Q2 2020 ConocoPhillips Earnings Call

July 30, 2020

[music].

Good morning, and welcome to the Q2 20 earnings call. My name is an era and I'll be the operator for today's call. At this time all participants are not listen only mode. Later, we'll conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your time.

Tone Cohen. Please note. This conference is being recorded I'll now turn the call over to Mr. Alan to thing to Ellen you may begin.

Thanks at our Hello to our listeners and welcome to our second quarter 2020 earnings call.

Today's speakers will be Ryan Lance, our chairman and CEO, John wallet, our SVP and Chief Financial Officer, and Matt Fox, Our SVP and Chief operating officer.

Hi, as many of you've noticed in conjunction with this mornings press release, we posted a short presentation deck, a supplementary material on the quarter.

Page two of that deck contains our cautionary statement, we will make some forward looking statements. During today's call actual results excuse me could differ due to the factors described on that slide as well as in our periodic SEC filings.

We'll also referred to some non-GAAP financial measures today and reconciliations to the nearest corresponding GAAP measure can be found in this mornings press release and also on our website and with that I'll turn the call over to Ryan.

Thank you all in and good morning to our listeners.

We're now at the midpoint of what has been nothing shy of them historic year for our industry and for the World I hope everyone on the call assays as well.

Since the pandemic and the industry downturn began in March Conoco Phillips is focused on three things.

Safely operating the business, including taking appropriate actions to help mitigate the spread of covert 19 and protect our workforce.

Our field and office personnel are successfully delivering the business plan Im very proud of our organization has stepped up in the face of this challenging time.

Next we're focused on executing thoughtful and prudent actions to create and preserve value by leveraging our relative strengths.

Third we're continuously monitoring the market developing scenarios and testing our current and future plans against those scenarios.

As a quick recap of our actions through the first half of the year.

We reduced 2020 capital spending by about 2.3 billion lowered our operating costs by roughly 600 million in suspended the share repurchase program.

In April is pricing deteriorated significantly we announced that we would begin voluntary production curtailments we.

We laid out a clear and compelling economic rationale for curtailments. We believe we were well positioned to carry them out because of our operational flexibility and our significant balance sheet strength.

We believe this is a preferable approach for us versus hedging because it allows us to retain full exposure to the recovery in prices.

Low realized prices and reduced volumes due to curtailments made for a tough headline second quarter earnings that mask the underlying strength for the company.

Here is how you should we read through the quarters results.

We came into the year with total liquidity of nearly 14 billion, including the 6 billion available under our revolver.

At mid year, we are sitting at about 13 billion. Despite the crash in prices with available cash and short term investments totaling roughly 7 billion.

If current prices hold for the rest of the year, we expect to the exit the year in a similar position.

Our cash position create significant optionality for navigating the downturn.

We can better withstand price volatility elect to take actions such as production curtailments.

And transact on high value LOE costs will supply bolt on deals like we announced in the Canadian Montney.

Our underlying business is performing very well again curtailments and dispositions mask the topline production numbers, but we have a very good handle on the base business.

While our previously announced capital and cost reductions have modestly impacted near term productive capacity, we believe our lower capital intensity and portfolio diversification represent a relative advantage compared to the competition, many of whom have much higher decline rates and weaker balance sheets.

So we're set up well during this time of uncertainty and volatility.

But just as importantly, we're very well positioned to benefit from the inevitable recovery in prices.

We have strong financial and productive capacity low capital intensity and run hedged this should benefit us significantly when prices eventually move in a more positive direction.

Importantly, we have choices on how to manage the recovery in a way that maximizes value for shareholders.

So as you'd expect were take were already looking ahead.

We are actively developing our views on the short and medium term outlook for both the path and the timing of recovery in prices.

Giving ongoing uncertainty you can appreciate there isn't a simple answer to what's next.

The or some other questions will be asking ourselves over the next weeks and months.

What should our capital program be in relation to expected cash flows and our balance sheet capacity.

To what extent might we choose to kick start cash flow expansion, if we see a recovery.

How much cash do we want to carry on the balance sheet.

What's the right way to think about stress testing our future.

When we do distribute cash above the dividend to shareholders and by what mechanism should we do that.

While it's too early to communicate a definitive plan for the next year and beyond you shouldn't expect a fundamental tenants of our value proposition to change.

We still strongly believe on our approach to the business invest to generate strong cash flows and financial returns. While also returning a significant portion of cash flows to shareholders and maintaining a strong balance sheet.

That's the business model, we've been following for nearly four years, we launched it coming out of a last downturn in 2016 and it positioned us well for this downturn.

We still believe it's the right model for the business and one we're uniquely positioned to execute as the environment recovers.

Now, let me turn the call over to Don to cover the key drivers in this quarter's results.

Thank you Ryan.

I'll begin by providing a summary of the key second quarter earnings drivers and then recap our curtailment activities before handing off to Matt for some outlook comments.

We provided some supplemental slides along with this mornings press release and they are available on our website.

If you refer to slide three and our materials I'll recap the quarter performance.

The earnings variance from the first quarter to the second quarter can be explained primarily by two drivers.

Realized prices fell 41%.

And production, excluding Libya was down 23% sequentially.

On the lower lower right side of the slide you can see the factors that cause realizations to decline from almost $39 a barrel equivalent in the first quarter to just over $23 a barrel in the second quarter.

Of this roughly $16 per barrel decrease about 70% was due to lower benchmark prices across all products.

25% by a significant downturn in differentials in the U.S., Canada and for LNG.

And the remainder was related to deficiency payments associated with unused transportation and our Canada business.

And as you are aware the primary driver of the reduction in second quarter volumes was protection production curtailments, which I'll cover now on slide four.

Recall the rationale for our curtailments decisions was that we can create value by foregoing short term CFO to realize better cash flows in the future.

We were not willing to sell our product for the prices on offer at the time.

We've estimated our curtailments for the quarter to approximately 225000 barrels of net oil equivalent per day.

Roughly 145000 BOE per day of that total was sourced from the lower 48, and you can see the breakout of the big Dthree unconventional fields.

We estimate Alaska at 40000, Surmont at 30000, and we had some minor curtailments in Malaysia.

And in Norway.

As we previously discussed our curtailment activity was based on a clear economic framework.

We view voluntary curtailments as an investment.

Meaning we're electing to forego current cash flows for what we believe will be more attractive futures CFO.

The average realized oil price for the areas, where we voluntarily deferred oil production in the second quarter was about $27 a barrel.

So we would expect to capture higher prices on these deferred barrels in the future.

And while we will not know the economic return on this investment for a while we can reasonably estimate the cash flow impact of our decision on this quarter's results.

As the slides shows assuming we had produced and sold these curtailed barrels at average realized prices for the quarter.

We estimate the curtailment decision represented about 250 million of cash from operations.

We believe this was a sound economic decision that at current strip prices would yield a return of greater than 20%.

Marker prices have increased from the second quarter lows and differentials have tightened as well.

As we announced in our recent operations update we're beginning to restore production in the areas, where we had actively curtailed during the second quarter.

Matt will describe third quarter plans in a moment.

But I'll summarize our actions with a few key takeaways.

We're taking deliberate sound.

Returns driven actions through the downturn.

Our focus is on preserving the productive Cape capacity of our company and maintaining a strong balance sheet.

Lastly, despite a challenging year so far we're in a very strong competitively advantaged financial position with a clear focus on value creation.

And with that I'll hand off to Matt.

Thanks, Don.

Dawns already clear to high level view, the second quarter production curtailments as shown in more detail on slide five and I'm going to briefly add some more color to lose actions.

So between the us in Canada, as we safely rather than production facilities, we show and lower than 2000 production wells.

1800, and the lower 48, 300, and Alaska and 100 in Canada.

We opportunistically sell to maintenance, we would like to download pressure measurements and sustained injection and the relevant fields to maximize flush production. It was a massive effort industries extremely rail by a lot pretty since then.

Also soon this chart anticipated sound quarter curtailments.

We're still making month by month decisions based on the criteria and we just state than me.

But at this time, we estimate Havertys curtailments of about 115000 barrels of oil equivalent per day roughly half the volume continued in the second quarter.

Production in Alaska as may be fully restored.

Ramping up the little fluffy over the next few months and at this point expect to be fully restored there sometime in September.

But also increase in production at Sunderland, but thats going to be a slower ramp due to planned turnaround in the third quarter.

And the precautionary decision to limit staffing in the field as a coolfit mitigation and that's going to lengthen the duration of the turnaround.

And also some main or non operated curtailments expected to continue in Malaysia, and though right.

The bottom line as except for Canada, We expect most of our curtailed volumes through back online by the end of third quarter.

Now when we announced a curtailment plans go look questions about operational risk so negative impacts from curtailments.

Our answer was that we didnt expect any negative impacts due to shut ins and thats being the case.

And does anticipate Ecova, Sam flush production in Alaska, and then we were 40 as we brought wells back online.

So now I'll take a few minutes pitlane some other operational items for the next three year.

In addition to curtailment activities in the third quarter with planned turnaround activity, primarily impacts Alaska that comparison, helping someone as a touched on a few minutes ago normally in Malaysia.

Actively.

We will reduce third quarter volumes by about 20000 barrels a day.

And the Montney effects development, Pat static pool back in February of next year.

Well 14 of the new males and they've been tied in the permanent facilities and production from pad one is ramping up.

We used completion designs develops and remove 43 fields, which as far as we know the biggest job's pumps in the montney today.

And the rails are performing in line with at or above expectations.

Montney production has no roughly 15000 barrels to be about half of that being liquids.

Tied to nine mill pad staffing flew back a week ago.

So we're very pleased when they walk reasons of unmet montney and encouraged by the end avail ourselves and we could see from or at least for tried to me it will be to the liquids as part of this please tell significant low cost to supply resource and that's what increases to expand that position through the recently announced bolt on acquisition from Kevin.

The transaction adds adjacent acreage to the east roughly doubling up position to almost 300000 acres with 100% working interest.

Unlike a current possession business sweet spot of the liquids rich when do have montney in fact, the liquids content is slightly higher than the unique to each.

On a combined pro forma basis, the montney Sturgis enclosed duck it doesn't battles would be with over 50% methods.

And the Gilats about those in development, where locations and over 1 billion barrels of resource.

And all in cost of supply, including the acquisition cost.

In the mid thirties pair battle in a double yutai basis.

We are very happy with this bolt on acquisition.

Moving next to the lower 48, we're currently running seven rigs.

Cool in the Eagle Ford tune, the bulk and one in the Permian.

We expect to maintain this level of rig activity for the remainder of the year.

Since me, we've had no frac spreads under contract.

We expect to add one or two crews in the Eagle Ford between now and the end of year.

And then given the changes that are capital plans to production curtailments and adjustments to some of other operating activity. We understand is difficult for years to calibrate our underlying production.

Because the environment still insensitive both had we're not yet for baking detailed guidance, but to give you a calibration point.

When adjusted for Curtailments, Libya and dispositions.

We expect twentytwenty to be about flat, but underlying training 19 production.

Now I'll turn the call back to Ryan for some closing comments.

Thanks, Matt and Don I'll close by summarizing the key messages I want you to take from the quarter.

Despite this year's low prices, we've retained our financial strength, including roughly seven day in and available cash and short term investments at mid year.

The underlying business is performing very well a big credit to our workforce.

The actions we've taken to date will only have a modest impact on our near term productive capacity.

Our lower capital intensity portfolio diversification and financial strength represent a relative advantage compared to the competition.

This gives us the ability to successfully navigate the environment from here, but.

We can better withstand price volatility, while maintaining exposure to higher prices.

So as we set our future plans you should expect us to remain committed to our successful value proposition. The maximizes shareholder returns and that we believe is the right one for the sector.

Now before I turn the call over to Kuni I wanted to recognize Dom whose retirement, we announced a couple of months ago. Many of you know done quite well and I appreciate everything he's done for the company over his 39 years of service I certainly do so Don we'll Miss you. We thank you and we wish you all the best in your retirement.

So that operator, we'll turn it over to acuity.

Thank you we will now begin the question answer session. If you have a question. Please press Star then one on your Touchtone phone.

Using a speaker phone you may need to pick up the handset first before passing the numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone waiting on standby for any question.

And our first question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.

Hi, Yes, so no and my congratulations to down to you will definitely be best and.

Are you seeing all the time Weve begun.

Thank you Phil.

I guess my first question I appreciate all the commentary navigate the provided on the third quarter and recognizing that youre not giving specific guidance here I guess I just wanted to clarify the moving pieces here. So obviously, we had the curtailment impact that's positive 110, we have the maintenance.

It would be a I think it's in 20.

D headway, but I wasn't sure went the second quarter maintenance was so is that does that number you gave.

The absolute or was that a delta quarter over quarter and Dan is there anything else, we should be thinking about in terms of moving pieces, such as perhaps base decline rates or anything like that thanks.

Yeah. Thanks, Phil the yes for the quarter that yes, 20000, and Thats the absolute number in the second quarter that was about 5000 barrels the dsos of 15000 Delta in the same CLO.

The and it's it's about 5000 barrels a day in Alaska.

Those seven in Canada, but those seven in any and.

And the leisure and the and there's a little bit in Norway. So thats the yet that's the split the.

The it was.

And the third quarter of 19 that was a bit more as about 40000 barrels a day.

And so so it's a bit less in the third quarter of 19.

No other significant movement. So obviously other than the turn of the Kim production, which will mostly be done in the platform.

So the.

As I answered your question.

It does okay. Thank you for that color.

Second question just a little.

Further out here how does how you suggest that we should think about.

The four key exit rate.

For the business and as you're looking out to 2021.

Brian you rattled off a bunch of things you're thinking about it but I guess im here today think of an environment like we're in today for the dollar that BTI.

How would you think roughly about Capex and you had the.

Any kind of revised view on what sustaining capex requirements would be for the company and door for the lower 48.

Yes, let me miserable.

Real quickly have been let let Matt chime in fill yet we're spending a lot of time thinking about what the trajectory of the recovery would look like in.

So the view that we see demand recovering in some cases supply restraints. So we do see some recovery in prices as we go into 2021 and that's what we're kind of building in current plans, but as I've said before were in over we're kind of in the middle of that process right now and yet I mean, if we saw the case where.

You suggest where prices remain in the low fortys, where they're at today I think we would act differently than if we saw some some ramp up or some improvement in the in the demand, causing a prices to be a bit more constructive next year. So we're in the process. So trying to understand that today would have a different answer if we.

So wrapping prices, which we think is a base case versus something it's flat relative to today and then I can let Matt chime in on some sustaining capex numbers in the.

Exit rate question that you had.

Yes, so on the and exit to exit the.

Say that we expect 2020 production could be roughly the same is taking 19 on an apples to apples basis.

And production the in the first and second quarter. This year was a bit higher than the first and then than in last year.

So it's going to be a bit lower in the second half again, the a and they end up with that balance right now from a fourth quarter, who are quotas basis, we the state rates to be somewhere between six and 8% lower in the fourth quarter between your training than in 2019.

Yes. So that's the that's a rough southern cadence there has to have you seen machine because they feel fine in terms of the sustaining capital and it hasn't changed is still about $3.8 billion a year.

No I haven't flat production from 19 training and shouldn't be taken with a current capital program between 20 to be an indication of sustaining capital the because when I'm trying to sustain production in this price and volume and booking still contracting activities and shut in production.

And they still the case, if we wanted to design the capital program to sustain production is about $2.8 billion senior.

Thank you Sir our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.

Good morning, Good morning, guys. The first that question I had with just around price realizations in the quarter.

They were softer than what we had anticipated.

A function of differentials in the role in the curve that we pointed to be more onetime in nature or was there anything in there that you would think of carrying forward.

Well Neil this is Don Yeah, we would be hopeful that it would be a turn out to be onetime in nature. I mean, that's going to obviously depend on what the future holes, but we have seen you know certainly seeing some improvements as we went through the second quarter.

April and May were pretty tough I think we talked about this may be in late April, but what we were seeing physically in the field as far as differentials was quite a bit different from what everyone. We're seeing you know on the screens.

So but that situation did.

Materially improve as we got into June and certainly has held up in July as far as the the.

The real differentials that we're seeing netbacks at the lease so.

And even into we're in the trademark.

We finished the trade month of August so.

Looking like it's holding up reasonably well for most of the second.

The next quarter the third quarter.

You know Alaska realizations were were pretty weak of I mean, everybody is familiar with the the PADD five west coast demand situation with very very low refinery refinery utilization rates there.

And you know just to give you.

A point of reference.

In the first quarter, let's just talk brand because we've talked WT IR brand, but on a Brent basis, we were able to capture 97% of the Brent marker price in the first quarter.

As a realization and in the second quarter, we were only able to capture 86%.

So quite a difference quarter on quarter and now what we're seeing in third quarter is more of a return to normal and we hope that it will stay there, but we did see significantly lower realizations relative to the marker.

In Alaska, We also saw him in the lower 48, particularly in the Bakken in the Permian.

Thank you and I do want to extend my gratitude down as well and wish you well I in your retirement.

The follow up question, it's the kind of a two parter here when we think about pushback, we get on conoco that the too.

Areas of focus continued to be from a strategic standpoint continue to be one risk around consolidation in M&A, and then to risk around Alaska, but from a federal lands perspective, but also on the ballot initiative. So Brian if you take that to head on we would appreciate it.

Yeah no. Thanks, Thanks, Bill Yeah, I think the the M&A you know I think we tried to describe in probably.

Now gating detail in November you know kind of how we're thinking about the business. The how we think about cost of supply both from a all in.

You know looking perspective.

And from you know what the acquisition cost needs to include and what the ongoing development needs to be competitive for capital inside the portfolio again, we've got 15 billion barrel resource base, whose average cost of supply is no in the 30. So you know what it has to fit our financial framework as to be accretive to the business. So we're patient or persistent.

We're watching the market every day, we're looking at both asset deals were looking at corporate deals. We look we looking across the board, but you know and I think we're encouraged today you know when do you see that Chevron notable deal and that kind of premium that.

Chevron eight for that I think is encouraging because you know market changing or a large premiums over the past couple of years just don't work in this business going forward. So we're certainly encouraged by what both by what we see there because I think that's that's going to help drive some of the actions as necessary.

Sorry.

In the market today to take some of the gene a out of the business. So yeah. We're watching we're looking at both assets and the other kinds of deals, but it's got to fit the framework that we described out there in November.

On the federal acreage in Alaska the balance to.

The ballot initiative is coming up for vote in November.

We're working on that pretty hard I think the citizens of Alaska recognize this is not a time to be raising taxes on the industry and over the long term, it's going to just create more of a problem for them, it's going to its going to represent and result in lower investment and a slowing down of activity across the whole north slope not just maybe.

What we're doing but what other people are doing as well so it's bad policy in bad fiscal policy.

For for the state and it's a bad way to legislate through the initiative.

Process.

The federal acreage up in Alaska is probably a little bit different most of the state acreage that Ron the big fields around the state the federal acreage is out in NPR, a where we're operating in the alpine that Willow discovery and what we're doing out out west and no. Despite all the rhetoric, we hear from the politicians you know there our view out there.

There is it's a it's pretty safe we've leased up we've leased up what we think is the prospective acreage already out there. So that becomes a question do the if you are successful explore and you go into a development mode does that get drug out through the permit process and while we've been doing this for 50 years.

We're all forms of different administration Democrats and Republicans those that has said they wanted to shut the business down and those are under accelerated we still managed to get our projects done because we do have responsibility, we do it sustainably and we follow the process. So we're not not too concerned if it.

As a year delay to something that's well manageable within our global portfolio.

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

Good morning, everybody and Don Congratulations to you and we to appreciate you and all the help over the years.

Morning, Doug Thank you.

And so so first Ron your choice to reduce sales volumes, maybe all's choice when prices and.

Differentials went to record low levels in second quarter looks like a pretty astute economic decision.

And on this point <unk> my questions regard a few of your high level commented, specifically you talked little bit about negligible production degradation. So can you just kinda give us.

Some evidence as to why you feel so Sean that's likely to be the case for Conoco Phillips and then second with many of your BMP peers, having higher shale exposure and also weaker financial flexibility. After this most recent opex salvo. It seems like your normalized production levels should be stay.

Longer versus peers in the future simply so just wanted to get any additional color that you had on those comments that you might have.

Yeah. Thanks, Doug I can let me start Matt may want to add a few comments as well, but yeah. So the we have talked and I think that fit in his prepared comments. We see some you know we do we don't expect to have any issues with returning to shut in production and then that's what we've seen so we've started the process we curtailed 225.

5000 barrels in the second quarter, Matt described what the third quarter as during the process of bringing on some of that production in Alaska in the lower 48, Alaska is Matt described as the it's not curtailed any longer and we've actually seen returned to production we've seen flush production and a in fact I don't think Matt.

Can provide some color I don't think we've seen some of the issues that we even might have expected in terms of bringing that production. So we feel very confident that.

We're not only going to come back we're going to see the flush production and the economic analysis that Don described even just looking at the forward curve delivering something in excess of a 20% return we feel pretty confident that that's the kind of.

Profitable economic decision that we made through the course of the the curtailment discussion that we've had.

Then finally on shelf, but yeah. We do believe were competitively competitively advantaged. We believe we have a lower decline rate we're not completely.

Reliant on the shale the shell will have a higher decline rate coming out of the a reduced capex and some other curtailments that people have described not only for us, but the industry in general, but given our financial flexibility to strength of the balance sheet that we have and that experience that we gained from this.

Yeah, we think we're in a in a in a very competitive position and we've got the financial strength to respond.

So.

Okay. Thanks, a lot guys.

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

Yes. Thank you good morning, and Don Congratulations.

Okay, Great retirement God lease from calls like this but thank you for everything over the last several years.

Yeah, He's smiling he's smiling Roger from appreciate Roger Thank you [laughter].

Just too to flip back to kind of the M&A. Thank you had the Celtic acquisition, you announced just a couple of weeks ago.

$400 million nice bolt on type transaction I was curious to know how that compared maybe just some of the other things you're looking at I mean, you mentioned the noble transaction I assume thats, probably a little bigger than you want to take on at this point not to mention the offshore part of it but as you look at kind of the opportunity suite that's out there.

How did you compare.

Hello, and that acquisition at this time as opposed to something.

Lower 48 or elsewhere.

Yeah, I think what we're seeing Roger probably is a you know there's there's companies out there that are distressed and those that have either a singular assets or even a bit more of a diversified portfolio. We're looking at potentially trying to transact to bolster their financial condition in their balance sheet. So we see.

We see some interesting asset deals and we see some you know smaller other kind of corporate deals that are kind of interesting, but I think we're looking at it you know pure and simple lot on the financial framework, we we outlined in November and it's on an all in cost of supply.

And we did we identified this acreage you know even a year or two ago.

It wasn't a it wasn't until they were motivated to sell at a at a price that we were willing to pay that we actually transacted with them. So again were pretty patient and persistent and they just got it has to fit our financial framework, our cost of supply framework that weve.

Outlined incredible detail to you guys for the last five or six years and and that's what we're sticking to that's got to be competitive in that regard then it will attract capital within our portfolio as long as it meets that criteria.

So is it fair to say that sellers are a little more motivated than they have that.

Some certainly our yes.

Okay.

And then just than it did change directions little there with your second question, we've seen some S&P companies start talking about on a minimum price for oil before they would.

We started some of their drilling programs as you think about managing the decline rates completing the wells that were deferred earlier this year as everybody shutdown drilling and a 3.8 billion of kind of sustaining capex is they're up.

Oil price to lever, we should pay attention to our marker. They probably makes you more likely to drill or what is it that you probably need to see just feel more confident as you think about that 20 wanting 22 plans.

Yeah, Roger I may take that this is Matt the and.

I wouldn't say, there's a specific tigger I mean, they it's very clear than the curtailment discussion.

There was an economics and try TV and easy to see prices and the and the keys that it made more sense and then certainly below that to be a fitting the production and bringing on later this a similar several of the and economic calculation for adding new production as well.

I mean, that's one of the reasons of course is we've been good concealing production of course, and then completing and bringing on new with any new balance that would not made an economic sense. So did the criteria for bringing on new production as long as a cost of supplies Luna.

And I know Anderson and if in a portfolio that we're developing is below $40 coastal supply so as long as opposed to supply is little or nothing we would use a similar so criteria for bringing on new production as a bit for consumers.

So if you look at the district today.

They that that would suggest that there are four wheel is it's okay to bring on new production into that strip.

If necessary.

And I think I'd add Roger we're you know that that's one are starting to balance all the.

The next years, how do we think about the the price the cash flows where where the balance sheet stands today as we try to balance all those are competing a competing things for the cash flow that we generate based on the price. So I think thats right, we're not afraid to be we're convinced that.

World deliver a competitive and a good RFC and a good return on the capital investments given the cost supply that we're investing and we just need to now balance that against our expectations for cash flow and though in the balance sheet.

Thank you. Our next question comes from Dr. Lucky from Bank of America. Please go ahead. Your line is open.

Thank you.

Good afternoon, everyone. Good morning.

Don can add my congratulations as well, but maybe spend a little differently. Thank you for putting off with all of us for the last.

Bunch of years since almost always been easy, but good luck with everything.

It's been a pleasure thanks.

With that high.

Right.

I'm going to kick off question forgive me for being a little controversial here.

You've expressed some confidence in our commodity recovery ethanol cost too strong of tower.

But you've got smaller appeared as you mentioned mobile specifically this seems to be less confident to the point of selling out one with argue off the bottom.

When you think about title the M&A landscape has changed what the strategic goals offer Conoco Phillips my controversial, but as mobile fold a process that you would kind of.

If not why now on this not one of the kinds of things that Conoco Phillips to lease with federal quote unquote gaps in your portfolio.

Well, we did look Doug and I think it's I think a fair fair question I think when we look at it we think about the match in our portfolio bit concerned about I mean, the Jim is certainly the middle eastern gas position.

And.

With with some of the other things we're doing in the middle East that creates maybe a little bit of a little bit of an issue and problems with us politically and then the second big piece of the normal portfolios, the Colorado and we just got done painfully ex exiting call, Colorado and not wanting to go back and obviously.

Then being in Weld County offers maybe a little different perspective on Colorado, but I would just say we thought there Ah.

Pretty fair fairly valued for even a commodity price recovery and not to not a great fit in our portfolio.

So so if I may just pushing thank you for the answer but let me just push a little bit more so long life low decline.

Growth potential offsets it seems to be a great clinical is what are you looking for us when you look at the M&A landscape are you more concern for example assault so sometimes OS.

About inventories actually get unconventional portfolio when do you see the gaps if you like strategic gaps.

Well I don't think were too worried about inventory gap in our unconventional portfolio and I think the recent Kelk acquisition, just add some even much more long dated.

Position there so again it sits quality over quantity and we're just in its cost of supply. So we're firmly focused on that in the unconventional space. Just like we are elsewhere in your low cost your low decline long life assets that would describe another train and cutter wouldn't it.

Yes, yes, it was well look I know my what my follow on question as this take advantage of dawn still being here Dawn.

The so-called ends up almost 10% this morning that something supplies a lot of people. It seems that were very wide range of estimates on the I'm not sure what exactly that was behind us, but I wonder if you could just walk us through some of the noncash moving parts I'm thinking specifically about how do you you money CD.

Anyway. So some of the other maybe core pricing is released its in market moves and so on just to kind of clean off what what's the difference between the earnings and the cash flow down because a lot of this quarter and I'll leave it there. Thanks again for the health of the costs.

Yeah. Thank you. Thank you Doug.

Yeah. The difference between the course, you know there was a wide range on earnings estimates as you would expect because it was quite a volatile quarter in.

In addition, we did not provide any guidance. So I don't know that we were completely surprised there.

But we can I can point to a number of things that we would think that it would be very difficult for folks outside the company to estimate I guess, the first and probably the most important or significant was the what I talked about before with the lower realizations now that was a cash items.

Noncash item, but.

We think that those I mentioned, some some figures as far as our percentage of market capture versus prior quarters in historic quarters, and we think that that was probably somewhere around 15%.

Per share impact and hopefully as I mentioned before a temporary impact.

You mentioned DNA and that was another factor that.

Probably was not expected of course, our DNA fill a reduced considerably during the quarter as you would expect with the lower production, but our DNA rate did go up a couple of dollars per per BOE. We.

And that was a result of an adjustment that we made to the rate in anticipation of declining reserves due to the lower price that we've seen now you know some companies wait until the end of the year to adjust 30 day to day rate and to revise their reserves.

We look at it periodically through the year. So we will do interim updates you've seen us do before we did it in 2016.

As reserves were going down and then we went the other direction in 2017 18 as a prices improved and reserves came back on the books and so perhaps that will be the situation here, but oh, we did make an interim adjustment in the second quarter that caused the DNA rate to go.

Go up.

That wasn't the only thing that caused the DNA ready to go up we also had some impacts from our curtailment decisions. You know we were we had an unusual product mix I guess, you know I would say during the second quarter with.

Low lower 48 low Alaska.

Volumes and so you'll see that a product mix had an impact on the rate as well.

And the third most important.

Area that may not have been anticipated I wouldn't think that it is something that you would normally track is the the mark to market movements as the stock market rebounded pretty significantly from the end of the first quarter to the end of the second quarter and Conoco Phillips stock as well.

Dan.

We saw an adverse cost impact of I think it was around 50 million pretax just on the mark to market compensation and benefits issues. Now you know from the ended the fourth quarter or to the ended the first quarter and booked recognized in the first quarter. We saw the the opposite we saw.

A cost benefit when you saw SGN eggo negative and we had I think it was about a 90 million dollar pretax of.

Impact on Mark to market as the stock market went down in this conoco Phillips stock price went down. So those are the three main items that I would point to that we'd be difficult I think to estimate outside the company.

Thank you. Our next question comes from Scott Hanold from RBC. Please go ahead. Your line is open.

Thanks, and done congrats as well just a question Ryan you'd made a comment a it gets in your prepared remarks about taking a look at <unk> guidance for the next year and moving forward.

The Big picture it sounds like your core tenets of your strategy have not changed from what you.

Discussed over the last several years and in most recently I guess that the November analyst day, but.

Should we think about like conical coming up and in sort of recasting what we some of what we heard in terms of like high level operations on how you approach your growth strategy over the next several years considering what has happened over the last you know last several months then are you guys, becoming a little bit more conservative because what of what we saw.

Yeah Scott.

Yeah, I think will I think once we get through all of the noise associated with the curtailments you know, we'll we'll we'll we'll be talking little bit differently about guidance as we go forward. We just had a lot of uncertainty is we came into the second quarter and then as we are working our plans and testing.

Our scenarios against what we see.

Recovery or what kind of recovery it looks like in terms of timing and quantity then we'll be well come to the marketable will tell you what our plans are as we look forward. Both in the 21, you know and points forward and beyond that but I think you know we've got the portfolio, we've got a car a huge.

Large resource base of low cost to supply investment opportunities you should expect us to get back onto that you know a modest growth trajectory similar to what we described back and back in November and we've got the assets and we've got the portfolio to go do that you know I think the questions in front of us are what.

Kind of recovery are we seeing in the in the market. If you need to maybe some of the other people to think it's going to be flat forever I do we don't have that kind of a view we do see recovery, we do have a view of mid cycle prices.

With some demand recovery and and then a lot of questions around what the NPV sector in the industry is going to do or they're going to follow follow a rational or irrational way to investor not going forward or they're going to repair balance sheets are they going to put you know a decent return back to the shareholders, which is a value proposition.

We believe is the right one for the industry. So I think there are a lot of moving parts, but we feel pretty confident in in our plans and being able to to grow grow the company. If that's the right decision from a returns perspective, both to the shareholder returns of capital and returns on our capital.

Okay I appreciate the color and look forward and some of that detail. It is a follow up and this may be a the dominant in mad question, but what we've seen from some of the more pure play type of companies. So far our operating costs that have dramatically dropped a in the second quarter obviously no.

Not all that sustainable, but you know the views a good portion has it doesn't seem like Twoq you that conoco saw that same drop is there a little bit of a mix shift does it have to do with the type of production that conical curtailed versus others. If you could give us a little bit of color there and I'm not sure. If you can quantify some of that.

Scott This is Don I'll try that I think that I caught the question being on a quarter that our unit cost rates didn't fall as much as you might have excess or didnt fall like competitors did and I.

I'm just going to speculate on that because I don't know.

Exactly because I haven't looked at the competitors numbers.

But I would I was I would.

Surmise that a lot of it has to do with our production plan in the second quarter and our decisions around curtailment and if you look at.

The other areas, where we did curtail for example pretty heavily in the in the Eagle Ford.

In our lifting costs in the Eagle Ford is like couple of dollars.

Barrels. So you know you look at our Unconventionals. These are high cash flowing.

Typically very low.

Operating cost per BOE, we type feels and so with that production offline, we're not going to see the benefits of of that.

I will say beyond the second quarter looking back in recent history Conoco Phillips is always benchmark very competitively.

On operating efficiency and.

You know as far as this year, we do benchmark against or keep track of.

Say the top 20 companies that we compete with and you know the range of operating cost reductions. It looks like it's been from you know a low of 3% from one company up to a around 15%, maybe a little bit higher by one company.

We announced a very early in the year that we were reduced by 10%. So I think.

I would expect that we've retained our competitiveness on operating efficiency.

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

Hi, good afternoon, everyone.

Hello.

Hi, good afternoon. Thank you have any on.

Hi, Yes follow up on Neal's earlier question on last so Lucky risk and then lastly, I believe you mentioned that you already know all the acreage that you're interested in but I'm not sure hotly said on establishing the permit and specifically do you already have state and federal permits for Willow.

Thank you receive those are all permits how insulate. It do you think the project would be if there was some kind of potential change in the oil and gasoline and freight environment on federal land.

Well I ER so for Willow specific to your question. We're in the process right now and we expect to get all the federal permits. A later later this year. So everything's on track all the comments the we're in the process on the record of decisions. So we don't expect a it this 10 fat.

And so we don't expect any issues associated with the the permitting process for Willow and some of the other things that were doing on the north slope.

I'm not sure I'd Ginnie I'm not sure I got your last part what.

Could you rephrase that for me the he said something about what would the citizens say two different permitting Oh. The I think you I think you ask you to in terms of having.

If you think that might be insulate. It was the second part of your question, Okay, I guess and on the follow up would be.

Yes, there is some kind of issue that would affect your development and either in Alaska Federal furlough or elsewhere can you talk about what's the most likely alternatives would be to backfill those gross either say Hey, you mentioned the higher project are still very interested in maybe can you just run through a couple more that you think might be higher.

So whether.

Potential risks.

Hi, factored in here. Thank you for definition. Thank you.

Jinyan. This a this is Matt so maybe take that so a little in particular that was apparent the answer we don't anticipate blend as to where one week just to leave the projects until that was resulting in that had to do that in the past in Alaska and they wouldn't necessarily reallocating that capital of the thing because we we.

If we hit back towards the that capital piece that we had been.

For the Oh, they called it crisis, there is no advantage and accelerate so we probably would just the then wheat and there were still as rain sort of alluded to earlier than that coal, but we're still interested in the north slope expensive that they know field expansion.

Opportunity and but I suppose as though when it's close to the through the rest of this year.

The intends to federal land in the U.S. other than in Alaska. The most of the federal land. We have me. This is a is in new Mexico and the but look we this was a topical question several months ago in its becoming topical again and that the team I think we did for Vega and and so that as we look.

Our 10 year plan at the time.

If we were unable to Joe on federal lands completely in new Mexico, I could just substitute that with loan federal lands for the next 10 years. So we would just new drilling.

Two different locations this not affected by that so the short version of the is it any constraints on their ability to to develop and federal lands in the U.S. will not be a significant issue for the company.

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

Thank you good morning.

On that let me add my congratulations really appreciate a half over I think yes, we have fun.

I also say timeline, how people you don't get to combat the falling in the beach or not in the Gulf caused you to down for that.

Thanks, Paul anyway that a couple of questions.

First.

Why it can you.

Maybe help me understand that being a big in terms of your thought process.

Got the signing for next year Capex.

Okay do you plan to run that position, that's going to be free cash flow positive.

What that neutral free cash flow or what that you will be willing to have a cash both deficit.

On.

After capex and different than what makes you and also in addition to the point signal, yes. That's the most important dry docking decision or that this is actually a second we and most important new way looked at the activity mine supply bonds and big inventory. So we're trying to understand that how you're going through that process.

Well I think.

As we try to answer to your question Paul has to be determined.

I don't think we've you know we want we want to watch or as I said in my opening comments not only the under the direction of the recovery of the magnitude that recovery as it goes back to what we believe will be you don't mid cycle price over the long haul. So we're trying to balance all those things we're trying to consider what will be our free cash flow.

And that's going to be a function of obviously of the pricing the supply demand fundamentals that drive that and then are you know what our Capex program is gonna be to get the productive capacity. The company, we ramped up to where we were pre pre kobe level, but we're also considering what what the balance sheet needs to look like what the cash on the balance sheet needs to be and.

Think about a potential scenarios around a slower recovery and you know slower kind of price movement, and and either worst demand fundamentals, our excess supply fundamentals, depending which side of the equation that you're on so I know, it's not a very satisfying answer, but we're putting all that into the pot mixing it around.

And then are trying to understand and we'll have more to say about that is the is the year come a year follows through it as we get closer to 2021, but that's what we're trying to those are the but that's why I wanted to establish those kind of questions were asking ourselves, which I think all of industry is asking itself, but it is rooted in the fundamentals of supply and demand.

And understanding what the price trajectory is going to going to look like as we go into that next year and beyond.

Thank you. Our next question comes from Ryan Todd Simmons Energy. Please go ahead. Your line is open.

Great. Thanks, then I'll add my congratulations on its its been a pleasure over the years.

Maybe a one one follow up on on the curtailed lower 48 volumes as you talked about the restoration into September is that.

Is the timing I just based on on production nominations. The based on the current oil price or does it depends on further recovery between now and then unpriced.

And is there any as we think about the timeline on that redemption is there anything that could cause that to press for there to the right.

Okay.

Yeah I mean.

Uh huh.

The conjoined take that go ahead.

All right I think.

You know, we got to netback pricing.

A little while ago to where we were comfortable starting to restore production.

You know saw that happen.

And our plans for August and are increasing a little bit more in a in September as well.

We just got to the point, where you know the netback pricing was was high enough to work Retailmenot economics just work.

Going to it looked like it was going to deliver the the 20% plus type of returns that we were expecting so so we decided to come up with a ramp up plan, but you know rather than just a you know go from a 20% of capacity in July 200% in August we decided to spread that out over a few months and.

And watch the market and.

Frankly, we were kind of.

Expecting then we still expecting that there could be a pullback somewhere along the way and so if there is then what are what we showed you this morning and whats in the and the materials that we posted is our current plan.

Based on our current outlook if things change significantly then we may change as well so we will be responsive to the market and and you know if the market returns back to very poor netbacks like like they were in April and May then well adjust our plan accordingly.

Alright, Thanks, Don and then maybe.

One follow up Brian in your in your prepared remarks at the start your your comments seem to suggest some debate on the proper mechanism returning cash to shareholders above the current dividend has your view on this changed at all in recent months and what other mechanisms are you looking out beyond a share buyback.

Well, our you know I think we've.

I think we've had this conversation probably with most people on the phone over the course, the last two or three years as we look at kind of the optimum way to return.

Money back to the shareholders would obviously today in the current environment that we're dealing in the the ordinary dividend that we're providing as well in excess of 30% of our cash flow. So satisfy some of our you know the markers that we sat down with respect to our value proposition.

So as we think about price recovery and in incremental cash flows coming we are thinking about what what is the optimum are the best way to return money back to the shareholder and that obviously share buyback is one of those options that were like looking at as a as well as some sort of variable dividend type of structure. It's a conversation we've had with.

I think the by the sell side for a for a number of years now we continue to analyze the continue to think about it trying to figure out the the best way, but a large part of that's informed about you know what the trajectory is what the current recovery looks like and ultimately what the mid cycle price. We think is gonna be a in the marketplace. So a lot of that we have put together, but our thing.

Talking about all those all those kinds of alternatives.

Thank you we have no further questions at this time.

Let's turn the call back over to Miss LNG. Thanks.

Thank you then our that wraps things that for at the top of the hour appreciate Everybodys time and interest this morning and.

By all means reach out if you have any follow up questions. Thank you everybody in stay safe.

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

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Good morning, and welcome to the Q2 20 <unk> earnings call. My name is an era and I'll be the operator for today's call.

Hi, all participants are not listen only mode.

Later, we'll conduct a question answer session. During the question answer session. If you have a question. Please press Star then one on your Touchtone Cohen. Please note. This conference is being recorded.

Now I'll turn the call over to Mr., Alan just saying just Ellen you may begin.

Thanks, Anoro Hello to our listeners and welcome to our second quarter 2020 earnings call.

Today's speakers will be Ryan Lance or chairman and CEO, John wallet, or even VP, and Chief Financial Officer, and Matt Fox, Our EVP and Chief operating officer.

Well as many of you've noticed a in conjunction with this mornings press release, we posted a short presentation deck of supplementary material on the quarter.

Page two of that that contains our cautionary statement, we will make some forward looking statements. During today's call actual results [noise] excuse me could differ due to the factors described on that slide as well as in our periodic FCC filings.

Well also referred to some non-GAAP financial measures today and reconciliations to the nearest corresponding GAAP measure can be found in this mornings press release and also on our website and with that I'll turn the call Overdrawing.

Thank you Alan and good morning to our listeners.

We're now at the midpoint of what has been nothing shy of historic year for industry and for the World I hope everyone on the call assays as well.

Since the pandemic and the industry downturn began in March Conoco Phillips is focused on three things.

Safely operating the business, including taking appropriate actions to help mitigate the spread of covert 19, and protect our workforce or feel that office personnel are successfully delivering a business plan I'm very proud of our organization has stepped up in the face of this challenging time.

Next we're focused on executing thoughtful and prudent actions to create and preserve value by leveraging our relative strengths and third we're continuously monitoring the market developing scenarios and testing our current and future plans against those scenarios.

Well, here's a quick recap of our actions through the first half a year.

We produced 2020 capital spending by about 2.3 billion lowered our operating costs by roughly 600 million and suspended the share repurchase program.

In April as the pricing deteriorated significantly we announced that we would begin voluntary production curtailments.

We laid out a clear and compelling economic rationale for curtailments. We believe we were well positioned to carry them out because of our operational flexibility in our significant balance sheet strength.

We believe this is a profitable approach for us versus hedging because it allows us to retain full exposure to the recovery in pricing.

Low realized prices and reduced volumes due to curtailments made for a tough headline second quarter earnings that mask the underlying strength of the company Here's how you shouldn't read through the quarters results.

We came into the year with total liquidity of nearly 14 billion, including the 6 billion available under our revolver.

At mid year, we are sitting at about 13 day and despite the crash in prices with available cash and short term investments totaling roughly 7 billion.

Current prices hold for the rest of the year, we expect to the exit the year in a similar position.

Our cash position creates significant optionality for navigating the downturn.

We can better withstand price volatility like to take actions such as production curtailments.

Transact on high value LOE costs will supply bolt on deals like we announced in the Canadian month.

Our underlying business is performing very well again curtailments and dispositions mask the topline production numbers, but we have a very good handle on the base business.

While our previously announced capital and cost reductions have modestly impacted near term productive capacity.

We believe our lower capital intensity and portfolio diversification represent a relative advantage compared to the competition, many of whom at much higher decline rates and weaker balance sheets.

So we're set up well during this time of uncertainty and volatility.

But just as importantly, we're very well positioned to benefit from the inevitable recovery in prices.

We have strong financial and productive capacity low capital intensity and run hedged the should benefit us significantly when prices eventually move in a more positive direction.

Importantly, we have choices on how to manage the recovery in a way that maximizes value for shareholders.

So as you'd expect would take were already looking ahead.

We're actively developing our views on a short and medium term outlook for both the path and the timing of recovery in prices.

Giving ongoing uncertainty you can appreciate there isn't a simple answer to what's next.

There are some other questions will be asking ourselves over the next weeks and months.

What should our capital program be in relation to expected cash flows in our balance sheet capacity.

To what extent might we choose to kick start cash flow expansion, if we see a recovery.

How much cash do we want to carry on the balance sheet.

What's the right way to think about stress testing our future.

When we do distribute cash above the dividend to shareholders and by what mechanisms should we do that.

While it's too early to communicate a definitive plan for the next year and beyond you Shouldnt expect a fundamental tenets of our value proposition to change.

We still strongly believe in our approach to the business.

Best to generate strong cash flows and financial returns. While also returning a significant portion of the cash flows to shareholders and maintaining a strong balance sheet.

That's the business model, we've been following for nearly four years, we launched it coming out of a last downturn in 2016 in a position us well for this downturn.

We still believe it's the right model for the business.

In one we're uniquely positioned to execute as the environment recovers.

Now, let me turn the call over to Don to cover the key drivers in this quarter's results.

Thank you Ryan.

I'll begin by providing a summary of the key second quarter earnings drivers and then recap our curtailment activities before handing off the math for some outlook comments.

We provided some supplemental slides along with this mornings press release and they are available on our website.

If you refer to slide three and our materials I'll recap the quarter performance.

The earnings variance from the first quarter to the second quarter can be explained primarily by two drivers.

Realized prices fell 41%.

And production, excluding Libya was down 23% sequentially.

Of this roughly $16 per barrel decrease about 70% was due to lower benchmark prices across all products.

25% by a significant downturn in differentials in the U.S., Canada and for LNG.

And the remainder was related to deficiency payments associated with unused transportation and our Canada business.

And as you are aware the primary driver of the reduction in second quarter volumes was protection production curtailments, which I'll cover now on slide four.

Recall the rationale for our curtailments decisions was that we can create value by foregoing short term CFO.

Realize better cash flows in the future.

We were not willing to sell our product for the prices on offer at the time.

We've estimated our curtailments for the quarter at approximately 225000 barrels of net oil equivalent per day.

Roughly 145000 BOE per day of that total was sourced from the lower 48.

And you can see the breakout of the big Cthree unconventional fields.

We estimate Alaska at 40000, Surmont at 30000, and we had some minor curtailments in Malaysia.

And in Norway.

As we previously discussed are curtailing activity was based on a clear economic framework.

We view voluntary curtailments as an investment.

Meaning we're electing to forego current cash flows for what we believe will be more attractive future CFO.