean the use of that cash would be to fund our dividend and our ongoing capital programs. Yes. And I'll jump in there Doug a little bit. It's the priorities are the dividend to the shareholder, the balance sheet and then a growth we can afford. Thank you. Our next question is from Paul Sankey of Wolfe. Please go ahead. Hi, everyone. Hi, Paul. You talked about 2017 cash flow neutrality and an $8,000,000,000 hold flat number. Are you implying that you're actually going to outspend cash flow between now and then? Or are you essentially going as fast as you can to get to cash flow neutrality? Well, I think largely Paul depends on the our outlook on commodity prices, which we're watching pretty closely right now. But we would have some slight outspend in 2016 if we continue to ramp up and hold the capital at $11,500,000,000 But that's something that we're looking at dropping down at the current price and continuing to exercise the flexibility. What people tend to forget about though starting in 2016 and going into 20 17 is we have pretty significant ramp in production from Cermad Phase 2 and from APLNG. And that's capital and cost that we spent the last 4 to 5 years. So we've got production coming on in 2016 2017 that people tend to forget about that is right in front of us. Surmont 2 just first steam earlier this year. We'll have 1st oil here imminently and 1st cargo is coming out of APLNG. So the intention is to get to cash flow neutrality as quick as we can. And we're just trying to demonstrate that we've got a lot of flexibility even at the current lower prices we're seeing today. Yes, I understand. And I probably should have prefaced it by saying, if we assume the strip, which I guess is something around what you're talking about here sort of a $60 outlook is what we see on the futures market? Yes. And that's why we tried to put that into our slide at that kind of a price level just to give you some sense of how we would manage the business at that kind of a deck. And could I think you've been asked this and you've tried to answer it. Forgive me if I just slightly missed what was being said. But can you just run over again the deflation element here, the lower service costs? I know you've done some excellent work in your presentations showing how costs are changing. When I was with Mr. Hirschberg, he said that this is actually lagging. This is last year's data. Could you would you mind just kind of going back over how we get from an $11,500,000,000 $11,500,000,000 run rate this year all the way down as low $8,000,000,000 seemingly simply if oil stays at $60,000,000 Yes, Doug. So we in April, we talked about deflation of $700,000,000 that we're trying to capture. We now see that probably closer to $900,000,000 And obviously, if the kind of strip prices that you're talking about persist, we'd expect that to continue down as well. So as we look out of that, it's the $8,000,000,000 is really to stay flat. The $9,000,000,000 or the $10,000,000,000 or $11,500,000,000 grows our production based on the amounts that we laid out in April. So we've got a lot of flexibility between the $11,500,000,000 that we laid out to the marketplace in April versus this what we're calling $8,000,000,000 just to stay flat production. So what we're trying to describe to folks is with the capital flexibility, the deflation and the efficiencies that we're creating in the business is just adding to the flexibility on the capital side of the program and gives us a lot of choice as we go into the back half of this year in deciding what kind of program we want to execute in 2016 2017 on our pathway to get to cash flow neutrality as quickly as we can. That's great, Ron. Thanks. And if I could just add in we've had the idea that you would IPO the exploration business and have it as a standalone business. I assume you want to retain some access to that business as opposed to, for example, disposing of it altogether. But at the moment, it feels like the potential for you to spend in that business is going to be undervaluing it essentially? Yes. I think that's right. But we're looking at all the alternatives right now Paul about that business. And we'll have more to come on that as we progress later in the year and into next year. Thank you. Our next one one more follow-up on the cost issues. The incremental $300,000,000 cut to OpEx that we saw on this is that again is that were you saying was that just incremental capital deflation? Is this more of an issue of pace? Or to be clear are you trending towards much larger levels of cost reductions on a 2 year basis than you would have expected earlier? Yes. I can take that one Ryan. Yes, we're definitely running ahead of schedule on where we thought we were going to be on reducing cost. And as we mentioned, it's a combination of deflation in the business, some minor amount of FX benefits, but it's really mostly related to us figuring out ways that we can drive costs out of our business. So we talked in terms of having this $1,000,000,000 cost reduction target. We're feeling really good about our ability to achieve that or go beyond that. Great. Thanks. And then maybe on the at APLNG, you've talked about hopefully a cargo during the Q4. Can you maybe talk about what are the remaining steps that you have to achieve there at APLNG between now and the Q4 to get that first cargo? Yes. So we're at the stage where we're beginning to load refrigerants. We have to go process it's called going through the mechanical runs, getting all the drinks and the compressors are running and everything's running well. And that whole process of this sort of integrated completion and then hook up commissioning of the plant is all in hand and the gas is there in the upstream side to feed the plant. So we're feeling good about the ability to get that initial cargo sometime in Q4. Great. Thanks a lot. Thanks, Ryan. Thank you. Our next question is from Blake Fernandez of Howard Weil. Please go ahead. Folks, good morning. Thanks for taking the question. I'm sorry, I'm going to go back on cost structure as well. I'm just curious about maybe the sustainability of some of the cost deflation that you're witnessing. Obviously, industry in general sees costs coming down, but I'm just curious what steps are being taken to ensure that these are more structural so that they don't simply reinflate once the commodity finally does recover? Yes, Blake. We're taking a pretty hard look kind of top to bottom in terms of how we run the company. And we're considering where we came from as an integrated company and the size, scale and capability we have as that company and looking at taking the opportunity now to a bit rightsize relative to how an independent company like ConocoPhillips finds itself today. So there's things that we do in our company that we're sort of a remnant of the integrated company in terms of how much functional expertise they have in the center, how much oversight versus that accountability that goes out to the BU. We've done a pretty good job of building that model our Lower 48 Unconventional business. We're going to extend that across the whole company with more of a less of a one size fits all and more of a fit for purpose design recognizing that an asset in the Lower forty eight is different than an asset in the North Sea or up in Alaska or offshore Australia. So really our employees get it. They understand it. They understand where we're seeing. And we're already seeing the benefits of that shift. We've been working on that over the last 2 to 3 years as we've tried to build the culture of an independent company. Now certainly with the downturn it just puts more of a laser focus on the need to accelerate that and to make it more prominent throughout the whole organization and the whole company. And then I think that will make it much more sustainable. Thanks, Ryan. The follow-up is on the strategic shift toward shorter cycle type of projects. I guess when I think of deepwater, definitely longer term, highly capital intensive, but they do tend to contribute fairly well to earnings. And when I look at the Lower 48 contribution for earnings, it seems to be one of the areas that's the weakest. As you kind of shift more toward these shorter cycle projects, do you anticipate that to have a negative impact on your actual earnings profile? Or is that a concern? I think you can I'll take that one. So when you look at Lower 40 being charged currently as we develop the unconventionals. And we're probably having depreciation charges which are a third larger than they'll be longer term because of the reserve booking schedule and the relative conservatism that's forced upon us as we book according to the rules that are out there. So as we go through time, you're going to see depreciation rates come down in the lower 48%. That's going to have a significant improvement in the earnings from that segment. The other thing of course as you've heard us talk about and you've heard the industry talk about is just the cost levels that are in that it's taking to develop reserves in the unconventionals have come down dramatically. And that will reflect itself in lower depreciation rates as well going forward over time. So yes, where we do have fairly weak earnings coming out of our Lower forty eight segment over time, you will see that currently you will see those improve as we go forward. Thank you. Our next question is from Ed Westlake of Credit Suisse. Please go ahead. Yes. Two very quick questions on the $60 breakeven again. Sorry. That would be what 2017 17 production the same that you have laid out in the past? Or are you changing that production growth? No. It's the same Ed. Okay. Great. Yes. As Ryan mentioned a lot of the production growth is coming from things that we've already invested in. Yes. Okay. And then presumably even on that stay flat there would still some positive cash margin shifts as you still back out some of the older gas production that's still in that mix as you get out 2017 even on flat CapEx? No, absolutely. So when you look at the Canadian the Surmont 2 addition and the APLNG that's coming on at a higher margin than a large part of our portfolio with the North American gas piece that you described Ed. And then we talk about margins in terms of kind of flat price cash margins. So one of the things we're seeing as we talk about it as well as costs are coming out of the business as well which improve margins across the board. So it's kind of dividend plus a little bit. And then on just on AP LNG, I mean, obviously, everyone's observed that the Asia LNG market has suddenly faced a sort of dramatic drop in demand and there's obviously a lot of cargoes coming on to compete for that gas demand. I mean, clearly, 1st cargo is an important milestone and the CapEx will fall for the project. And therefore, the cash contribution from the APLNG associates will improve, which we'll see next year. But can you talk a little bit about how you're placing that product into the market Train 1 and Train 2 given weak demand? Yes. Right now we're working through that Ed and I know there's been a lot of speculation in the marketplace around the contract and the SBA that we have with the buyers. We have 2 buyers. We have a Japanese buyer for Train 2 and Train 1 is going to China to Sinopec. And we have an SPA. We have a contract with them. They've got diversionary rights within China. And with our approval, which we've provided, they've got diversionary rights outside of China as well. And we're working with them to understand the volume that they can take into the country in 2016 and as we go forward in 2017. And I just remind people that our contract is a take or pay contract and we expect them or we expect they're going to live to the terms of that contract. Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead. Hey, guys. Good morning, Paul. Maybe several quick questions. The first one is probably for Jeff. Jeff, on the second quarter, what is your cost saving run rate? And what do you expect those run rate going to look like in the 3rd and the 4th quarter? I'm not sure what to interpret your question Paul. When you say cost savings already I mean Right. I mean that you have a program that to reduce costs. And I'm trying to understand that how much of that cost saving is already reflected in your 2nd quarter result? And what is the incremental improvement we could expect in the remainder of the year into next year? So when we I'll take you back to the analyst presentation. We talked about 2014 cost levels of $9,700,000,000 and we were going to take that down to $8,700,000,000 that was the 1,000,000,000 dollars we're taking out. And we said we thought we'd get halfway there in 2015. So we gave cost guidance of 9.2%. So we're well along that path is what we're pointing out today and we actually revised that 9.2% down to 8.9%. So we're going to continue to see that as we go through the year. And you can see that we've had some really pretty low cost levels in the 1st part of the year. The difficulty I add with your question is there's variability from quarter to quarter as we go through the year. But if you look at the whole year, we're running well ahead of where we thought we were going to be for the year. Do you have a number that you can share in the Q2? What is the cash operating cost? Well, as well, you can look at our balance sheet, it was $2,100,000,000 essentially in what we call cash operating costs, which is production costs, G and A costs and the G and A associated with exploration was $1,000,000,000 $2,100,000,000 So annualized it is $8,400,000,000 but you're talking about the full year is $8,900,000 Yeah. So that again that's why I point out that we have seasonality in our costs related to turnaround activities. And we'll have some costs that will increase as we go through the year and as production ramps up in some of the new projects. And maybe the second question is for Ryan. Ryan, I Under what commodity Under what commodity prices let's assume that if the commodity price stay where we are, what is the CapEx is going to look like? Is it going to stick at the $11,000,000,000 or end of that you going to reduce it? I mean, trying to understand that what's the criteria you're going to go for? Are you trying to because clearly you're not going to reach the cash flow neutrality this year. So what kind of criteria we should be looking at that reset your CapEx program? Well, as I said, Paul, we'll try to we'll set a capital budget later in the year as we look at what the commodity price and what we can afford. When we laid out a plan at $11,500,000 that assumes some slight modest recovery in prices. If we see prices aren't recovering and they remain at kind of today's level going forward into 20 16, you wouldn't you shouldn't expect us to be spending the $11,000,000 $11,500,000,000 $11,500,000 we laid out in April are the $11,000,000,000 that we're talking about today. So no, we're going to manage the whole system to make sure we reach cash flow neutrality. We're doing the right things to grow the business and fund the maintenance capital, but you should expect it to become lower. And we'll provide more clarity around that as we go through the course of the year and we watch where commodity prices end up. Thank you. Our next question is from Roger Read of Wells Fargo. Please go ahead. Thank you. Good morning. Good morning, Roger. I guess maybe to get back to some of the kind of the internal cost cutting and the commentary about structuring the company more like an E and P as opposed to large integrated? And then given where you are on the operating cost savings, what more should we expect to see from a streamlining or the headcount reductions that sort of structure? Well, as Jeff said, we're well on our way to the $1,000,000,000 cost challenge. We think we're certainly going to hit that probably exceed that. The exploration decision that we made and announced earlier, as I said, that's going to be incremental both on a capital and operating cost side. We'll have some impact on the organization as we think about that going forward. So we think there is running room beyond where we're at, but it's something that we're spending a lot of time looking at. And with respect to sort of relooking at how we run the company, that's going to deliver sustainable reductions for the longer term. So it's not just about taking $1,000,000,000 or more out of the cost system in the short deflation. It is about making that a sustainable cut over time and that's where our focus is at right now. Okay, great. Thanks. And then for Jeff, looking at the cash flow statement or the cash flow waterfall, working capital was a negative to this point. As you think about latter part of this year 2016, is there an opportunity to pull out of working capital as well as cash flow from the business as well as potentially more debt? What's some of the things we should think about? And maybe as some of these large projects start to come online as to whether they consume or free up capital in addition to the CapEx changes? I think from a working capital perspective that what we've seen in the first half of the year is really just the effect of a couple of things is accounts payable coming down because of the lower activities on the capital side. This is really the as we've moved our capital program down from the 2016, 2017 kind of level last year to this 11 this year, you got this lag effect on working capital. Now that we're kind of down at the level that we're going to be at on capital, we wouldn't expect that effect to continue in subsequent quarters. And then as prices come down, you've seen changes in kind of our taxes payable as well come off and be a use of cash from a working capital perspective. That's pretty well out of the system now also. So we wouldn't anticipate that being a significant change in use of cash going forward for us. As I mentioned in the call, we still have really solid access to the capital markets to the extent that we that it's necessary to go beyond our cash balances to fund our capital and our dividend in the period before 2016 when we get to cash flow neutrality. We certainly have the ability to do that in a very effective way. Thank you. Our next question is from Evan Kallio of Morgan Stanley. Please go ahead. Hey, good afternoon guys. Hey, Evan. Yes. Look maybe my question is related to the U. S. Earnings comment and offshore exploration reduction. Maybe for Matt, I mean, I know you look at resource upstream globally and the savings and efficiencies onshore U. S. On conventional have been most notable to date. I mean, do you see the scope for international to significantly move down the cost curve to compete for greenfield capital? Or in this strip environment, unconventional position as economically superior and effectively taking market share? So I mean, I think from a deflation perspective, more than half of the deflation that we've seen has been in North America so far. Historically, the international business has been slower to respond from an unconventional from a deflation perspective. So we still expect to see more of that come in over the next months and into 2016 in the international side. And as we see this emerge emerge then we get an understanding of what implications it has for capital costs and then that has implications for the viability of projects across the portfolio as a whole. So that what we're seeing emerge from a deflation perspective will influence how we think about capital allocation in the years ahead. Right. And efficiencies here as well. I mean, at current strip pricing, what's the breakeven period on one of your $8,000,000 to $9,000,000 Eagle Ford wells? Is that are we a little over a year? What's I think we're still in the 12 to 18 month sort of level to get for breakeven on an individual well. Yes. It's pretty powerful. Okay. If I could slip in just one other if just a question on if you can discuss the changes to working capital I guess associated with investing activities in the quarter that was sequentially higher. And then just what drove that reclassification of the working capital change from investing activity? Yes. I think you're noticing that on the cash flow statement. This time we broke working capital out from related to operating activities and investing activities. We did that to provide more clarity on what was really driving changes in working capital. And again, as I mentioned a couple of times now, the real driver has been just the slowdown in the investing activities. Thank you. Our next question is from Alastair Syme of Citi. Please go ahead. Hi, everyone. Jeff, I think you noted a few times about the bond offerings in the quarter. But I think I'm right in saying that you're still on negative credit watch. So I kind of was wondering where those discussions sit in the current environment with the various rating agencies And how decisively you would you feel you need to defend a A rating? So where we're currently rated is A1 with Moody's which is the highest single A and we're at a middle single A with Standard and Poor's and Fitch. And all of them as you mentioned have us on a negative outlook. All 3 of the agencies confirmed our rating in conjunction with the $2,500,000,000 bond offering that we did in the Q2. I think the position that they're in is they're waiting to see how commodity prices out and what levels of incremental borrowing we might do before we get to cash flow neutrality in 2017. But as we said before, as we look at different scenarios of what borrowings we might do and before we get to neutrality in 2017, we're still very comfortable that that level of borrowing is not going to take us out of the single A range. It could knock us down a notch within that range, but it wouldn't take us out of that range. And defending single A would be paramount would it? Well, we think that's the right place for a company like ours to be. What we've and it just fits strategically distributions like we've talked about with the dividend that is pursuing modest growth and wants to have the capability to do that through all kinds of different commodity price cycles. So we do feel like that's the appropriate credit space for us to be in. Okay. Thank you very much. Thank you. Our next question is from John Herrlin of Societe Generale. Please go ahead. Yes. Hi. Thank you. With the Cook Inlet sale does that include the Kenai plant? No, it doesn't. Okay. Thanks, Matt. Next one. You've talked a lot obviously about efficiencies and cost savings and optimizations and deflation and all that. You're a big company as Ryan talked about earlier. You have the ability technically to run your fields differently than say smaller companies. So how much of your overall performance is related to that type of self help from say field automation, so you can minimize unplanned downtime and enhance recovery. Yes. So that's I mean as part of our cost reduction process, we're looking at our operating costs, our lifting costs across the company as a whole. And we've had for years have had a very strong operations excellence program that we've applied across the organization. Frankly, for the past few years, we've been focusing that on increasing production. That's what you do when oil prices $100 a barrel. But with the same tools exist within that capability to focus out more on cost reduction. So we've operations excellence on making sure that we're getting the right balance of the right operating efficiency and the right costs in this price environment. So having that capability is in that sort of integrated view across the whole organization is really good. And I would add John to that that as we talk about the independent some of the capability we have as a company our functional excellence around integrated operation centers and the ops excellence plans that Matt talked about the reservoir understanding and characterization, the EUR, the simulated rock volume work that we're doing, we need to we're going to maintain that and expand that capability because we think it's differential and leveraging in the independent world. Thank you. Thanks, John. Thank you. Our next question is from Jason Gammel of Jefferies. Please go ahead. Thanks very much. I had another question on long cycle time versus short cycle time investments. And you're clearly at a point where you're hitting an inflection point and capital is dropping away and production ramp is coming in. But I suppose long cycle time by definition means that if you're not investing today then you don't have those big step changes in production in let's say the 20 nineteen-twenty 20 time frame. So my question is twofold. First of all, do you expect to move towards FID on any major capital projects this year and next year just given the capital constrained environment? And then the second part of the question is over the cycle, how much CapEx above the $8,000,000,000 of maintenance CapEx would you want to be putting into these longer cycle time projects relative to your short cycle time investment opportunities? Okay. On the FID question, we will be making final investment decisions on a few relatively small projects as we go through this year and into next year. We're in a fortunate position that most of our major projects that are in the portfolio now are not mega projects and they are projects that we've executed before like adding drill sites in Alaska or adding platforms in the North Sea or in China. So they're all relatively small scale things. So we do have the scope within the capital program to continue to invest in those longer cycle with smaller scale One of the strategic questions, which I think is what you're getting at Jason is, for the long term, what is the right balance for a company like us between the more flexible short cycle investment opportunities of which we have a lot within our development programs and in particular on unconventional business. And then these longer cycle program and projects that are the characteristics I just spoke about. And that we have flexibility to decide exactly what that ratio should be and that's one of the sort of lenses that we look at our strategy through. Okay. Thanks, Matt. Appreciate the thought. Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead. Good afternoon. Hi, Neil. Appreciate that incremental disclosure on cash flow neutrality in 2017. Definitely been top of mind for investors. Two more industry focused questions. I guess the first one Ryan, Speaker Boehner yesterday came out in favor of crude exports. Senate I as we speak is at least discussing it. Flipside is we're going into an election year. Just wanted to get your thoughts on the latest temperature on this issue as you've really been leading the charge on behalf of the industry. Yes. Thanks, Neil. No, it was we're glad to see we've been working with the Speaker's office to get them to support the repeal of the ban and get it up for a vote later this year. And I think we made some significant progress both in the House and the Senate. And of course the speaker's comments yesterday were well received by the industry and everybody. I still would it's still going to be a little bit of a tough uphill climb. There's we're getting bipartisan support both in the House and the Senate. We could use a little bit more of the Democratic support for it. So we're working on that. But what chances do I give it of passing this year? We I haven't climbed to 50%, but it's encouraging to see that we may get a vote at least an up down vote at least one of the chambers to go forward. I think the question everybody is asking is there enough bipartisan support to clear both houses and then to clear the administration. And that's what we're spending most of our time on right now. Thanks, Ryan. And then the second question is views on industry consolidation. This is less a Conoco specific point, but more an industry point. If you expect an acceleration in activity with the double dip in the commodity and the capital markets tightening less so as you guys pointed out for yourselves, but for companies less attractively positioned from a capital structure than you, your thoughts on M and A going forward for the industry? Yes. If we saw some modest increasing in the commodity prices maybe that we would have envisioned a little bit more earlier in the year, I'd have told you that I think the stocks are pretty fully valued and expecting prices to come back to that $70 mid-seventy dollars $80 kind of level. Certainly with this recorrection over the last few months, it's putting a long spotlight on some of the companies as you say that may not have the financial capacity that ConocoPhillips does. So if these lower prices persist for a I still don't personally believe the floodgates are opening on that, but I still don't personally believe the floodgates are opening on that, but I think it's something that industry will be watching pretty closely if these kinds of prices persist for a longer period of time. Thank you, Ed. Thank you. And our last question is from James Sullivan of Alembic Global Advisors. Please go Hey, guys. Thanks for fitting me in. Just wanted to be very crystal clear on one point. Obviously, you guys had highlighted a 14 to 16 operating cost to go back to that issue, a reduction of $1,000,000,000 of which I think you'd said about 70% was supposed to be roughly 70% was supposed to be structural savings. Am I right in thinking that that was really before you guys had envisioned a strategic review of the kind that has been talked about a couple of times regarding streamlining some of your let's call the major like execution capacities, which would is it right to think of those as incremental potential incremental structural cost savings outside of that original first $1,000,000,000 Well, no, James. We when we laid out the $1,000,000,000 we kind of had a vision that we were going to go through this process and make some structural changes to the company. So I would say that some not all, but many of those structural changes are built into the $1,000,000,000 trajectory that we're on. As Jeff described, I think we're ahead of plan and our expectation is that we'll generate more savings beyond the $1,000,000,000 And then the exploration decision that we made not to pursue continue pursuing some of the deepwater that is incremental to the $1,000,000,000 decision. And we're working through what the implications of that given that we have some portfolio and discovered portfolio that we're going to continue to invest in or monetize in other ways. Okay. That makes sense. So there it's yes, so downshifting in that way would be the incremental piece. Okay. Just a separate thing kind of following up on the quarterly discussion regarding long cycle, short cycle. But and correct me if there's been a change in this, but looking at 8 ks LNG, as I understood it, there was the potential for that to proceed to pre feed in 2016 or at least graduate to the next step in the development process, which would probably require a material capital contribution from stakeholders. It may be that that's getting pushed to the right. But could you describe your thinking on that project, your participation in it? And then how it fits into your portfolio given that obviously we're trying to skew towards shorter cycle projects at the moment? Yes. I think we are making some progress on that with the partners in alliance with the state. There's still a lot of work to go do to get an aligned view around the fiscals and state's participation and what that's going to look like. So there's a lot of work to go do even before we take that next step that you described in the pre feed. I think the companies are looking at kind of the end of this year into 2016 to make that decision. But a lot of that's dependent on kind of how we see the alignment working with the State of Alaska and their participation in the project. It's a very, very long project. No resource risk for us. So it kind of goes back to Matt's comment is how much of this longer cycle time but very flat production with very low resource risk do you want in the portfolio. And we're going through those thoughts and analysis right now. It doesn't mean that there's 0 of that in the portfolio. I think a healthy portfolio has some of that. We've got some LNG properties. We've got our cutter property. We've got APLNG coming online. We have a large resource potential in the oil sands. We're trying to figure out how to break those projects into shorter cycle time projects, but still they're long dated resource barrels that are attractive and should be a part of the portfolio. So that's going to be the challenge for us as we think about 8 ks LNG going forward. Okay, great. All right. That's all I have. Thanks guys. Thanks, James. Thanks, James. Thank you. I will now turn the call back over to Ellen DeSancas, VP, Investor Relations and Communications, ConocoPhillips. Thanks, Christine, and thanks to all our participants. Obviously, feel free to call us back for any follow-up questions. We really appreciate your time and interest. Thank you. Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may