Q3 2019 Earnings Call

Please note that this conference is being recorded I'll now turn the call over to Miss Ellen just scientists Ellen you may now begin.

Thanks, and era, Hello, everyone and welcome to our third quarter earnings call. Today's prepared remarks will be delivered by John Waller, our EVP and CFO and met Fox, even p. and our Chief operating officer.

Our three region Presidents are also in the room with US today. They are bill Bullock, the president of our Asia Pacific Middle East region, Michael Hatfield, The President of our Alaska, Canada, and European Europe region, and Dominic Macklin, the president of our lower 48 region.

Page two of today's presentation deck shows our cautionary statement, we will make some forward looking statements during today's call actual results could differ due to factors described on this slide and also in our periodic SEC filings.

We will also refer to some non-GAAP financial measures today.

Excuse me and reconciliations to the nearest corresponding GAAP measure can be found in this mornings press release and also on our website.

One final comment before I turn the call over to dawn given that our November analyst and Investor meeting is only a few weeks away, we're going to limit questions to one per person and aspect questions address today's earnings release or recent announcements and with that I'll turn the call over to Yvonne.

Thanks cylinder and good morning all.

I'll begin with the third quarter highlights on slide four.

Starting on the left with our financial performance, we realized adjusted earnings of Zero point $9 billion or 82 cents. This year.

Higher LNG road realizations and higher production volumes combined with lower overall cost to mitigate the impacts of reduced marker prices.

Cash from operations was 2.6 billion, resulting in free cash flow of $1 billion in the quarter.

And 4 billion year to date.

We ended the quarter with 8.4 billion of cash and short term investments.

And our strong financial returns continued.

With the return on capital employed at just under 11% on a trailing 12 month basis.

Moving to the middle column operationally in the quarter, we produced 1.32 million barrels of oil equivalent a day.

Up 7% on an underlying basis compared with a year ago quarter.

And up 12% on a per share basis.

Matt will cover the rest of the operations highlights in a moment.

On the strategic side earlier this month, we announced for 38% increase to our quarterly dividend.

Which reflects the company's improved underlying financial strength.

As well as our commitment to peer leading capital returns to shareholders.

In addition, we repurchased $750 million of shares in the quarter.

And announced our plan to buyback $3 billion of shares in 2020.

In both the third quarter and year to date, we've returned over 40% of CFO to our shareholders.

We closed the sale of Orient PSS in the UK in September which generated 2.2 billion in proceeds.

And as recently announced we entered into definitive agreements for the sale of our Australia West business.

If you turn to slide five I'll wrap up with a look at our cash flows for the quarter.

We began the quarter with cash and short term investments of $6.9 billion.

Moving to the right cash from operations was 2.6 billion.

There were a couple of items impacting cash from operations in the quarter that are noted here.

First in conjunction with the UK sale.

We made a onetime top up contribution to the pension plan.

Such that it is now fully funded and essentially self sufficient.

That $320 million can be viewed as an acceleration of future pension contributions.

And second as we do each quarter. We note the cash received during the quarter associated with the paid evasive settlement.

To date, we received over $750 million related to the $2 billion settlement agreement reached in the third quarter of last year.

Working capital was a 300 million dollar use of cash and as mentioned, we recognize 2.2 billion and proceeds from closing of the UK disposition.

Capital spending was 1.7 billion, resulting in free cash flow of 1 billion in the quarter.

And we distributed 1.1 billion or 41% of CFO to shareholders during the quarter through dividends and share buybacks ending the quarter with a cash balance of $8.4 billion.

So as you can see this past quarter. Once again continued our trend of consistent strong operational and financial performance.

It also demonstrates our unwavering commitment to financial returns capital discipline free cash flow generation and returning capital to shareholders.

We firmly believe that ours is a sustainable distinctive and compelling value proposition one that is highly competitive not only within the energy sector, but also across the broader market.

With that ill turn the call over to Matt.

Thanks, Don I'll provide a brief overview of our year to date operational highlights and discuss our outlook for the remainder of year. Please turn to slide seven.

Across the portfolio, we continue to advance the operational milestones we highlighted at the end of last year.

Starting in Alaska.

We safely completed our third quarter turnarounds approval, the western north slope and coupon.

And close the Nineth discovered resource acquisition.

We also continued to progress appraisal of our WEHLU and Narwahl discoveries.

Earlier this month, we spud another horizontal well from an existing outpacing drill site into the normal trend.

The rail is designed to provide offset injection to the horizontal producer, we drilled and leaders in the year.

And help us optimize future development planning.

We're also giving up for the winter exploration appraisal and project execution season.

Moving to Canada, we completed commissioning of our Montney gas plant this quarter.

Due to delays in the third party pipeline, we now expect that project to be online in every 2020 .

As Surmont parent adult alternative billion project is on track for start up from the fourth quarter as planned.

In fact, we're actively transitioning to feedstock condensate blending for Dilbit seals, beginning on November 1st.

This capability will know only reduce the amount of deal you would acquire the also prepaid blend flexibility and consistently improve or netbacks.

And the lower 48.

The third quarter production by asset was.

Eagle Ford at 226000 barrels equivalent per day.

Vulcan 102, and Delaware at 51.

For a total of 379 business.

As we indicated last quarter, we expect big see production to remain relatively flat for the remainder of the year.

And we're on target to achieve a few years grew three of about 21%.

Lastly in the lower 48, we now have three vintage five multi well pilot pads online in Eagle Ford.

You'll hear more about that in a few weeks.

Moving over to Europe , the UK disposition closed than we successfully transitioned operatorship.

In Norway partner operated turnarounds with safely completed in the third quarter.

In Qatar, we've been invited to submit a bid for the the north field expansion project.

And in Malaysia production ramp up UCB continued through the quarter and we expect to reach full throughput by year end.

In addition, commiserate phase two came online in August .

And finally in Australia, we announced the divestiture of Australia, Wes assets for 1.4 billion.

Which we expect to close in the first quarter of 2020 .

Meanwhile, we continue to progress roosa and remain on schedule for at Ivy by early next year.

So we've had another strong quarter of execution as well as significant progress across the portfolio.

Now I'll discuss the outlook for the remainder of the year on slide eight.

As we entered the last quarter of 2019 were continuing a focus on execution, while maintaining capital discipline.

Our full year operating plan capital guidance remains unchanged at 6.3 billion.

Excluding about $300 million of opportunistic low cost of supply resource additions that we discussed last quarter.

On the production site full year guidance also remains unchanged except for updating for the close of our UK asset divestiture.

With that in mind, we now expect the fourth quarter to average between 1.265, and 1.3 eurfive million barrels equivalent per day.

But the full year guidance between 1.3 in 1.1 million barrels a day.

So we remain on track to deliver 5% underlying full year production growth and.

When combined with our buyback program that results and 10% production growth for next year.

Finally, we're looking forward to analysts and Investor meeting in November 19th in Houston.

We will show a decade long disciplined plan that delivers free cash flow and strong returns.

And of course will provide a deep dive into the assets across our diverse portfolio.

Our continued strong performance highlights the strength of our portfolio diversity and our ability to generate free cash flow to support distinctive returns to shareholders.

Our entire Conoco Phillips team is focused and successfully executing the remainder of our 2019 plan.

And we look forward to shaping our longer term plans with you in November .

Now, we'll open up for questions on the quarter.

Thank you my first question.

I'm sorry. Thank you we will now begin the question answer session. If you have a question. Please press Star then one on your Touchtone phone. Once again, if you have a question. Please press Star then one on your Touchtone phone and our first question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.

Yes, Hi, good morning first question here, just as you said on the quarter. As you look ahead here to the fourth quarter guidance. It looks like from your prepared remarks. The production outlook was let's just meant to be an adjustment for the closing of the UK transaction just wanted to confirm that if there any other moving pieces we might.

I want to be thinking about for the quarter Sachs.

Yeah, Phil the yeah. It really is just an adjustment for the for the.

UK change and has said is this a bit less of an increase from the start to the fourth quarter than we than we usually see but thats, mostly because weve had front end loaded production and the lower 48 in Qatar.

And it's also influenced to some extent by the fact that Montney startup has slipped into the first quarter because of this delay in the third party pipeline.

It really is that primarily just reflecting the change in the.

And in the UK.

Okay got it and then just one for Don on the Castle, you've had a decent working capital headwind year to date and I was just wondering if there any transitory dynamics there that could reverse some of that in the fourth quarter and then obviously I think we're going to get to a step up in the LNG distributions as well correct.

Yeah, Phil on the.

P. LNG distributions, yeah, we do expect to the even quarters to be high in the odd quarters would be low. So we'll continue that trend we had 60 million distributed a in the third quarter.

I would expect that a number to grow to about 300 million in the fourth quarter. So.

Still pretty consistent with what our.

Guided to last time, which I think was 750 for the year on a p. LNG.

On working capital we had to.

300 million dollar use in the quarter.

And.

There we saw an increase in accounts receivable due to some sales timings on liftings in Norway, and Malaysia, both and a decrease in accounts payable of about the same about 150 million.

That's just normal payment timing, so there's really.

Not a lot going on there okay I wouldn't suggest that we're we have a trend trend line that we're following.

Okay.

Thank you. Our next question comes from Doug <unk> from Bank of America Merrill Lynch. Please go ahead. Your line is open.

Thank you hi, good morning, everybody.

I Wonder a again trying to stick to the core for I guess with all also one of the things included in your slide today, Matt.

Susan to exit, but we're also in the middle of the quarter, but yet prepared to still consider investment in Qatar I, just wonder if you could walk us through.

You are thinking in terms of.

LNG market outlook, why or why no exiting one and still being involved in another might make sense for you guys on the.

Maybe if you if you could get all that kind of part D to not just it was like international gas prices a little bit better. This time I'm just wondering if you're seeing any improvement or thoughts just like the effect on pricing I'll leave it there. Thanks.

Yeah.

Huh.

Thanks, Doug and we.

Yeah, we we decided to exit the.

If you asked not because we're concerned over the course to supply there, we actually think that as a competitive project, but the we concluded that the we should monetize those assets and redirect the capital to higher returning projects across the rest of a portfolio. So it was a pretty straight forward.

Allocation of capital decision for us to make the decision that we did you list.

We are we are still interested in the Qatar Northfield expansion.

The we think that will also be a very competitive cost of supply LNG project.

And we will there and continue to progress was discussions with cutout as we go through the rest of the even into next year.

Thank you our next question.

Yes.

Well.

Yeah.

Yeah, Doug you had a question about LNG realizations in the third quarter. So I just wanted to address that in and you're right. It is the lag effect in pricing the way. These long term contracts work. So for example, a in the quarter.

Brent as you know was down about $7 from the previous quarter, but JCC pricing was up $8. So what you're seeing is just the lag effect on LNG realizations.

Go ahead in our we'll take our next question.

Thank you I apologize about that our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.

Hi, Good morning team that the first question I had was around Qatar and you remind us again, Matt It just round the mechanics of production. It makes that you haven't.

Hi, This first half weighted production run in Qatar does that come maybe come up again.

Come up against any claps or restrictions on volumes again for the fourth quarter.

And yeah. The the so we've already talked as we've gone through the year, but the front end loaded nature of the a of the little for heat in Qatar. The there's an annual limits to total production. The a that we can produce there in Qatar and we had very strong performance through the first first three quarters.

So that means that we choke back in the fourth quarter, two that to me or limit.

And that's something that's been in please from the beginning of Qatar, but it's been a bit more pronounced this year because performance is being so strong in the first three quarters.

Yeah, Thanks, Madeleine <unk> drilling down at a lower 48.

Walk us through each of the three regions and what you're seeing from a volume perspective that go into the fourth quarter.

Nothing notable that to call out impairment so.

How is the performance as a play by play.

Yeah, Thanks, Neil as Dominic here, I mean, I think in terms of.

Q4, I will appear on the big three all pretty flat I think eagleford.

Food pretty flat from Q3 into Q4 Bakken.

Yes, good strong quarter in Q3, it's probably relatively flat into Q4 will may see some weather impacts in December up there in North Dakota calls and we will see a little bit growth in the Delaware, but overall you know our guidance is relatively flat Q4 for the big three versus Q3.

Oh, we will see continued growth in 2020 into big three and we look forward to talking about that in November .

Thank you. Our next question comes from Doug Harrison from Evercore ISI. Please go ahead. Your line is open.

Hi, everybody.

And Doug.

My question, it's about the application of divestitures in the North Sea and Western Australia on your total corporate retirement obligations and specifically how you expect that was to change once those asset sales close.

Yeah, Doug this is Don.

I'll give you some.

Some guidance around.

The asset retirement obligations.

In the UK I think we've already published that but thats, a $1.8 billion of reduction and they are.

And then and or let's say Australia west.

Assuming that that completes in the first quarter next year.

We would expect that aero reduction to be about 650 million. So.

Combined between the two major asset sales, we'd see or two and a half billion dollar reduction that's about 30% of our balance.

Oh Wow, okay. Okay. That's all I had thank you.

Thank you. Our next question comes from Roger read from Wells Fargo. Please go ahead. Your line is open.

Yeah. Good morning. Thanks.

I was just curious.

During the winter program is already pretty sad.

Just kind of curious about an update there what we may look for in coming months.

Yeah, Hi, Roger This is Michael we're gearing up for our winter drilling program now in fact this upcoming winter program will be our largest ever I will drill wells that at Willow, what narwahl in Harpoon and we're looking forward to sharing the details of that program at our meeting in November .

However, there's really nothing further to share at this point.

All right I'll leave it there thanks.

Thank you. Our next question comes from Paul Cheng from Scotia, Howard Weil. Please go ahead. Your line is open.

Hey, guys good morning.

Matt just given stat on Monday, I think you guys at Pollo cutting on the condensate window, what stay apiay, you're targeting because one of the push back we had some people is that.

Yeah, I did that people actually want to happen <unk> condensate, so that they use less off the quite nice space when they blended with the bitumen.

So from that standpoint, I mean that the wide that you guys thing that yeah, Youre condensate you get from there given that they send <unk> do we have a good market.

Yeah. Thanks, Paul This is Michael again.

The.

Our liquids in mountain is about half of our product mix at about two thirds of our revenue mix about over half of that is condensate and it's a it's a fairly light condensate. It's about 40 degrees, it's not linked to physically with our surmont asset will sell a the condensate into the market in for.

That.

We're in the process of of just waiting on the third party pipeline to start up our gas plant probably early next year and so we'll start to see production results from this first pad that will bring online at that time, so the condensate and other products will all be sold into the market in Canada, which which is at.

Actually up a pretty strong market in terms of condensate.

Michael I'm, sorry, we say, what's his day people you know condensate.

Yeah. It's it's it's around it's it's in the 40 degree range plus or minus.

40.

Okay, that's seems pretty low.

Okay. Thank you.

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Thank you. Our next question comes from Paul Sankey from Mizuho Securities USA. Please go ahead. Your line is open.

Thank you hi, all we had.

Question about the maintenance capital levels that will be ongoing off because of disposals. He made Matt.

We wanted just to know what the impact to on spending on an ongoing basis from the disposal well if I could follow up on the M&A seem could you talk a little bit about 300 million of.

Opportunistic add ons living equal them what are the what are the parameters for those deals do we assume that the parameters that you're using that would be similarly applied to a bigger deal. If you made with thank you.

Yeah. They thanks, Paul the a maintenance capital them.

Yeah, I assume you're referring to the sustaining capital number that yeah, exactly those things where she was good.

Yeah, no that's the that's things to the sort of interchangeable but the.

Yeah, that's around $3.8 billion and a and that continues here, but I do in fact it continues through the next decade when they talk about some in the in a few weeks and so there's no no significant change there. There's some puts and takes with the acquisitions and growth in the unconventionals, but it stays around a 3.8 billion than that keeps or.

Oh sustaining price, which is what we're really focused on my well below $40 battle.

The won the emanate from the.

Really.

It really to the $300 million spent this year and acquisition capital.

So EM so those would those were adding physicians in Alaska and they did the new not trends. This new closed in the lower 48 am I doing and for the most part royalty acreage within or existing operating positions and some smaller additions in the Montney continue to continue calling up there.

And then the entrance into the Bakken, we typically in Argentina.

There's nothing new in this quarter from in that respect, but the you you asked where they so decision criteria.

When we whom we're thinking about lose its it basically refocus the as we on all of her council investments on the cost of supply.

So we have to be able to see the the acquisition price plus the development cost of supply in aggregate being competitive with other sources of resource additions and again, that's something that we'll talk more about in the in November just.

Philosophically, how do we think about all of that in the context of asset or corporate.

Positions.

Thank you. Our next question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

Hi, good afternoon, everyone.

And so my question, Hi, Hello, I'm in terms of Alaska and I think this question qualifies because it's on recently.

Do you see anything changing from an operating perspective now that you haven't you partner with BP exiting and have you had maybe any early conversations and could there be some upside there and I guess, what we're getting out authorized because we've noticed that you spent almost all of stuff will your budget in Alaska already.

Yeah Jeanine this is Michael again.

So with the with the transition from Hilcorp, sorry from BP to Hilcorp, it's still early stages. So the a we're still pending the successful close or that transaction, but hilcorp does have a track record.

In Alaska rejuvenated mature fields.

They've reduced lifting costs they've increased development activity in increased production in these other fields and so we expect to see a reduction in operating cost and a renewed and every new for every new focus on investment.

You know any capital plans for crude obey require the approval of Hilcorp axon and Conoco Phillips and so while we work very closely today.

With BP as the operator, we'll continue to work closely with Hilcorp as they come in and axon to maximize the value of this legacy assets. So we're excited our for this transaction, we see opportunity to unlock more value accrued obey.

Okay interesting will stay tune. Thank you very much.

Thank you. Our next question comes from Bob Brackett Bernstein Research. Please go ahead. Your line is open.

Another Alaska related question, if we think about the fair share Act ballot initiative can you talk about that and perhaps put it in the context over the longer term ebb and flow of tax policy up on the north slope.

Yeah. Thanks, Bob This is Michael again, its a situation that we're monitoring very closely you know I'd say this initiative is not in the best long term interest of the Alaskan citizens. We believe the Alaskan citizens will see the benefit that the north slope exploration Renaissance is already brought.

To the state and to its citizens. If you look at the positive changes that have occurred since SP 21 went into effect in 2013, Conoco Phillips and others have announced several additional discoveries and projects that could add significant incremental production in revenue to the state and so we.

We believe that continuing those investments is good for employment, it's good for the Alaskan economy and it's good for the Alaskan citizens and so that's for both now and over the long term and so we feel like it's it's also worth noting.

At this sort of initiative has come up in the past and we've successfully informed voters are the negative consequences of jobs production and long term revenue I'm the impact of those sort of initiatives have on the benefits of the benefits of the citizens real would see so we do have a long history of engagement with the public.

We feel that Theres, a mutually beneficial relationship with the stakeholders and in short so it's very much on our radar and something we're monitoring quite closely and we do expect in fact, we're gearing up now to make our case to the citizens about the benefits of continuing under the fiscal regime that we currently have.

Great Thanks for that.

Thank you. Our next question comes from Jeoffrey Lambujon from Tudor Pickering Holt. Please go ahead, Sir your line is open.

Good morning. My question is just on capital allocation for the remainder of this year just thinking about the unchanged budget. When a thought there may have been some downside potential in spending just given that you pay close so just looking for any color on where that on spend capex might be allocated to instead for the remainder of the year.

Yeah and that the this is not just the.

So so far this year a run rate has been about 1.6 billion a quarter and that's going to draw up $500 million into the fourth quarter part of it because of the UK disposition, but also just general phasing primarily associated with completions in re fracs and exploration timing.

And the a and it's just that the those men modus. So plan changes that causes to go from a run rate of 1.6 to 1.5.

Thank you.

Thank you. Our next question comes from Michael Hall from Heikkinen Energy. Please go ahead. Your line is open.

Thank you good morning, I appreciate the time, I guess, maybe going back up the Canada or Ah to Alaska, sorry, Yeah.

Can you hear to provide a an exit rate.

One of the lack of production look like after the turnaround.

Yeah, we're we're producing in around the two tended to 20000 barrels a day at this point.

Great.

That's helpful and then on the the Canadian gas plant can you just remind me what the then that capacity on that is to ER to those operation to you.

Yeah. The capacity is about 100 million cubic feet a day one of the benefits that we have at the plant that we've designed here is we can design one and build many so as we're in this appraisal mode and we ramp up to different stair steps of production levels will be able to close this plant multiple times over.

Thank you. Our next question comes from Pablo Mall, China from Raymond James. Please go ahead. Your line is open.

Thanks for taking the question first just a quick one about high gas pricing you mentioned, the lack of fac benefiting our LNG in the quarter by in your European gas pricing.

Why is the lowest odd number.

As far as I can remember on record lower than in 2016, even I'm curious why why north sea gas lets so depressed in.

The September quarter.

Yes.

Hey, Paul This is a this is gone.

All of the markers were down during the third quarter from a from brand to W. T. I M and ER Henry hub of course here and in.

The U.S. eco international gas in Europe .

LNG of course is is quite different is priced differently Oh, that's why we saw the increased realizations and are in the third quarter.

But no that's just the supply and demand a factor in Europe , there's oh weakness in a in a market or there was in the third quarter and it continues in the fourth.

Okay understood that my my follow up a little more thematic or if I may.

Indoor sale of Australia, where did you consider.

Including LNG as part of that same transaction is simply exit Australia altogether.

And that this is not the travel and though this was this was focused on the.

The cash flow characteristics and maybe you asked in the a and the nature of that asset to the stage of the lifecycle.

And it wasn't that we didn't consider an exit of his feel yet.

In the sometimes it.

Thank you we have a question from Douglas <unk> from Bank of America Merrill Lynch. Please go ahead. Your line is open.

[noise] I know I asked my one question nobody nothing nothing mistake I can ask another one if you like [laughter] two feet Doug.

Oh, well have you guys. The I actually doesn't line up another question I feel quite bars, but had some of the one written down I'm just on your cost guidance I'm expecting that to come up next week, but because the cost what they've been running about like this year I'm just wondering if there's anything.

But we should and we didnt it or are you are you doing a lot better on both operating costs and I guess, you need about low as well, but pretty much on the cash costs.

Well I'm guessing that something youre addressing a couple of weeks, but any comments you can share, but and I'll I'll I'll extend my gratitude to the operator forgetting the second shot thanks.

[laughter].

So thanks for your second question, though.

No the operating costs to continue to hold the line in fact in third quarter. I think are production operating costs and S. S. DNA were down about 6% or so from the previous quarter I wouldn't read a whole lot of that into that you know some of it was we had a bit higher cost in the second quarter because of the turnaround activity and we.

I think a settlement of litigation thing that we settled so we see operating costs remained essentially flat you know for this year and so we're not adjusting the.

Full year production production operating cost guidance at this time and we can talk more about how we see that outlook I'm going forward next month, but we're continuing to be aggressive on on trying to keep a very efficient operating structure.

Thank you and at this time, we have no further questions I would like to turn the call back to Ellen.

Thank you said all right. Thank you to our listeners today, we look forward to see you in a few weeks I. Appreciate your time in interesting Conoco Phillips.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

In the.

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