Q4 2020 ConocoPhillips Earnings Call
Good morning, and welcome to the Q4 2020 Conocophillips earnings Conference call. My name is scenario and I'll be the operator for today's call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone. Please note. This conference is being recorded I will now turn the call over to MS. Ellen Desanctis Ellen you may begin.
Thank you <unk>, Hello, and welcome to our listeners today.
First I will introduce the members of the Conocophillips executive team who are on today's call.
We have Ryan Lance, our chairman and CEO Bill Bullock, our executive Vice President and Chief Financial Officer, Matt Fox, Our executive Vice President and Chief operating Officer.
Tim Leach, our executive Vice President in the lower 48, Dominic Maclin, our senior Vice President of strategy and technology and Nichols, our senior Vice President of global operations.
Brian will open this call with some prepared remarks, and then the team will be available for your questions.
Before I turn the call over to Ryan excuse me a few reminders.
Our results were released this morning reflect 2020 results for Conocophillips, only we will not be discussing any concho specific results today, but beginning in the first quarter of 2021.
<unk> will reflect the combined Conocophillips Concho company.
We will make some forward looking statements. This morning based on current expectations.
Actual results could differ due to the factors described in today's press release and in our periodic SEC filings.
We'll also refer to some non-GAAP financial measures today reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and on our website.
Thanks, and now I'll turn the call over to Ryan. Thank you Alan and thanks to all our listeners for joining today's call.
Lately I've been reflecting on this time a year ago, we have just rolled out a groundbreaking multiyear plan for the company Brian.
Brian was anchored to a comprehensive philosophy and approach we've been espousing since 2016, there was aimed at reversing the failings of the E&P sector to create a sustained value for shareholders through cycles what.
What was that business model.
Reinvest about 70% of our cash flows and the lowest cost of supply resource to grow financial returns and free cash flow return at least 30% on the cash flow to our owners.
We maintain a very strong balance sheets and lead an ESG stewardship.
Our multi year plan gave the market a credible example of how this business model would work.
Well almost as soon as they can drive on our multi year plan along game in 2020.
And for the entire year nothing went as expected for any of us, but here's the thing.
Despite the most challenging year on the history of our sector of our business model worked.
The value proposition prevailed.
We exercised available flexibility without forfeiting productive capacity, we high graded our portfolio, we executed our programs and returned over 50% of our cash to our owners our balance sheet stayed strong and we continue to up our game on ESG.
In other words, our value proposition passed the test of 2020.
And this strengthened our conviction that we have the right model for this volatile sector.
This conviction is what led us to acquire Concho on a transaction that will enhance our ability to deliver our proven value proposition.
So we've turned the difficult experience of 2020 into an opportunity to emerge as an even stronger more investable company for our sector.
Earlier today, we announced fourth quarter and full year 2020 results for Conocophillips because of the constant transaction closed after a year and the results. We reported today represent Standalone Conocophillips performance for 2020, However, beginning January one or 2021 results will reflect the combined.
Any performance.
No I don't plan to review the results we announced this morning I just described some of the important highlights from last year, but this morning's results should give you all confidence that the underlying standalone conocophillips business is running very well. Thanks to the many efforts of our workforce and I can assure you the concho Permian business is running well.
And again, thanks to our workforce in Midland.
Our mindset is we started 2021 is all about doing the work and delivering the results that make us the best E&P company in the business.
On to align all of US here are our key focus areas for 'twenty one.
Our top priority is to create the strongest competitor in the business from a combination of Conocophillips from Concho.
The closing of the Concho transaction cleared the way for us to begin comprehensive integration and optimization efforts across every part of our business.
We're just getting started post closing, but we're already taking actions that will drive greater efficiency and capture best practices to ensure we perform at the highest level organizationally technically operationally financially and culturally.
We have already identified the sources of capital and cost reductions to meet the 500 million target we set from the deal was announced.
And I can report that we will significantly outperform those initial expectations as we review our processes share best practices and organize for the new realities of the business, but let me put our revised saving expectations into perspective for you.
Compared to pro forma 2019, adjusted operating costs of approximately $7 billion, we anticipate being at an annual run rate of approximately $6 billion in 2022, assuming a similar production level of roughly $1 5 billion million barrels a day equivalent.
Now this billion dollar reduction about $400 million of that was driven by actions taken by both companies prior to the deal announcement with the remaining savings to be realized through cost reductions implemented in conjunction with the transaction and it represents a major value upgrade for the company because it greatly enhances the competitiveness of our free cash.
So generating capability.
Is how we win.
We will be implementing our cost reduction actions throughout 2021, and we'll provide updates on our progress along the way.
The next priority is execute the announced operating capital plan of $5 5 billion.
This budget is comprised of sustaining capital of about $5 1 billion.
About $400 million will be directed towards major capital projects, primarily in Alaska and ongoing appraisal activity.
Now for this level of capital, we expect to produce about $1 5 million barrels of oil per day equivalent.
Which was roughly flat to 2020 pro forma production adjusted for curtailments and asset sales.
And this morning supplemental materials, we provided operating capital plan by segment we.
We expect to spend about 55% of our capital on the lower 48 with the remainder allocated across our diverse global programs.
We set the capital budget at about $5 5 billion for two principal reasons.
First of all the macro environment has firmed up recently, we are cautious about the trajectory and the timing of a recovery.
<unk> recovery is taking longer spare supply remains and inventories remain elevated it makes no sense to grow into this market environment. So we're choosing to stay at a sustaining level for the year.
Second we're committed to growing free cash flow and we are setting up the company to be a significant free cash flow generator.
That means maintaining capital discipline, but also driving program improvements that enhance uplift efficiency in other words, we're driving for free cash flow growth not production growth.
At $5 5 billion of capital in 2021, and if current prices hold we expect to generate significant additional free cash flow in that situation, our dividend alone would not be sufficient to meet our target of returning greater than 30% of our CFO to our shareholders you should not be surprised to see us reactivate buybacks as a channel.
And we always like the idea of improving net debt.
A third key 2021 priority is engagement with our various stakeholders. This includes investors regulators government officials partners communities and our workforce we are undergoing.
On a significant level of change both on the inside as we integrate our companies, but also on the external environment.
While we consider engagement part of ordinary business. There's no question. This priority has taken on a new level of importance in today's environment.
Especially given the recent industry related announcements coming from the new by the New administration.
Now, let me take a moment to address our thoughts about the administration's recent pronouncements of a temporary moratorium on leasing and permitting on federal lands.
Now I have to say we were not entirely surprised by the announcement in fact, President Biden said during the campaign, but issue a temporary moratorium on new leasing.
As for the permitting moratorium. The administration has publicly indicated this is a temporary pause and that they will continue to issue permits on.
Obviously, we hope these temporary actions are resolved in a timely fashion and we are certainly watching the situation closely.
Now from our perspective, some of the recent executive actions targeting U S oil and gas production, we will have a negative economic and environmental consequences to the American people.
If the moratoriums become permanent.
They will eliminate well paying jobs, mainly in rural America slower economic recovery negatively impact energy and National security and increase our reliance on higher ghd foreign barrels.
We certainly want to avoid these these outcomes. So we stand ready to work with the buy and the team as we did successfully with the Obama administration to find balance solutions to address the issues.
As for the questions of what a permitting moratorium could mean for Conocophillips, specifically, let me take that head on.
While we certainly are going to engage to protect our interests.
Philips has the flexibility the diversity and the depth of low cost of supply and low <unk> resource to manage through this issue without materially impacting our plans.
And on final 2021 priority will be continuing to up our game on another issue that is very important to our stakeholders, namely ESG.
This is an area, where we have a long term demonstrated track record of commitment and performance.
But clearly there is heightened interest across all of industry on this topic.
We continue to accept our responsibility for continuing ESG improvement and in fact embraced the opportunity to be an industry leader.
Last year, we became the first U S based upstream company to adopt a Paris aligned climate risk strategy.
We set internal emission reduction targets that are consistent with the goals of that agreement and are taking significant measures to monitor and reduce methane emissions across our operations and.
In addition, we are actively advocating for a well designed price on carbon in the U S. Because we believe that's the most economically efficient.
And effective step that can be taken by the U S to set the world honestly sustainable path to long term ghd emission reductions.
While we work diligently to reduce emissions on a parallel path, we have established a low carbon team within the company.
Team is conducting in depth studies of energy transition alternatives monitoring trends in evaluating the economics and the viability of these alternatives for Conocophillips over time, our board is engaged with the team and it's worked and we're committed to continue our analysis on this important topic, but at least for now we believe that.
Highest value we can create for all our stakeholders is by buying the best E&P company in the business the world needs clean low cost barrels that are safely delivered by disciplined free cash flow and returns focused companies like conocophillips.
2020 was indeed, a challenging year.
But the lessons and accomplishments we took from it but it's in great stead, not only for 2021, but as a <unk> 75 billion enterprise value industry leader.
We're in a unique position to help transform the perception and the performance of our sector with a clear vision of what we need to do.
Deliver value from the console transaction execute our 2021 operating plan engage with our stakeholders and keep pressing on ESG leadership.
We look forward to keeping you informed of that progress as we go throughout the throughout the year.
Now, let me turn that back over to the operator, and we will take your questions.
Okay.
We will now begin the question and answers from you.
If you have a question. Please press Star then one on your Touchtone phone.
A speakerphone.
You may need to pick up the handset price.
Before passing the numbers once again, if you have a question. Please press Star then one on your Touchtone phone.
First question comes from Doug Harrison from Evercore. Please go ahead. Your line is open.
Hi, everybody.
Hello, Doug.
Ryan Conocophillips has emphasized cost effective energy supply ESG leadership, which you just referred to and competitive returns to shareholders, which has really been a pressure on approach and one that most of your peers have ended up emulating over the past couple of years.
And while having a good head start is usually a good thing a paradigm shift seems to be underway on energy with investor expectations from management teams change and do so.
My question is what are some of the things that the management team is going to need to do to sustain its leadership position in this new environment to continue to be the best E&P company.
With these new realities I think is the way you phrased it a few minutes ago.
So that's my question.
Alright, Thanks, Doug in the first big Callout and congratulations on the on your retirement, we know we're going to probably see your name around you've been.
Net incredible partner and thought leader in the industry.
They've gotten it right more tons than you've gotten it wrong. So.
Kudos kudos to you as well so thank you.
Yes.
Doug It's really good lot of external pressures right now certainly on the industry and on.
On on what's happening with the New administration, I guess I'd go back to kind of our our three areas that we think are really critical for success of an E&P company and I think it starts with the returns on returns of capital you've got to generate income.
<unk> of return for our shareholders in this business you got to do that sustainably and through the cycles, and we think thats critically important and we're well bought into that as you know for a number of years.
And to do that we've got also deliver this low greenhouse gas affordable energy all around the world and that's going to be a part as we go through this transition that's really important and I think it's maybe lost in some of the rhetoric today just how important.
Oil and gas is to this transition.
We're going to be going through over the next number of years and decades.
Finally, you have to do that sustainably, we have to do that with the environment in mind, we cant we cant put the planet through a great experiment, we've been an advocate of this and.
And a supporter for a long period of time and as I described in my opening remarks, it's about taking care of our scope, one and scope two emissions and we're on a pathway to reduce that intensity by 2030 that puts us on a pathway to 2050 and the goal that's consistent with the Paris agreement. So we think everybody needs to.
Be focused on your scope, one and scope two emissions and then for scope three we advocate for a price on carbon we think thats. The best way, that's most economical way, it's the best way that the market can deal with this issue and drive consumer behavior that takes that puts us on the pathway that is consistent with the Paris agreement as well.
So that's how we've come up with our climate strategy and that's how we're dealing with is kind of.
Contour around how do you get an energy and make it affordable how do you make it sustainable and how do you make it resilient and <unk>.
Something that shareholders can invest in.
And thanks for that Ryan and also to be fair. It's been a really easy to have Conocophillips is my top on idea and Anne day. Since you guys. Since you became CEO in 2012 and net.
You guys originated the model for success in this sector, it's obviously worked and you're stuck to it so kudos.
Kudos to you on the team. Thank you for your leadership in the space and the pleasure has been on mine. Thanks again.
Yeah. Thank you Doug.
We will Miss you.
Thank you. Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning team.
Good morning, and thanks for good morning, Neil.
Good morning, Ryan So I guess would kick off question is about capital return.
Ryan you alluded to this but if you look at 2021 at the $5 $5 billion capital budget, where do you see the breakeven to cover your dividend then I'm guessing the number is a lot lower than where the spot is right now which is close to $58 brand.
So how do you think about using a share buyback to take advantage of.
That excess cash flow and also the dislocation you've historically talked about the correlation between your stock and the price of oil on that correlation has recently broken down. So how do you. How do you think about leveraging excess cash flow via buyback to take advantage of the dislocation to the extent you see one.
Yeah, So maybe I can take the latter part of year as Neil maybe Matt can chime in on breakeven.
The first part of your question, but yes, youre right certainly.
I know you guys can do the math and are doing the math pretty pretty pretty quickly. These days and certainly at current prices. If they hang we're going to be you shouldnt be surprised at all for us to be back on the market and buying our shares back at kind of the level. We were at pre pre transaction. So we recognize that in our <unk>.
<unk> is to deliver 30% back to the shareholder and we're committed to doing that we recognize that the ordinary dividend today and the kind of market. We're experiencing today and if you look at the forward curves that would be insufficient. So we recognize we'd have to take some of that free cash flow and return that to the shareholder and that's certainly our commitment and as I said in my opening.
Remarks.
Always with what we experienced in 2020, having a really really strong balance sheets really important so reducing our net debt is something of interest to us as well. So let me maybe Matt can chime in a little bit on the breakeven numbers.
Yes Neil.
One day, a little bit.
We've seen that because of some of the one off costs.
When the gas cleaning cleaning and this day.
Mode.
On the breakeven to cover the cost for.
Our sustaining capital on the debit James is going to be somewhere around $40 per barrel consistent with what we showed at the time that we.
And then the transaction.
Net.
Consider then some additional cost savings from May come from capital reductions and margin improvements from commercial line.
Supply team and so on so we're feeling very comfortable that it will be.
And consistent with that roughly $4 million.
Net loss.
Between.
Okay great.
And I would add me on that.
So it was sorry the line just add that we're taking the time to.
Drive the efficiencies and the free cash flow generating power through the transaction with Concho and we're just getting started with that we've been two weeks now since we got it closed and I think we've been about a month of price is above $50 <unk> as well so.
We're just getting started on our focus is on trying to drive that as low as we possibly can and the teams are up for it.
Well that's that's.
That's the follow up for you Ryan it's Jeff.
On a couple of weeks.
On your hands on on.
On the conscious steering wheel just thoughts on what youre seeing so far what is surprising to the upside and downside.
Downside and any.
Quantification around the value creation that <unk> seen so far.
With the Concho assets.
No. Thanks, I think I.
I'd say, we haven't seen a downside yet we're just.
We're happy to have Tim.
Oil and Jack on the team and helping us.
Get jumpstarted in terms of what we're doing in the Permian Basin and building on the best practices as Matt talked about so we're quite excited about the upside and the opportunity and just continuing to drive that.
Efficiencies free cash flow generation get our assets on the on the Concho learning curve.
And continue to drive to drive the value and Thats what this year.
Kind of a sustaining level of capital we're coming into the same level that we came in out of 2020 and that gives us the chance to get the team really focused on driving those efficiencies in.
And getting more out for every precious capital dollar that we're spending.
Thank you. Our next question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open hi, good.
Good morning, everyone. Thanks for taking my call.
Good morning, Jim Good morning.
My question is maybe on the medium longer term, you'll be holding production flat this year pro forma.
And over the medium term.
On the mid cycle price.
$50.
Hi.
Ralph will underpin the 10 year plan.
You indicated that kind of go past the value proposition cash with Bonnie Bonnie.
Is the plan.
More than 3% production CAGR on this substantial through the cycle on share buyback or how does the macro and the Concho acquisition kind of maybe think a little bit differently.
Well, maybe I'll start and then let Matt chime in a little bit as well I think long long term Janine our view of the mid cycle. If you think about it that way over a long period of time Hasnt really changed we see some potential for demand destruction coming out of this post COVID-19.
It could be up to a couple of million barrels a day, we also see.
Some supply destruction as well so on balance we would have a long term view that the.
On the mid cycle price Hasnt Hasnt really changed.
Maybe turn to Matt he can maybe address that.
That medium term question that you asked which I guess is kind of directed maybe over the next two or three or four years.
Yes Jeanine.
Okay.
Sure.
Space and perhaps in a moment.
As we work on inventories in the user base demand and supply.
But viewers.
In the medium term is quite possible that we will spend some time above mid cycle price.
Moving on to some demand reduction we noticed a significant supply reduction, particularly in Europe.
And think of it could put some numbers to that.
Total oil production was.
$8 2 million barrels would be.
2019, and last year. It was 7 million barrels a day, so that's a significant growth in.
In overview.
Don with the Battle.
Got it.
Thank you.
50.
The moratorium on pyramid isn't expanding quite a long period.
U S tight oil probably featuring 7 million barrels per day for <unk>.
'twenty one at least that's that sales team.
And then if you take that.
And then looking into 2022 net leased to a 3 million balance being dilutive.
Pre COVID-19 chain.
As soon as demand comes back from 2000 claims.
And assuming U S producer disciplined.
I think is reasonable piece day, if you use above mid cycle.
On balance.
Let's segue from the longer term adjusted yet.
Okay, Great and then to the latter part of your into the latter part of your question Janine.
Pretty committed to the 30% return on turnover.
Cash back to the shareholder that where were we believe that's the right model for this industry and we're committed to doing that.
Okay and then my follow up is Jeff maybe digging in a little on Neal's question.
I apologize for my question to you on this a little bit, but I think that conoco cash return on our model.
<unk> differentiated mono line.
On our <unk>.
If at all are able to return capital the way you can.
You mentioned in terms of OPEC.
Total expectation for the buyback.
You said it could be may be around the level three transaction.
On the.
Panther transaction level. So I know that you had announced a $1 billion buyback on park 20 alone which got canceled.
We're supposed to be anchoring around that or is it more kind of.
2019.
Jim.
Well I think you can do the math at these kinds of prices and calculate sort of the CFO that we generate and our commitments to return 30%. So it's.
It's more similar to like.
What we were doing before the transaction.
Okay, great. Thank you very much.
Thank you. Our next question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.
Hi, Thanks for taking the question so on.
First one here I guess it would just be.
On the outer year look at capital spending and I know youre going to give us an update here in March and you just closed the transaction, but I guess this is more directional in nature. If you have any color about how you think about the moving pieces looking out.
I noticed that you do have some spending here in 2021 allocated for Willow as well so should we be anticipating that that will be ramping up in 2022 and beyond at this point.
Yes, I can maybe give a yes, we have an expectation to come back and talk about update you throughout the course of the year end.
Kind of said, we cut back in March and certainly expect towards the latter part of the year, we need to come back to the market and describe our longer term plans.
We have thoughts and ideas around optimize plateau levels of spend for the assets, we do that the company level and certainly do that at the asset level as well.
In the lower 48 and across our portfolio, including the Willow asset and I can have Nick describe a little bit about what we're what we're doing today on on.
Willow asset, but we will give that update to you Phil longer term, but expect that there'll be.
Some ramp up to optimize kind of levels, both at the company level and the asset level a lot of that is dictated by the recovery in this market, we got to see just what happens and how quickly.
Supply and demand.
Get rebalanced in this.
On the global markets. So we're watching that really closely that I understand that.
There's going to be a ramp up to some from optimized level.
We're busy trying to assess right now and understand after the Concho acquisition, maybe I can have Nick add a few comments on the Willow piece, specifically, yes. Phil. This is Nick just take you back a little bit to Q4 2020, as you've seen we cross through two major milestones around permitting.
For <unk>, we had a record of decision by the BLM in October and then the Army Corps of Engineers 404 per minute that allows us to put gravel for roads and pads for this year. We've got part of that capital will be advancing engineering through our feed. So we took feed end of December that's a major decision gate within.
On the company so advancing the front end engineering and design and that we plan to move to a detailed engineering sometime this year.
And then part of the scope for 2021 is also some small civil construction to put gravel and start the road system for <unk>.
And then we're targeting FID.
Final investment decision later this year, so we will advance the detailed engineering wishful.
Impact had overall decision.
So we're watching it closely fill and if things move to the right because of this current administration or somehow we get curve balls thrown at US we have not taken yet we've got a lot of flexibility around that.
How fast we we actually ramp up at Willow and what our option options are around that.
Got it okay. Thank you a follow up question.
To Neil's question on on the breakeven.
Understood on the 2022 kind of still normalizing in a 40 to 41 on Ti, which I presume includes the incremental.
Synergies.
This yesterday, but.
With respect to the <unk>.
Transient factors.
Our 2021.
Hoping just a little bit more color there is that just the severance.
Youre, referring to is the one offs or were there other things because I think there were some things like LNG distributions on a lag effect on other things, but anything else you could share would be helpful. Thank you.
Yes, I can have a dominate keys, leading up the integration efforts around the two companies and describe some of those transaction costs.
In relation to the synergies.
Yes, Phil.
Obviously.
Theres, obviously severance cost in terms of where we have duplicate labor.
On other savings.
There is obviously fees and associated with that but you.
Now once we get through this year in.
To get through those costs I think we're focused really on what our cost structure will look like so maybe just to give a bit of on update on that I want to be clear about that the integration is going well.
That's on the system side the organization side than we are and we do have line of sight to <unk>.
<unk> targeted 500 million cost and capital savings, we announced at the time of the transaction so.
If you remember that $500 million was made up of $350 million of operating cost savings on a $150 million of capital reductions and those are only came across three areas on the direct savings from the transaction restructuring on a corporate staff groups to better align with our new portfolio on the Conocophillips site.
And then stopping new ventures exploration program that reduced our targeted exploration spend from $300 million to $150 million a year.
And in fact, John 2021 capital program of $5 5 billion reflects a reduced exploration capital spend.
Along those lines.
I expected operating cost savings have now increased from $3 50 to 600 and so our teams have really done an excellent job turning over every stone both in relation to the transaction and restructuring our center. So in total the operating cost and capital reductions will now amount to 750. So we're up from 500 to 750.
And we're still counting I think as Matt mentioned, we still have the opportunity from a cost and capital efficiencies across our D&C spend supply chain economies of scale and also an improved price realizations on the commercial marketing side. So we do expect that $17 752 to increase through the year on we'll be providing on.
Another update on my end March now finally, just to tie back to Ryan's prepared remarks.
The operating cost savings, having increased to $600 million together with the $400 million of sustainable cost reductions. Each company made both companies made together in 2020, we anticipate our 2022 operating costs to be around 6 billion and that's 1 billion less than on a pro forma costs in 2000.
19, and that was really the last normal year pre pandemic. So represents the best baseline Russell assuming production flat at about one 5 million barrels a day so.
At the end of the day as we think about we get through these transition costs. This year. We then get into on a run rate of about $6 billion. It's those bottom line cost, but not to the end of the day and that's what we're very focused on to make really the company the strongest competitor on the business from from two already very strong companies.
Okay.
Thank you. Our next question comes from Alastair Syme from Citi. Please go ahead. Your line is open.
Thank you and Hello, everybody.
It doesn't get today, one of your U S peers slash.
Flush that then even growth forecast what's going on.
40%.
What is intriguing about that on their conference call.
So there's not a single question asked me about that revision.
Total bonus on the market has swung the pendulum on that.
It depends on the works so I wonder if.
You can really reflect on the trend you are seeing in efficiency cost and supply and I think ultimately the question but.
Market doesn't seem to believe that this business can be turned into on that generates free cash flow.
Thank you.
Yes ill start Alastair, maybe let Tim chime in on he's our president President Permian expert that we're enjoying having on the team, but I think as we look at it and what drove our decision around the transaction early on is <unk>.
Looking for the lowest cost of supply of resources, we can find in the world today and the companies that owned it.
That's what drew us to to Concho and the transaction that we announced back at the end of last year. So when we look at it and we look at the performance inside our own company and now that we've gotten a look under the hood deeper on the Concho side, we're pretty pleased with what we're seeing and continue to see efficiencies in it.
Free cash flow growth above and beyond that and maybe ask Tim he can supply a little bit of color to that as well, yes, just a follow on by saying how pleased I am to be here and how well I think that.
Concho fits within this portfolio, but specifically to the Permian basin.
We were operating a really efficient program coming into this deal.
Conoco was also operating very efficiently and as I was reminded recently the program. We're executing right now is generating the best economics that we had seen during most of my career. So it's pretty exciting to have the inventory that we have in <unk>.
I have the opportunity then to go on and make that better and making it better mix it more capital efficient, which will greatly expand the free cash flow and drive down the cost of our already low cost of supply area. So.
We really see.
Opportunity too.
Really enhance the economics of what we're doing together so that's that's.
The exciting part of going forward.
Tim can I.
Do you think the industry in 2020 is managed to bring the cost of supply down volume dependent.
Okay.
I'm not sure we caught that Alex to say it again.
So the question is whether you think the efficiency gains in 2020, both a cost and supply John.
Yes.
It will.
Oh, Yes, certainly I think.
We saw.
Declining capital cost, but then also enhanced efficiencies from.
Better designed wells better design spacing across the board. So yes, I do think that cost of supply came down dramatically in 2020.
Thank you. Our next question comes from Roger read from Wells Fargo. Please go ahead. Your line is open.
Yes, good morning.
Yes.
But on Roger.
Just wanted to jump in on no question was asked a little bit earlier, just got your hands on the wheel.
With Concho, but maybe as a step back and looking at the overall company. Thank you John.
Your cost of supply portfolio review the step away from the exploration as part of the savings from the transaction.
Are you thinking about overall portfolio kind of shakeup in coming years or is everything that's in there.
It really does make sense and then as an addendum to that how youre thinking about some of the international LNG opportunities at this point.
Yes Roger.
We've made a lot of portfolio changes.
Since we spun the company in 2012.
I think now as we look across the entire portfolio, we're pretty pleased with the the resource base that we have the cost of supply of all the major assets that we have in the portfolio with that said.
If they if they don't compete for capital.
We've demonstrated our ability to move them out of the portfolio and we'll do that if their cost of supply gets higher and they don't compete for capital, but that's how we're really focused and feel like the portfolio today is in a in a really good shape.
What we're investing in is a less than $40 cost. Despite it averages below 30.
So we feel very comfortable we can deliver the returns of capital returns on capital even through the cycles in this business with the portfolio that we have and part of that includes those LNG projects that you described now we did divest of one at the end of last year in Australia, and we did that because we were concerned about the cost of supply in the GHT.
Footprint amongst a few other things, but we are we do like the LNG projects. We think we're we like the market in Asia, we like the growing need for gas around the whole world. We are interested in.
Competing in Qatar for another train.
We think that that should be coming soon it's been certainly delayed with COVID-19 like everything else, but.
If it fits our our investment profiles on our investment thoughts around cost of supply we'd like to participate in that because it ultimately lowers our capital intensity.
<unk>.
Really helps we think the overall portfolio. So we are still quite interested in and that particular project and then obviously, we still have the one of the trains in Qatar and we have our AP LNG project, that's performing very well right now on top of it as well.
Great. Thank you.
Thank you. Our next question comes from Scott Hanold from RBC Capital markets. Please go ahead. Your line is open.
Thanks, Hey, good morning, guys.
Ryan I appreciate the color that you provided on on what you view in terms of the changes in administration and regulations, there, but do you all anticipate that youre going to have some visibility to make your longer term direction at some point.
So when when do you expect to have a firm direction by the administration or is there a risk that there.
There isn't anything that's that's as clear as you need.
Well Scott I mean, we're watching the next 60 days really closely and we've got to get back to perfecting rights toys and easements across public lands and.
If that gets hung up it takes a lot of time, we will have to.
What we're watching very closely we're already starting to see frankly.
A bit of loosening up of that some permits getting approved it.
That being said even during this moratorium wouldn't wouldn't get approved so that's what we're following pretty closely and certainly we will adjust our plans if it turns out to be something other than temporary which is but for what we're hearing from the buy and administration is that it has to get their feet on the ground understand the lay of the land understand what.
It was transferred to them from their prior administration and understand how they're going to.
Deal with those issues going forward, but we expect them to come back we worked very successfully with the Obama by an administration on all these issues and would expect to do it and take them at their word that this is temporary and that.
We'll get back to business as usual or at least something close to it after the 60 days.
I appreciate that color and as my follow up when you look out at the synergies that Youre looking to capture can you discuss how much of that is.
Is included with what your commercial teams can do with the Concho assets and remind me. If that's included in that and if you could give a sense of like what should we expect from that because I know certainly obviously country with a two stream reporter you guys had three stream, but what's gonna be that transition period in and is there some synergy upside in addition to what you have.
<unk> already spoken to.
Yes, So Scott I think as Dominic described the $750 million of synergy that we're talking about today does not include any commercial uplift to our realized price benefits or supply chain enhancements are best practices that drive more capital efficiency.
<unk> are yet to come and we fully expect we're going to get significant uplift from those.
Those particular items as well.
It's going to take us probably the better part of this year commercially to understand all the different contracts you brought up to stream and three stream reporting ultimately will go to three stream reporting for the combined assets, but it's going to take us some time to understand the restrictions on how quickly we can get there for for the Concho assets in fact, I think Tim was.
Trying to get there as a company anyways. So there is they plowed a lot of ground in that regard. So it'll just be a matter of getting to understand those contracts, but importantly, that's why it's helpful to take a sustaining approach and just the stable approach to our execution. This year gives us the opportunity to really focus the teams on.
Trying to drive those efficiencies and trying to drive those additional cost reductions finding those opportunities on the supply chain and the commercial side of the business that are not included in the current estimate that we provided to you, but we will fully update you again in March and provide you another look at.
Where we stand and provide additional details as we go through the course of the year.
Thank you. Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open.
Thank you my interest was piqued by your mention of the studies of energy transition alternatives and my thought would be that there is a financial lens and thinking about that business compete for capital against other options on the portfolio and I guess it was up.
Strategic lens, which is is this in our core capabilities is this something we could do better than most are better than the rest.
Without giving away how far along you are what how do you frame those in terms of financial and strategic objectives.
Yeah.
Yes, Bob It said Dominic here, if I can just talk a little bit but net.
Low carbon team Ryan mentioned that sits on our technology organization.
That work is really in support of a Paris aligned climate risk strategy.
As well as monitoring opportunities more generally with the energy transition for the company.
You mentioned the competencies and that's something we have to stay very focused on as to the contribution that conocophillips can make overall to the energy transition and so they have primary focus that low carbon team. We have now is focusing on those opportunities most relevant to our core business into our core competencies. So those are things like carbon <unk>.
<unk> storage carbon offsets alternative power sources to further reduce the emissions intensity of our operations and so and now they are also working with the B use our business units very closely.
To implement the lowest cost opportunities we have to.
Reduce operational emissions more broadly so.
That is where our primary focus is that we are looking more broadly as well on monitoring but.
As you say the end of the day, we've got to achieve the three things that day.
Ryan laid out.
We have to provide affordable energy to the world, we have to generate returns on and off capital for shareholders. So we have to be very.
Continued to be very disciplined and thoughtful about our capital allocation, but we have to do all the sole sustainably through ESG excellence, So and I think the key thing here is that we are very committed to.
<unk> line climate risk strategy and the work we're doing is in support of that over the longer term.
Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead. Your line is open.
Thanks, Good morning, everyone happy new year everybody.
Good morning, Greg.
Two quick ones.
Ryan My first one is although not to the extent you can answer this but.
I'm just wondering if the consolidation opportunities in your line.
As the war.
Obviously.
There was a bit more going on in the S. Four sometimes first time zone and the chance to talk about it.
Elusive company Adas as mentioned I'm, just wondering where do you stand now.
In terms of are you still looking for additional opportunities as we move to let's say the Republic day.
Well, thanks, Doug I think in.
Our focus is just integrating these two great companies.
It's really the whole focus of the company right now so I'd say, we're not trying to be distracted on anything else other than driving the efficiencies the cost reductions.
Free cash flow growth.
And then applying all of these best practices and learnings that we have across two great companies two to the cash.
Current company that we have.
With that said you know I don't know I don't think M&A is down in this business I think.
You got to continue to drive down cost to supply you want the best resource in the business.
You've got to be the most sustainable company from an ESG perspective, and I think.
On continuing to drive out costs from the business is going to be a good thing. So no I don't think M&A is over and.
I think we've laid out our framework for how we think about that but.
No thats not on the radar screen right now relative to our company we're focused on.
Just driving the best best results, we can out of the transaction that we did with Concho.
Thank you for that my follow up on portrayed this on another capital allocation question on it's great to see Tim on the room. So I don't know, which one of you guys want to answer this but.
Obviously, the federal law on the exposure of the combined portfolio.
Might change, let's say, where you decide to allocate capital so on.
As you think about the go forward portfolio, how do you think about prioritizing capital allocation, maybe just store a part b to not what is the right longer term goal for the combined portfolio you block on marks question.
Yes, I mean whats the right. So I'll take your last one first and maybe let Tim talk a little bit about the federal land exposure that you talked about whats the right level for the company I think.
That's something that we work on every day and trying to understand we know theres a ramp up to an optimized.
Plateau for the oil company and for each one of the individual assets and Thats informed by the market environment that we find ourselves in the long term mid cycle price.
And what but production comes out of that set output.
Not trying to drive <unk>.
A certain amount of growth I think to an earlier question that we had were trying to grow free cash flow. We're trying to make sure that we get as efficient as we can drive as much free cash flow growth as we can and we will take what the mark on the macro gives us an animal set of capital allocation and then we will make sure that we are developing the lowest costs by re.
<unk> for that capital and doing that across our global portfolio I think we've demonstrated that capability.
It had been really committed to it since we started down the journey is.
As a big E&P company. So maybe let me have Tim talked a little bit about your first part Doug on the federal land exposure, yes. Thanks, Doug.
No.
To reinforce something that Ryan said, it's really great to have such strong assets in the lower 48.
With.
Eagle Ford and Bakken and Permian and Montney.
On the Montney in Canada. So we've got we've got some of the best assets.
Unconventional assets in the business and they're all in different places on this optimized plateau model.
From very early time to ones that are more fully mature so.
As we go through time, that's part of the evaluation is allocating more capital to bring those assets up to plateau model.
And that's really what we're working on now on the.
Just as a reminder to something you already know on the on the federal lease side.
He said short term that the.
Whats going on with the federal leases really doesn't affect greatly any of our plans in the short term we can still deliver on everything that we've said, we're going to do and as a reminder, we've got.
Several decades of non federal high quality drilling locations throughout the portfolio. So it's really a great opportunity to be disciplined capital allocators.
Okay.
Thank you. Our next question comes from Paul Cheng from Scotiabank. Please go ahead. Your line is open.
Thank you.
Hey, Ryan just curious that I mean, we understand that on your puppy to ready to jump to any conclusion about what by then the many thanks John.
Maybe on May not do.
But I think you summed up high line.
Yeah, so on the operating with Uh Huh.
A condensate per volume testing in the U S.
Silicon bet on that.
Okay.
Youll unions themselves.
Uh huh.
The big investment that you're going to make OPEC that mix by year.
U S S E.
I'm just trying to get from Thomas Pynchon, or you don't think that we do not change your view on that.
And that needs to go on.
Polio.
Yes.
To make any changes like for example, you previously from <unk>.
Pina with E on.
Selling Paul that would be a candidate to be diverse and.
So.
That makes those decision being somewhat different.
Yes, Paul I would say.
There is a bit on recency effect with the by mid administration coming into path and putting all these executive orders. So I would caution everybody not to swing the pendulum too far one side to the other.
We know we've got a large position in North America. When you consider the lower 48, Canada and Alaska, we recognize that but.
Uncertainty around administrations in fiscal terms and permitting and all that that really is that exists all around the whole world, we're kind of going through a little bit of that during the recency of this new administration. So I wouldn't get hung up in every day, we taken into consideration, but we're focused on just making sure we got the lowest supply.
Resources were developing those.
We do value diversification as you described but we want to make sure it's diverse across our cost of supply mantra. So we're all all about diversification, but it's got to be low cost supply. So we think about that globally. We think about it when it comes time to allocate capital and certainly the company does have a.
We have a large north American footprint, but we like it and we've worked with prior administrations to get all our work done and we've permitted the activity and we do it responsibly and sustainably. So we think we've got a good track record as a company.
So.
That's where our focus and attention is now on some of the exploration stuff as Dominic said, we've we've reduced our allocation to <unk>.
Those new new venture exploration opportunities from $300 million to $150 million and.
And that's where it places that South America and other places around the world may not compete in the portfolio. So we will be looking at trying to monetize those in and potentially get out of them.
Thank you. Our next question comes from Ryan Todd from Simmons Energy. Please go ahead. Your line is open.
Great. Thanks.
Maybe a couple of quick questions on on capital allocation.
First off I guess can you give us any any color on relative capital allocation within the $3 1 billion do you plan for the lower 48.
In terms of Permian versus Eagle Ford versus Bakken or other.
And then maybe as a follow up you had some pretty material exploration tax in Norway during 2020.
Does that compete for capital on your portfolio how might it be developed.
And how do you think about further exploration potential there on the region.
Yeah.
Yes, let me take your first one no we haven't split anything out Ryan in the lower 48. So the $3 1 billion is being allocated all lower 48, there'll be who will provide more updates down the road as we go through the course of the year.
Maybe ask dominate to east.
In charge of exploration talk a little bit about whats exciting about Norway with so yes, we did have some two pretty interesting and exciting discoveries there over the course of the last few months.
Yes, Ryan we actually had four successful exploration wells on in Norway, there over the last year and a half, but most notably the recent two significant discoveries vodka on slow Google and I am showing no slick Google as a Norwegian.
From a type of al but.
Anyway, the market discovery both of these.
Both of these <unk> and so we would we're really pleased and excited about these I think bodes well.
Gas condensate discovery at northwestern Hadrian.
Our prelim estimates of 50 to 190 million barrels equivalent.
We're now operating there.
And and then a slow Google discovery is even near a huge on its oil and it's between 75 and 200 million barrels on so we're really excited about that as well.
And with an operating there so we would expect those being in the vicinity of existing infrastructure.
We would expect those to be very low cost supply subsea tie backs is probably what we have in mind, but we have more appraisal work to do this is a study.
Now I might add as well we have just picked up a couple of new prospects, just near Voka and single.
In that area. So we're really pleased with the Norwegian exploration team and but at the end of the day. They will have to compete day in our portfolio, but we expect those will be quite competitive.
Great. Thanks for the help there.
Thank you. Our next question comes from Dan Boyd from Mizuho. Please go ahead. Your line is open.
Hi, Thanks for squeezing me in.
Ryan if I, if I look back to your last analyst day, you talked about growth in the I think you are exceeding 3% and I know you've had a lot of questions on the call today of outgrowth, you don't want to necessarily put a target out there.
But if you look at where commodity prices are today, you look at your cash flow generation oil.
You would have the ability to grow I would say mid to high single digits as we get out.
2022, 2023, I don't think the market is actually looking for that type of growth really from any oil and gas company.
Can we think about while you have returning at least 30% cash flow as one number is there an upper end to growth that that we should think about as well.
Well I don't think.
You know.
As you said the macro is growing at best 1%, So I don't think.
You'd see our company trying to target a growth rate that's high single digit as you talked about again thats going to be an output from our plans and it only occurs as we deliver at least 30% of our cash back to the shareowner might people that we've well exceeded that over the last number of years.
We want to make sure we've got stronger balance sheet as we can have as well so I don't put pretty growth numbers on it. It's a it's an output to our plans and thats a function of the macro environment, we find ourselves in and how much cash flow. We think we're going to have and making sure that we're getting an appropriate amount returned to the shareholder on the balance sheet.
<unk> stands on a strong position. So it's it's triangulating around all those issues and so I think it's foolhardy to put outgrowth kind of estimates because I don't think they stand the test of time.
Nor a volatile market environment can we find ourselves.
So in other words, if we are above your mid cycle price, we would expect them to return more cash to shareholders. So if you are and as you said you have returned more than 30% though.
We wouldn't be surprised if that number was in the $45 50 per cent range is that is that fair because we're above.
I think you just yes look you look at our history and.
And we value strengthening the balance sheets in the process as well.
I would think about those two things.
This is Alan we're close to the top of the hour. So we'll take our last question. Please.
Absolutely. Thank you. Our last question comes from John Freeman from Raymond James. Please go ahead. Your line is open.
Good afternoon, and thanks for taking me in.
Yes.
One question from me when I think about.
<unk> cost savings have already provided that's now at about $750 million.
You all mentioned it doesn't include anything yet.
The upside on savings from the marketing.
Leveraging kind of conscience expertise as well from supply chain benefits. So I definitely think about the additional details on kind of capital allocation et cetera going forward.
Again in March.
At that point, you always have some sort.
Sort of quantify the benefits from all of that or is it too early for that.
No I think we will have more information in March and we provide some more guidance items.
To the market. We know we know you need them. We know you need them to calibrate. Your models. So you should expect us to be updating the synergies, but those synergies are going to persist throughout the course of the year as we go into 2022, so we're gonna be constantly kind of drive driving them, giving them.
As much capturing as much of that as we possibly can and will continue to update the market in March and our quarterly calls and then certainly have a more a more thorough market update probably towards the end of the year.
Thank you and we have no further questions at this time I would like to turn the call back over to Alan.
Thanks, Sarah and thank you to everyone for your time today and of course for your interest in Conocophillips. Please stay safe and I'll pass it back to you for the wrap up comments.
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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