Q2 2021 ConocoPhillips Earnings Call
My name is <unk> 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 1 on your Touchtone phone.
I will now turn the call over to MS. Ellen Desanctis Ellen you may begin.
Thanks, Sara good morning, and welcome to our listeners we have the following executives on today's call Ryan Lance our chairman and CEO Bill Bullock, our executive Vice President and Chief Financial Officer, Tim Leach Executive Vice President of our lower 48 Dominic.
<unk>, our senior Vice President of strategy and technology and Nichols, our senior Vice President of global operations.
Given our recent June 30 market update we plan to keep our prepared remarks very short this morning, and then as in Ara mentioned, we'll begin our Q&A session.
To call related logistics some of today's speakers are participating virtually we've done our best to ensure everything runs smoothly on the technology front.
Also because we wanted to give as many people as possible a chance to ask questions during today's call.
Don get offended if you got cut off you can jump back into the queue, where you can reach out to investor relations anytime after the call.
Finally, a few reminders in conjunction with this morning's press release, we posted a short deck of supplemental material that includes second quarter earnings and cash flow summaries, some guidance items and our cash flow sensitivities.
And then finally in today's call, we'll make some forward looking statements based on current expectations actual results could differ due to the factors described in today's press release and in our periodic SEC filings.
So refer to some non-GAAP financial measures today.
And as usual reconciliations to the nearest corresponding GAAP measure can be found again in this morning's press release and on our website.
Thanks, and now I'll turn the call over to Ryan.
Thank you Ellen today's quarterly results from right on the heels of our June 30 market update during which we again laid out a compelling multi year outlook for the company.
The update was widely followed and we received some pretty positive.
Positive feedback.
As you would expect given the recency of our update there isn't much incremental news to share at this time, except to say, we remain convinced of its timely and relevant given the ongoing volatility we're seeing in the sector.
And today, we're pleased to followed up with the very strong quarterly results, we announced this morning.
As you recall, we kicked off our update by declaring that we believe we are at a defining moment for the E&P sector and that persist today oil equities have been especially volatile recently in part due to uncertainties in the macro.
And because we know investors need to see evidence that sector discipline will hold and returns on and of capital will follow.
It's clear to us that long term sector sponsorship requires leadership on the BARDA company.
As well as conviction on the part of investors.
Of course for investors.
Case for these equities requires a reasonably constructive macro view.
The case for equities also requires conviction around a micro view in other words.
Best positioned for the cyclical business reality.
And who have a track record of execution and performance and who can truly lead in ESG.
Most companies are espousing the virtues of discipline and everyone now looks better coming out of the 2020 downturn.
The questions investors need to consider is who can deliver consistent returns focused performance through thick and thin.
That's where leadership matters.
In June we met this defining moment with a credible and highly investable plan that generates massive free cash flow and returns of capital with financial returns that are competitive with the S&P.
The leadership requires more than setting expectations and plan.
It also requires successfully executing them.
Execution is where the rubber meets the road.
Conocophillips offers a unique combination of a credible and compelling investment plan with a commitment to strong ongoing execution. You saw that you saw the plan in June.
And today you see the execution in other words you are.
As being the June plan at work.
This morning's release and supplementary information provided details on this quarter's performance, so I won't restate them.
But here are a few key takeaways and themes that I want to underscore.
During the second quarter, the business ran extremely well our planned turnaround activity went smoothly as did our ongoing core programs across the company.
These include activities in the North American shale plays as well as in the multiple programs in our Alaska and international regions.
While we're talking about execution I'll also mention that we continue to make good progress on more than 50 emission reduction projects that we have underway this year.
Every part of our business has a role in delivering our results and I'm proud of our team for their accomplishments during a very busy year.
Overall this quarter's financial results were really quite straightforward.
The noise of 2000, Twenty's market upheaval and most of the Concho transaction adjustments are behind us.
And the known deal integration synergies and streamlining impacts we discussed in June are showing up in our performance.
We're on track to meet the updated 2021 guidance, we issued a month ago, but we're not done not done with our efforts to continue driving the operational and underlying efficiencies. The team has described.
June material.
We can't ignore that higher benchmark price was worrying factor in this quarter's sector performance broadly and certainly conocophillips specifically.
Or what is somewhat unique to conocophillips is that our results demonstrate the capacity of our company to capture the benefit of higher prices when they do occur.
That's because we're unhedged oil.
Diversified.
And we're almost entirely in tax and royalty regimes.
Now a year ago, we demonstrated just how resilient we are low prices.
12 months later and post contract transactions. This quarter gives you a sense for the upside tour weaken realized when prices exceed the reference prices. We showed you just 1 month ago.
Declarer Bottomline.
Conocophillips works differentially through the cycles.
Cash from operations of 4 billion more than covered our capital expenditures of $1.3 billion and distributions of $1.2 billion in the quarter.
And importantly, we continue to meet and exceed our target of returning greater than 30% of our CFO to our shareholders.
We announced another increase to our 2021 distributions in June.
Our total planned returns of capital to about $6 billion for the year, representing almost 8% of our market cap today.
While other companies are only announcing or just reactivating such programs.
And of course as Bill described in our market update if prices continue at current levels. We would expect to have additional cash that could go toward greater distributions and for reference.
We estimate full year 2021, CFO at $50 per barrel <unk> would be about 11 billion after adjusting for the onetime contract transaction related impacts.
And you can do the math on our sensitivities that roughly 300 million per $1 per barrel change in price.
At this time, we still believe our distribution allocation of nearly 3%, yielding ordinary dividend and share repurchases as a very found mix, but we continue to evaluate the issue and we want to engage with the market on alternative allocation.
We know there isn't a perfect answer, but we don't what matters.
And that's a credible commitment to return capital and a solid track record of reliable performance, which we certainly delivered now for multiple years.
So to summarize.
We have a great shareholder friendly business model and plan, we're hitting our stride after a busy time and putting the execution runs on the board.
Maintaining our discipline the company is running extremely well and we're not done with our work to improve underlying financial returns on capital employed that's the goal.
That's how we and with long term market sponsorship and Thats Whats Conocophillips is all about.
We're pleased to be where we're at here at mid year, but we recognize the year is still young.
Looking forward to the second half of 2020, what our priorities are squarely focused on executing on our remaining plans and programs for this year.
Meanwhile, we are closely watching how the macro evolves and beginning our internal processes setting our 2022 budget and capital plan.
We will stay actively engaged with the market and look forward to ongoing discussions about how our plans are progressing.
So let me turn the call over to the operator, and we'll begin the Q&A portion of the call.
Absolutely. Thank you we will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone.
You're using a speakerphone you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question. Please press Star then 1 on your Touchtone phone.
Waiting on standby for any questions.
And our first question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning team 2 quick.
Quick questions for me first 1 for you Ryan just your perspective on M&A in this current market you did terrific transaction last year, but how do you think about the opportunity set that's out there for either buying and selling and the other 1 that might be per bill is just related to the quarter itself.
Was it a relatively clean quarter can we just simply said 4 billion of cash flow minus Capex and then annualize that free cash flow implies about a mid teens type of free cash flow yield, but wanted to make sure that we weren't missing any pieces here to the positive or negative.
That would be more onetime in nature.
Well, thanks, Neil I'll start on the M&A side, let bill chime in on your second question you know when we when we.
Think about the market our approach is to constantly know what assets that we like and we constantly are reviewing the portfolio to look at the pieces inside of the portfolio that are that are uncompetitive. So we're we're constantly screening.
Opportunities to both buy and sell assets and we're constantly trying to.
Great.
The portfolio I think the environment that we see today.
Certainly it feels like more assets tend to come into the market.
But I don't think that makes it makes it necessarily a buyers or a seller's market today I think what what matters to us is just to keep out the rigor and the discipline that we've described back in 2019, we continue through today and continue to do the Concho.
Transaction that we did earlier.
Back back in January and Thats, just the rigor of our disciplined framework around cost of supply and value and simply being patient I think the.
The market may require that even now more of it more than ever.
I think that's a bit about how we think about the inorganic side of the business now maybe turn it over to bill let him comment on the cash flow.
Sure. Good morning, Neil This is bill.
It was a very clean quarter on a cash basis. It was cleaner for both cash and it was clean for both earnings.
As Youre looking at your run rate.
2 just 2 items to consider though.
First 1 in and we mentioned this in the.
Press releases that we did make a $200 million discretionary pension plan contribution in the second quarter that reduced our second quarter CFO and the contribution increased the pension plan funding status above 90% and that eliminate the need to pay the PBGC premium payments.
It also leads to reduced financial statement volatility for the pension it reduces some of our go forward funding requirements. So that really did make good sense per use of cash to us in the quarter.
I draw that to your attention as a reduction in run rate and the other 1 that I pointed out as youre thinking about run rates would be our AP LNG distributions.
We received distributions of 250 million from AP LNG in the second quarter that brings year to date about $350 million.
And we anticipate about $100 million in the third quarter and $700 million per year. So just as a reminder, we typically receive lower distributions in the first and third quarters and higher distributions in the second and fourth quarters as Youre thinking about the run rates on that.
Those <unk> distributions are pretty locked in for the year, a big set long.
Long term LNG sales per <unk> LNG, a price lag in there so there's very little sensitivity.
To that for the remainder of the year and so as you're thinking about how to.
Look at run rates for the rest of the year I direct you to our sensitivities that we provide those still hold and a good rule of thumb is about $300 million annualized cash flow for every $1 million change in <unk> and with those you ought to be pretty bang on with.
CFO sensitivities.
It makes it easy thanks guys.
Okay.
Thank you. Our next question is from Roger read from Wells Fargo. Please go ahead. Your line is open.
Yeah. Thank you good morning, and congratulations on the quarter.
Interesting Ryan you kind of mentioned you know looking across at the industry overall and easier quarter for companies to do well.
So, let's maybe ask the question what are some of the things that may become a headwind as we think about some of the inflationary issues. It may be creeping up out there.
What you would do to offset that and what you think maybe will allow you to continue to separate some of those companies will look over the next several quarters.
Yes, Thanks, Roger I can provide some comments, maybe dominic can add a little bit of color to that as well I think if Europe.
You're a pure play 1 basin kind of operator, you are probably going to experience certain categories of spend that are inflating I.
I think the advantage of Conocophillips has right now is we're still capturing a lot of the best practices and the synergies from the Concho transaction plus the fact that we're a global diversified company. So other areas around the world are not inflating maybe like some of the economies that are leading the recovery from the Covid pandemic so before.
We're able to differentiate ourselves in that regard pretty clearly we think it's eminently manageable this year and as we go into next year and that.
I would add 1 other thing that seems to be missing a little bit from the conversation and I mentioned it in my opening remarks, and that's the unhedged nature of our portfolio I'm just surprised a few of the analysts are asking the question to the E&ps that are hedged what what happened there could even be more cash flow if you hadn't.
Did your position you Shouldnt expect that from from Conocophillips, We will get the torque from the upside on the prices as we described in my opening comments, but Dominic I don't know if you have any more you can add to the inflation part of Roger's question.
Thanks, Ryan, Yes, Jonathan I think volume covenant very well I mean.
I think the important point is that we still have wind in our sails.
The transaction.
I mean, we did gave a lot of synergy updates on them at the market update.
Over $1 billion, and we said well that would be the last time, we will give that scorecard, but that does not mean, we are done with sourcing supply chain efficiencies.
And the operational efficiency. So we really still have wind in our sales on that.
Of course, we are seeing some inflation in tubular cement in the lower 48, some pressure on frac crews, but.
Like Ryan said being a global company really helps because we are still seeing deflation in certain categories and internationally. So.
Yes, I think Thats I think Thats, an interesting question and I think it really is because we still have the momentum coming out of the transaction.
We do think we're well placed to manage inflationary effects. So.
No I appreciate that and I imagine the hedging neon hedging comes back to the balance sheet strength.
<unk> been able to maintain so congratulations on that thank you.
Thank you. Our next question comes from Ryan Todd from Piper Sandler. Please go ahead next question.
Great. Thanks.
Good morning, everybody maybe.
A couple ones here.
We've discussed this frequently on past quarters and on the on.
On the recent analyst day, but obviously you continue to generate far more free cash than you're targeting to return to shareholders via dividends and buyback.
Should the environment remain supportive can you talk a little bit about the potential.
Impact to pace of debt reduction versus share buybacks as you look forward.
Would you pay down debt.
Just far more quickly than the 5 year original target that you'd given in a ramp up the buyback more aggressively any thoughts there and then maybe.
A second follow up.
This is the first quarter that we saw the combined performance of the legacy Conoco portfolio and the acquired Concho assets with without some of the 1 off noise that we saw during the first quarter and the outcome was outstanding and I think your lower 48 business certainly exceeded our estimates quite materially.
I know it may be hard at this point, but can you talk through some of the things that maybe exceeding expectations either in terms of cost well performance capital efficiencies are our marketing efforts.
Sure.
Thanks Ryan.
Maybe some comments second let bill and Tim Tumazos, you can chime in on the lower 48, a little bit.
I'd say at a high level the debt reduction plan that we announced at our June market update.
Moving to take the gross debt off over the next 5 years that still remains our target and our goal and.
It Shouldnt.
We're not right at this point trying to increase that.
There are necessarily accelerate that we're going to have some natural maturities that will will retire and then we'll do some optimization of the day Bill can provide a few more details about that but I think as we think through the commodity tailwind that are in there right now, but beyond the plans that we've talked about to the balance sheet, we feel pretty comfortable that those are in place so any incremental.
A lot of the returns of capital back to the shareholder.
Maybe bill if you want to add anything to that and then I can let him chime in about the performance in the lower 48.
Yes, sure Ryan So we do have about $1 billion in debt maturities that that will be coming due before the end of 2022, you should expect us to retire that debt as it comes due and as we've previously said any potential debt refinancing and reduction of our depend on multiple factors, including cost to retire debt.
Cost issue debt and how we decide to approach that broader on debt reduction target, but we're in a really strong position with the balance sheet right now and so I think you should expect us to be patient in evaluating market conditions as we continue to consider transactions to reduce our debt portfolio.
Yes, I think the only thing that would have to add to that is as we've communicated in the market update.
My excitement about the performance of the lower 48, it couldn't be higher.
When you take the <unk>.
Levels of technology that we're applying to a broader set of really really good assets.
My expectation is that the efficiencies, we're getting out of our business. The performance of our business will discontinue so it's a it's a real driver of cash flow and value creation.
Yeah.
Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead. Your line is open.
Hey, good morning, guys, it's clay on for Doug.
A couple of questions from me, maybe first off on M&A.
Evidenced by the Concho acquisition, obviously Conoco has no vaccine per Permian assets at the right price and the right locations et cetera. So there are no holes in tycoons Permian position today. So there's no need to fill but the question is whether you would consider all large bolt on acquisition at the right price.
And if you would what would that bring to the table for Conocophillips.
Yeah. Thanks, So I think as we I think I answered earlier, we have a pretty rigorous disciplined kind of framework for how we think about acquisitions, we know the assets.
In the areas that we really like and you shouldnt be surprised if we're looking at opportunities that are consistent with that framework and contiguous to where we operate.
But they have to compete within our cost of supply framework and the discipline that we brought to that in the patients that we've done both on the buying and the selling side. So I would look at our history. Our performance what we've done not just in the Permian, but Alaska, Canada and elsewhere around the portfolio. So we're a P.
We think about it pretty consistently and.
And that's.
That's how we look at those kinds of inorganic opportunities.
Thank you. Our next question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.
Yes, hi, good afternoon.
2 questions from me 1.
I guess a bit of a follow up just on uses of cash.
Nearly $9 billion of cash and short term equivalents on the balance sheet right now as you said the Ryan answer.
We aren't really looking to reduce debt at this point in time.
So how do you think about this optionality is there a trigger are you looking for to return even more cash back to shareholders or would you rather be linear and just have the optionality of the cash on the balance sheet.
And then the second question just on Big 3 could you give us your latest update of where you stand with the rig counts and Frac crews by basin, and how youre thinking about activity levels for the second half of the year.
Yes.
Alright, Thanks Bill.
I'll, let Tim kind of chime in on the big 3.
Yes, as far as uses of cash we have.
Communicated before broadly we like to carry some of the cash on the balance sheet for strategic and reserves and operating purposes and.
We've described that in quite a lot of detail detail in the past I think with the commodity price environment that we're seeing today.
The balance sheets in great shape as Bill described earlier on the last question. So I think as we get incremental free cash flow above and beyond our means we're not necessarily looking to continue to build a lot of cash on the balance sheet shareholders should expect that they start getting incremental returns if the if our view of the commodity prices continues to hold.
We've seen how volatile that can be and the fact that the market is still pretty unbalanced demand has yet to recover to pre pandemic levels and you got arguably 5 million or more barrels a day of spare supply is hitting in the market. So we still expect quite a lot of volatility which is why we like the strength of the balance sheets that we have today and holding some cash on that.
Balance sheet, and we'll continue to watch that macro market, which will inform our our distribution strategy going forward.
Maybe Tim you could comment on the details around the lower 48 rigs and the Frac spreads.
Sure just as a reminder, in the lower 48, we invested about $1.5 billion. So far in the first half of the year, we expect that investment rate to stay steady throughout the remainder of the year. We're currently running 15 rigs in the lower 48.11 in the Permian for in the Eagle Ford.
And we're running 7 frac spreads for in the Permian and 3 in the Eagle Ford.
And we.
We expect those levels of activity to remain pretty constant throughout the rest of the year 1 of the big benefits of the size and scope that we have we also have various rigs running with our other operating partners in the big 3 and we're keeping a close eye on that to see.
Hi to model what that activity is doing.
And I will take the next question.
Thank you. Our next question comes from Paul Cheng from Scotiabank. Please go ahead. Your line is open.
Hey, guys good morning.
Paul.
2 questions.
Deferred tax.
Can you discuss about how is that that's a potential source.
It's also fun attached.
Cash flow statement, though about the mixed simple yeah hows that.
Progression, it's going to look like given the current commodity price environment.
The second question is why I don't know if you can give us some maybe share some.
Market insight that though what do you see from the pie thank proteins that they're operating.
I think the publicly traded company.
Disciplined up pretty good.
But we are concerned about it.
LIFO index.
In the private side, what are you seeing there.
Yes, let me.
You broke up there a little bit Paul I think your first question was around that and the last question around private operators I think.
The first question just related to that deferred tax and how that as a source of cash source of cash flow.
For you guys over the next several years given both okay and commodity prices, yes. Okay. Thank you sorry, thanks for the clarification, Paul I can let bill talk about the.
The way, we view deferred taxes over the course of the plan that you are referring to but I guess in general to your second 1.
On the private private side they are.
Representing about 45 or so per cent of the rigs that are running in the in the tight oil plays in the lower 48 today, but the only accounts for about 22% of the current production of about roughly 7 million barrels a day.
Probably increases a bit because they are pretty active to your point I think generally as we think about it going forward. They run out of some of their best acreage over the next couple of years. So we don't see them having a outside.
Outsized impact on the growth coming from the title and the and being a dominant driver to U S production growth.
That's really going to depend on the strong public companies like Conocophillips that have.
The best rocks, and the higher quality rock versus the private company. So I think that's really the area to continue to focus on although we see as well as you do in the short term some of the incremental production that is coming out of the private operators are certainly taking advantage of the commodity price environment that don't have maybe the inverse.
Jeff pressure on discipline and returns of capital back to their shareholders. While they are trying to increase the value of their properties as they as they go forward. So while on a short term thing. We don't think it would be a long term driver to what the U S. Tight oil play looks like so let me ask Jeff wants to chime in on the deferred tax question, Yes, I think before that.
Can I just thought that.
Some industry consultants are forecasting the <unk> operate that they may be able to grow production by half a million barrel per day next year or the next.
Yet the next couple of years you're beneath.
Beneath that.
That would probably be way at the upper end of our estimate Paul.
We would view that that much we would probably be half half or so that kind of an estimate that their current kind of rig load.
Yeah.
Thank you. Our next question comes from Neal Dingmann from Cowen. Please go ahead. Your line is open we probably have 1 follow up with Paul that Bill can ask maybe if I could ask just accuray Bill can address all of the other question.
He is an hour hang on a second we're going to break in with the with the answer to Paul second question.
Sorry, Neil will get right back to you.
Hi, Paul It's bill.
Per taxes, if you look at for this quarter, we had about $360 million of deferred taxes as a source of cash this quarter, that's primarily due to utilizing our U S tax loss carryforwards this quarter, but if you look back to what we showed at the market update in June net deferred taxes really are not a material component of that $70 billion.
Worth of free cash flow, we showed at reference price is at $50.
At <unk>.
We would expect that all of our significant businesses would be in a taxpaying position at that reference price by about 2024.
Now should the current prices continue we'd expect to move into a tax paying position a bit earlier, maybe late 2022 or 2023 at current prices compared to 2024.
But under normalized $50 barrel prices deferred taxes really arent a source.
<unk> force.
Okay.
Thank you as an era that will go to Neil sorry, Neil Thank you.
Thank you my apologies Neil. Please go ahead. Your line is right then.
Sure. Thank you 2 I had was just first on in the market and you guys have done a great job containing that Martin just wondering the opportunities you see there either to export oil or other market opportunities you would see to potentially see higher differentials and then just as a second lots been talked about obviously your great debt repayment.
I'm sorry, your debt I would say your share repurchase is is that the primary sort of free cash flow now item over debt repayment or they day sort of coexist.
Thank you.
Yes, Thanks, Neal I think yeah on your first 1 you know we've got export capacity for some of our oil coming out of the U S. Lower 48 and in fact, we're doing some direct marketing.
With our commercial organization that has been.
Been an uplift to our margins in net back prices. So we continue to see that Amazon opportunity and.
Our longer term growth to continue to grow that capacity to be able to access some of those unique opportunities in the export market and in fact, not even going to traders that pick it up at the shoreline going direct customer to customer given some of our relations primarily in Asia.
In Southern South America, as well so that that's an opportunity for us as well on your second question.
We announced our gross debt reduction plan and that is consistent and equally important to the share repurchases that we're doing today. Once we obviously get through that that optimization plan that we're doing in <unk>.
Returns of capital back to the shareholder would dominate but right. Now we are we are in a dual track of looking it as bill described retiring some of our near term debt maturities and then doing some optimization of our debt in the balance sheet as market conditions continue to provide the right opportunity to do that.
Great way to look at it.
Yeah.
Thank you. Our next question comes from Jeffrey Lambeau, John from Tudor Pickering Holt. Please go ahead. Your line is open.
Good morning, Thanks for taking my question just 1 from me on return of capital, which you've been very clear about in terms of plans and very consistent about in terms of executing those plans.
As you think about the multiyear outlook and the target that you put out for aggregate cash returns can you just remind us what some of the guideposts Suraj, we think internally about nailing down forms for that capital returned in a given year, whether that's an optimal level for the dividend that you and the board consider or if it's free cash flow metrics above a certain threshold that keep buybacks even further front in <unk>.
Over any consideration of a variable just trying to look for any parameters that can help us understand the thought process and how discussions have been with that with shareholders.
Yes, Thanks, Jeff I think I go back to our original sideboards of the fairway.
Described to the to our shareholders to our owners is that you should expect a greater than 30% of our cash returned back to our shareholders Thats on a quarterly and an annual basis and you look back at our history. The last 5 years, that's averaged over 40%. So I think that's really the differentiation between our model for return of cash.
Total back to shareholders and maybe some of the others that we've been reading about and that we've been hearing about because it's not free cash flow base. It as CFO base, so as CFO growth because commodity prices are up the shareholders should expect to get more distribution now we've chosen and our ordinary dividend. We've said we want to be competitive we want.
Grow that competitively with the S&P, that's how we're measuring ourselves that's how we're measuring our performance of return on.
On capital.
And that's how we're measuring our performance of return of capital with respect to the ordinary dividend and then but we want that ordinary dividend to be resilient through the cycle. So we don't want to we want to be able to afford it at the low end of the cycle, which we demonstrated last year through the pandemic and then we recognize as we get additional torque that we described with higher prices.
With our cash flow is going to grow and our returns to our shareholders should grow as well you should expect that to come in at a minimum it's going to be 30%. So it's not a free cash flow based model, we think about it as a CFO based model and as I said in my opening remarks, we continue to watch what the best distribution channel and maybe it's a combination maybe it's a hybrid down the road.
We'll continue to watch that but today, we feel like our shares are a great buy in the market. So the channel that we've chosen right now at this 10 seconds as to the <unk>.
Ordinary dividend, yielding what it is today.
Bind with returning.
Meeting, our threshold with greater than 30% through the share buyback channel.
Got it thank you.
Yeah.
Thank you we have another question from Doug Leggate. Please go ahead. Your line is open.
Thank you.
John it's folks on the rail Don.
Was that.
The number of calls going on Ryan Ryan.
I did not understand but.
I hate.
Moving to get you guys to coordinate a little better.
Therefore, all yours.
So what kind of side Ryan.
Forgive me I'm going to hit.
Question in general I want to pre Covid.
Couple of them.
Examples so BP announced the dividend increase their shares are up 6% shell announced the dividend increase no shares on the day were up fairly significantly.
I guess my point is that it seems to us at least the market recognition.
Volume.
Tends to be soon.
The dividend channel more than the buyback channel you guys have done a phenomenal job of resetting your portfolio you were spending $15 billion prior to the dividend and today, you've got better free cash flow on a third of the spending why not go back to.
A bigger dividend.
Market will pay you for it.
Well, Doug I think.
We've learned through the past history and you referenced that.
Actions that we made coming out of the downturn in <unk>.
<unk> thousand 14 in 2015 in that.
That that experience is there and we've got to make sure the ordinary dividend is reliable it is.
Consistent it's predictable it's transparent it's growable over time and it works through the cycle and through the cycles as an important.
Distinction here so a lot of the people that you've talked about raising the dividend is come out of a period, where they cut it pretty dramatically.
Growing it back to a place that works through the cycles.
We feel like we've done that heavy lifting over the course of the last 4 to 5 years and we're at a place now where we're comfortable with the ordinary dividend in and like I said, we want to be competitive with the S&P 500, as we go forward, but I pivot back to what are what's important is the shareholders going to get 30% of our cash flow or more on an ongoing basis.
So you will get it and maybe today cash return is to your point a little bit more in favor than buybacks I can point to a couple of years ago, where that wasn't the case I don't know what the case will be 6 or 12 months from now, but we're open to it we're looking at it we're evaluating it and you'll hear more from us about about that.
A particular piece of it as well, but today I think our shares are a pretty good volume.
Well forgive me if I keep putting them on this issue, but I think in your portfolio capital efficiency can support that in our view.
I don't think they are getting rewarded for it so I'll keep funding on that volume if thats. Okay. Thanks, so much for taking my call Jeff not here Doug. Thank you.
Yes.
Thank you and we have no further questions at this time I would like to turn the call back over to Ellen.
Thanks, Darren and thanks to all of our participants this morning really appreciate the questions and.
Europe more than welcome to check in with US at any point after the call and look forward to engaging with you over the next few months P. J.
Thank you and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.
Okay.
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Good morning, and welcome to the quarter 2.2021 Conocophillips earnings Conference call. My name is an error and I'll be the operator for today's call. At this time all participants are in a 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.
And then 1 on your Touchtone phone.
I'll now turn the call over to MS. Ellen Desanctis, Ellen you may begin.
Thanks, Sara good morning, and welcome to our listeners we have the following executives on today's call Ryan Lance our chairman and CEO Bill Bullock, our executive Vice President and Chief Financial Officer, Ken Leech Executive Vice President of our lower 48, Dominic macro.
When our senior Vice President of strategy and technology and Nichols, our senior Vice President of global operations.
Our recent June 30 market update we plan to keep our prepared remarks very short this morning, and then as in Ara mentioned, we'll begin our Q&A session.
To call related logistics some of today's speakers are participating virtually we've done our best to ensure everything runs smoothly on the technology front.
Also because we wanted to give as many people as possible a chance to ask questions. During today's call I'll. Please don't get offended if you got cut off you can jump back into the queue, where you can reach out to investor relations anytime after the call.
Finally, a few reminders in conjunction with this morning's press release, we posted a short deck of supplemental material that includes second quarter earnings and cash flow summaries, some guidance items and our cash flow sensitivities.
And then finally on today's call, we'll make some forward looking statements 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.
And as usual reconciliations to the nearest corresponding GAAP measure can be found again in this morning's press release and on our website.
Thanks, and now I'll turn the call over to Ryan.
Thank you Ellen today's quarterly results come right on the heels of our June 30 market update during which we again laid out a compelling multi year outlook for the company.
The update was widely followed and we received some pretty positive feedback.
As you'd expect given the recency of our update there isn't much incremental news to share at this time, except to say we remain convinced of is timely and relevant given the ongoing volatility we're seeing in the sector.
And today, we're pleased to followed up with the very strong quarterly results, we announced this morning.
As you recall, we kicked off our update by declaring that we believe we are we're at a defining moment for the E&P sector and that persist today oil <unk>.
<unk> been especially volatile recently in part due to uncertainties in the macro and because we know investors need to see evidence that sector discipline will hold and returns on and of capital will follow.
It's clear to us that long term sector sponsorship requires leadership on the BARDA companies.
As well as conviction on the part of investors.
Of course for investors the case for these equities requires a reasonably constructive macro view.
The case for equities also requires conviction around a micro view in other words.
Is best positioned for the cyclical business realities.
And who have a track record of execution and performance and who can truly need in ESG.
Most companies are espousing the virtues of discipline and everyone now looks better coming out of into 2020 downturn.
The questions investors need to consider is who can deliver consistent returns focused performance through thick and thin.
That's where leadership matters.
In June we met this defining moment with a credible and highly investable plan that generates massive free cash flow and returns of capital with financial returns that are competitive with the S&P.
The leadership requires more than setting expectations and plans. It also requires successfully executing them.
Execution is where the rubber meets the road John.
<unk> offers a unique combination of a credible and compelling investment plan with a commitment to strong ongoing execution. You saw that you saw the plan in June.
And today you see the execution in other words you are seeing the June plan at work.
This morning's release and supplementary information provided details on this quarter's performance, so I won't restate them.
Here are a few key takeaways and themes that I want to underscore.
During the second quarter, the business ran extremely well our planned turnaround activity went smoothly as did our ongoing core programs across the company.
These include activities in the North American shale plays as well as in the multiple programs in our Alaska and international regions.
While we're talking about execution I'll also mention that we continue to make good progress on more than 50 emission reduction projects that we have underway this year.
Every part of our business has a role in delivering our results and I'm proud of our team for their accomplishments during a very busy year.
Overall this quarter's financial results were really quite straightforward.
The noise of 2000, Twenty's market upheaval and most of the cultural transaction adjustments are behind us.
And the known deal integration synergies and streamlining impacts we discussed in June are showing up in our performance.
We're on track to meet the updated 2021 guidance, we issued a month ago, but we're not done now done with our efforts to continue driving the operational and underlying efficiencies. The team as described in our June material.
We can't ignore that higher benchmark price was worrying factor in this quarter's sector performance broadly and certainly conocophillips specifically.
However, what is somewhat unique to conocophillips is that our results demonstrate the capacity of our company to capture the benefit of higher prices when they do occur.
It's because we're unhedged.
We're diversified.
And we're almost entirely in tax and royalty regimes.
Now a year ago, we demonstrated just how resilient we are low prices.
12 months later and post contract transactions. This quarter gives you a sense for the upside tour weekend realized when prices exceed the reference prices. We showed you just 1 month ago.
The clear bottom line.
Conocophillips works differentially through the cycles.
Cash from operations of 4 billion more than covered our capital expenditures of $1.3 billion and distributions of $1.2 billion in the quarter.
And importantly, we continued to meet and exceed our target of returning greater than 30% of our CFO to our shareholders.
We announced another increase to our 2021 distributions in June bringing our total planned returns of capital to about $6 billion for the year, representing almost 8% of our market cap today.
While other companies are only announcing or just reactivating such programs.
And of course as Bill described in our market update if prices continue at current levels. We would expect to have additional cash that could go toward greater distributions and for reference.
We estimate full year 2021, CFO at $50 per barrel <unk> would be about 11 billion after adjusting for the onetime concho transaction related impacts.
And you can do the math on our sensitivities that roughly 300 million per $1 per barrel change in prices.
At this time, we still believe our distribution allocation of nearly 3%, yielding ordinary dividend and share repurchases as a very sound mix, but we continue to evaluate the issue and we want to engage with the market on alternative allocation.
We know there isn't a perfect answer, but we know what matters.
And Thats, a incredible commitment to return capital and a solid track record of reliable performance, which we certainly delivered now for multiple years.
So to summarize.
We have a great shareholder friendly business model and plan, we're hitting our stride after a busy time and putting the execution runs on the board.
Maintaining our discipline.
Company is running extremely well and we're not done with our work to improve underlying financial returns on capital employed that's the goal.
That's how we lived long term market sponsorship and.
And Thats, what Conocophillips is all about.
We're pleased to be where we're at here at mid year, but we recognize the year is still young.
Looking forward to the second half of 2021, our priorities are squarely focused on executing our remaining plans and programs for this year.
Meanwhile, we are closely watching how the macro evolves and beginning our internal process of setting our 2022 budget and capital plans.
We will stay actively engaged with the market and look forward to him during discussions about how our plans are progressing.
So let me turn the call over to the operator, and we'll begin the Q&A portion of the call.
Absolutely. Thank you we will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone.
Youre using a speakerphone you may need to pick up per handset first before pressing the numbers. Once again, if you have a question. Please press Star then 1 on your Touchtone phone.
Waiting on standby for any questions.
And our first question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
Good morning team.
2 quick questions for me first 1 for you Ryan just your perspective on M&A in this current market you did terrific transaction last year, but how do you think about the opportunity set that's out there for either buying and selling and the other 1 that might be per bill is just related to the quarter itself.
Was it a relatively clean quarter can we just simply say 4 billion of cash flow minus Capex and then annualize that free cash flow implies about a mid teens type of free cash flow yield, but wanted to make sure that we weren't missing any pieces here to the positive or negative.
That would be more onetime in nature.
Well, thanks, Neil I'll start on the M&A side, let bill chime in on your second question you know when we.
Think about the market our approaches to constantly know what assets that we like and we constantly are reviewing the portfolio to look at the pieces inside the portfolio that are that are uncompetitive. So we're we're constantly screening.
The opportunities to both buy and sell assets and we're constantly trying to.
Great.
The portfolio I think the environment that we see today.
Certainly it feels like more assets tend to come into the market.
But I don't think that makes it makes it necessarily a buyers or a seller's market today I think what what matters to us is just to keep out the rigor and the discipline that we've described back in 2019, we continued through today and continue through the Concho.
Transaction that we did earlier.
Back back in January and Thats, just the rigor of our disciplined framework around cost of supply and value and simply being patient I think.
The market may require that even now more of it more than ever.
So I think that's a bit about how we think about the inorganic side of the business now maybe turn it over to bill let him comment on the cash flow.
Sure. Good morning, Neil This is bill.
It was a very clean quarter on a cash basis. It was cleaned up for both cash and it was clean for both earnings.
As Youre looking at your run rate.
I'd point, you to just 2 items to consider though the first 1 and we mentioned this in the press.
Press releases that we did make a $200 million discretionary pension plan contribution in the second quarter that reduced our second quarter CFO and the contribution increase the pension plan funding status above 90% and that eliminate the need to pay the PBGC premium payments. It also leads to reduce.
<unk> financial statement volatility for the pension at reducing some of our go forward funding requirements. So that really did make good sense per use of cash to us in the quarter.
I draw that to your attention as a reduction in our run rate and the other 1 that I pointed out as youre thinking about run rates would be our <unk> distributions, we received distributions of $250 million from AP LNG in the second quarter that brings year to date about $350 million.
And we anticipate about $100 million in the third quarter and $700 million per year. So just as a reminder, we typically receive lower distributions in the first and third quarters and higher distributions in the second and fourth quarters as Youre thinking about the run rates on that.
Net those AP LNG distributions are pretty locked in for the year before.
Long term LNG sales at Braves LNG, a price lag in there so there's very little sensitivity.
To that for the remainder of the year and so as we're thinking about how to look at run rates for the rest of the year I direct you to our sensitivities that we provide those still hold and a good rule of thumb is about $300 million annualized cash flow for every $1 million change in <unk> and with those you ought to be pretty bang on with.
Yes.
CFO sensitivities.
It makes it easy thanks guys.
Okay.
Thank you. Our next question is from Roger read from Wells Fargo. Please go ahead. Your line is open.
Yes. Thank you good morning, and congratulations on the quarter.
Interesting Ron you kind of mentioned you know looking across at the industry overall, and an easier quarter for companies to do well.
So, let's maybe ask the question what are some of the things that may become a headwind as we think about some of the inflationary issues. It may be creeping up out there.
What you would do to offset that and what you think maybe will allow you to continue to separate from some of those companies will look at over the next several quarters.
Yes, Thanks, Roger I can provide some comments maybe dominate can add a little bit of color to that as well I think if Europe.
Europe pure play 1 basin kind of operator, you are probably going to experience certain categories of spend that are inflating I.
I think the advantage of Conocophillips has right now is we're still capturing a lot of the best practices and the synergies from the Concho transaction plus the fact that we're a global diversified company. So other areas around the world are not inflating maybe like some of the economies that are leading the recovery from the Covid pandemic so before.
We're able to differentiate ourselves in that regard pretty clearly we think it's eminently manageable this year and as we go into next year and now.
I would add 1 other thing that it seems to be missing a little bit from the conversation and I mentioned it in my opening remarks, and that's the unhedged nature of our portfolio I'm just surprised a few of the analysts are asking the question to the E&ps that are hedged what what happened.
There could even be more cash flow if you hadn't hedged your position you Shouldnt expect that from from Conocophillips will get the torque from the upside on the prices as we described in my opening comments that dominate John I don't know if you have any more you can add to the inflation part of Roger's question.
Thanks, Ryan Yeah, Roger I think I think <unk> covered it very well I mean.
I think the important point is that we still have wind in our sales from the transaction.
I mean, we did gave a lot of synergy updates on other market update.
Over $1 billion, and we said well that would be the last time, we will give that scorecard, but that does not mean, we are done with sourcing supply chain efficiencies and operational efficiencies. So we really still have wind in our sales on that.
Of course, we are seeing some inflation in tubular cement in the lower 48, some pressure on frac crews, but.
Like Ryan said being a global company really helps because we are still seeing deflation in certain categories and internationally. So.
Yes, I think that's I think that's an interesting question and I think it really is because we still have the momentum coming out of the transaction.
We do think we're well placed to manage inflationary effects. So.
No I appreciate that and I imagine the hedging and neon hedging comes back to the balance sheet strength.
You've been able to maintain so congratulations on that thank you.
Yes.
Thank you. Our next question comes from Ryan Todd from Piper Sandler. Please go ahead next question.
Great. Thanks.
Good morning, everybody maybe.
A couple of ones here I know we've discussed this frequently on past quarters and on the.
On the recent analyst day, but obviously you continue to generate far more free cash than you are targeting to return to shareholders via dividends and buyback.
Should the environment remain supportive and can you talk a little bit about the potential impact to pace of debt reduction versus share buybacks as you look forward.
Would you pay down debt.
Far more quickly than the 5 year original target that you'd given in a ramp up the buyback more aggressively.
Out there and then maybe.
Second follow up.
This is the first quarter that we saw the combined performance of the legacy Conoco portfolio and the acquired Concho assets with without some of the 1 off noise that we saw during the first quarter and the outcome was outstanding and I think your lower 48 business certainly exceeded our estimates quite materially.
It may be hard at this point, but can you talk through some of the things that maybe exceeding expectations either in terms of costs well performance capital efficiencies are our marketing efforts.
Sure.
Thanks Ryan.
Maybe some comments cycle, let bill and Tim Tumazos, you can chime in on the lower 48, a little bit.
I'd say at a high level the debt reduction plan that we announced at our June market update.
Turning to take the gross debt over the next 5 years that still remains our target and our goal and.
It Shouldnt.
We're not right at this point trying to increase that.
Our are necessarily accelerate that we're going to have some natural maturities that will retire and then we'll do some optimization of a dead Bill can provide a few more details about that but I think as we think through the commodity tailwind that are in there right now, but beyond the plans that we've talked about to the balance sheet, we feel pretty comfortable that those are in place so any incremental.
A lot of the returns of capital back to the shareholder.
Maybe bill if you want to add anything to that and then I'll, let him chime in about the performance in the lower 48.
Yes, sure Ryan So we do have about $1 billion in debt maturities that that will be coming due before the end of 2022, you should expect us to retire that debt as it comes due.
And as we've previously said any potential debt refinancing and reduction of our depend on multiple factors, including cost to retire debt cost issue debt and how we decide to approach that broader debt reduction target, but we're in a really strong position with the balance sheet right now and so I think you should expect us to be patient in evaluating market conditions.
<unk> as we continue to consider transactions to reduce our debt portfolio.
Yes, I think the only thing that would have to add to that is as we communicated in the market update.
My excitement about the performance of the lower 48, it couldn't be higher.
When you take the <unk>.
Different levels of technology that we're applying to a broader set of really really good assets. My expectation is that the efficiencies we're getting out of our business. The performance of our business will just continue so it's a it's a real driver of cash flow and value creation.
Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead. Your line is open.
Hey, good morning, guys, it's clay on for Doug.
A couple of questions from me, maybe first off on M&A.
Evidenced by the Concho acquisition, obviously Conoco has no vaccine per Permian assets at the right price and the right locations et cetera. So there are no holes and typhoons Permian position today. So there's no need to fill but the question is whether you would consider larger bolt on acquisition at the right price.
And if you would what would that bring to the table for Conocophillips.
Yeah. Thanks, So I think as we I think I answered earlier, we have a pretty rigorous disciplined kind of framework for how we think about acquisitions, we know the assets.
In the areas that we really like and you shouldnt be surprised if we're looking at opportunities that are consistent with that framework and contiguous to where we operate.
They have to compete within our cost of supply framework and the discipline that we brought to that in the patients that we've done both on the buying and the selling side. So I would look at our history. Our performance what we've done not just in the Permian, but Alaska, Canada and elsewhere around the portfolio. So we're pretty.
We think about it pretty consistently.
And.
That's how we look at those kinds of inorganic opportunities.
Thank you. Our next question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.
Yes, hi, good afternoon 2.
2 questions from me 1.
I guess a bit of a follow up just on uses of cash.
Nearly $9 billion of cash and short term equivalents on the balance sheet right now as you said the Ryan answer.
We aren't really looking to reduce debt at this point in time.
So how do you think about this optionality is there a trigger are you looking for to return even more cash back to shareholders or would you rather be linear and just have the optionality of the cash on the balance sheet.
And then the second question just on Big 3 could you give us your latest update of where you stand with rig counts and Frac crews by basin, and how youre thinking about activity levels for the second half of the year.
<unk>.
Alright, Thanks Bill.
I'll, let Tim kind of chime in on the big 3.
Yes, as far as uses of cash we have.
Communicated before broadly we like to carry some of the cash on the balance sheet for strategic and reserve and operating purposes and <unk>.
We've described that in quite a lot of detail detail in the past I think what the commodity price environment that we're seeing today.
The balance sheets in great shape as Bill described earlier on the last question. So I think as we get incremental free cash flow above and beyond our means we're not necessarily looking to continue to build a lot of cash on the balance sheets shareholders should expect that they started getting incremental returns. If these if our view of the commodity prices continues to hold.
See how volatile that can be and the fact that the market is still pretty unbalanced demand has yet to recover to pre pandemic levels and you got arguably $5 million or more barrels a day of spare supply sitting in the market. So we still expect quite a lot of volatility which is why we like the strength of the balance sheets that we have today and holding some cash on that.
Alan sheets, and we'll continue to watch that macro market, which will inform our our distribution strategy going forward.
Tim you could comment on the details around the lower 48 rigs and the Frac spreads.
Sure just as a reminder, in the lower 48.
We invested about 1.5 billion so far in the first half of the year.
We expect that investment rate to stay steady throughout the remainder of the year. We're currently running 15 rigs in the lower 48.11 in the Permian for the Eagle Ford.
We're running 7 frac spreads for in the Permian and 3 in the Eagle Ford and.
We expect those levels of activity to remain pretty constant throughout the rest of the year 1 of the big benefits of the size and scope that we have.
Also have various rigs running with our other operating partners in the big 3 and we're keeping a close eye on that to see try to model what that activity is doing.
And we'll take the next question.
Thank you. Our next question comes from Paul Cheng from Scotiabank. Please go ahead. Your line is open.
Hey, guys good morning, Gary.
Paul.
2 questions.
Deferred tax.
Can you discuss about how that net debt.
Potential sources.
So your.
In your cash flow statements over the next several years how's that.
Progression is going to look like given the current commodity price environment.
The second question is why I don't know if you can give us some maybe share some.
Market wound site that though what you see from the pie thank proteins that they operate that day.
Publicly traded company.
Coupled with disciplined up pretty good.
But we are concerned about it.
The LIFO index.
And the private side.
Are you seeing there.
Yes, let me.
You broke up there a little bit Paul I think your first question was around that and the last question around private operators I think.
The first question just related to the deferred tax and how that as a source of cash source of cash.
Paul you guys over the next several years given current.
And commodity prices, yes, okay. Thank you sorry, thanks for the clarification, Paul I can let bill talk about the.
Good day review deferred taxes over the course of the plan that you are referring to but I guess in general to your second 1.
On the private private side they are rep.
Representing about 45% or so per cent of the rigs that are running in the in the tight oil plays in the lower 48 today, but they only accounts for about 22% of the current production of about roughly 7 million barrels a day.
Probably increases a bit because they are pretty active to your point I think generally as we think about it going forward. They run out of some of their best acreage over the next couple of years. So we don't see them having a.
Outsized impact on the growth coming from the tight oil in the <unk> being a dominant driver of U S production growth.
That's really going to depend on the strong public companies like Conocophillips that have.
The best rocks, and the higher quality rock versus the private companies I think that's really the area to continue to focus on although we see as well as you do in the short term some of the incremental production that is coming out of the private operators are certainly taking advantage of the commodity price environment that don't have maybe the.
The investor pressure on discipline and returns of capital back to their shareholders, while theyre trying to.
Greece the value of their properties as they as they go forward. So.
Although a short term thing we don't think it would be a long term driver to what the U S. Tight oil play looks like so let me ask Scott to chime in on the deferred tax question before that that line can I just stop that.
Some industry consultants are forecasting that <unk> operate that they may be able to grow production by half a million barrel per day net.
<unk> here or there makes a yet the next couple of years beneath.
They need that.
That would probably be way at the upper end of our estimate Paul.
We would view that that much we would probably be half half or so that kind of an estimate that their current kind of rate load.
Okay.
Thank you. Our next question comes from Neal Dingmann from Cowen. Please go ahead. Your line is open we probably have 1 follow up with Paul the Bill can I ask maybe if I could ask just accurate bill can address all of the other question.
He has been our hang on a second we're going to break in with the with the answer to Paul second question.
Sorry, Neil will get right back to you.
Hi, Paul It's bill.
<unk> taxes, if you look at for this quarter, we had about $360 million of deferred taxes as a source of cash this quarter thats, primarily due to utilizing our U S tax loss carryforwards this quarter, but if you look back to what we showed at the market update NGL differ.
Gary taxes really are not a material component of that $70 billion worth of free cash flow. We showed at reference price is at $50.
<unk>.
And we would expect that all of our significant businesses would be in a taxpaying position at that reference price by about 2024.
Now should the current prices continue we would expect to move into taxpaying position a bit earlier, maybe late 2022 or 2023 at current prices compared to 2024.
But under normalized $50 barrel prices deferred taxes really arent a source.
<unk> force.
Thank you as an era that will go to Neil sorry, Neil Thank you.
Thank you my apologies Neil. Please go ahead your line is open.
Sure. Thank you 2 I had was just first on in the market and you guys have done a great job containing that Martin just wondering the opportunities you see there either to export oil or other market opportunities you would see to potentially see higher differentials and then just as a second lots been talked about obviously youre a great debt repayment.
I'm sorry, your debt I would say your share repurchase is is that the primary sort of free cash flow now item over debt repayment or they day sort of coexist.
Thank you.
Yes, Thanks, Neal I think yeah on your first 1 you know we've got export capacity for some of our oil coming out of the U S. Lower 48 and in fact, we're doing some direct marketing.
With our commercial organization that has been.
Been an uplift to our margins and netback prices. So we continue to see that as an opportunity.
Or have a longer term growth to continue to grow that capacity to be able to access some of those unique opportunities in the export market and in fact, not even going to traders that pick it up at the shoreline going direct customer to customer given some of our relations primarily in Asia.
In Southern South America, as well so that that's an opportunity for us as well on your second question.
We announced our gross debt reduction plan and that's consistent and equally important to the share repurchases that we're doing today. Once we obviously get through that that optimization plan that we're doing in <unk>.
In terms of capital back to the shareholder would dominate but right. Now we are we are in a dual track of looking it as bill described retiring some of our near term debt maturities and then doing some optimization of our debt in the balance sheet as market conditions continue to provide the right opportunity to do that.
Great way to look at it.
Okay.
Thank you. Our next question comes from Jeffrey Lambeau, John from Tudor Pickering Holt. Please go ahead. Your line is open.
Good morning, Thanks for taking my question just 1 from me on return on capital, which I know you've been very clear about in terms of plans and very consistent about in terms of exceeding those plans.
As you think about the multi year outlook and the targets that you've put out for aggregate cash returns can you just remind us what some of the guideposts sorry, as you think internally about nailing down payments for that capital returned in a given year, whether that's an optimal level for the dividend that you and the board consider or if it's free cash flow metrics above a certain threshold that keep buybacks even further front in <unk>.
Enter over any consideration of a variable just trying to look for any parameters that can help us understand the thought process and how discussions have been with that with shareholders.
Yes, Thanks, Jeff I think.
Back to our original sideboards of the fairway.
Described to the to our shareholders to our owners is that you should expect a greater than 30% of our cash returned back to our shareholders and thats on a quarterly and an annual basis and you look back at our history in the last 5 years, that's averaged over 40%. So I think that's really the differentiation between our model for return of cash.
Total back to shareholders, maybe some of the others that we've been reading about and that we've been hearing about because it's not free cash flow base. It is CFO base. So as CFO grows because commodity prices are up the shareholders should expect to get more distribution now we've chosen.
In our ordinary dividend, we've said, we want to be competitive we want to grow that competitively with the S&P. That's how we're measuring ourselves that's how we're measuring our performance of return.
On capital and that's how we're measuring our performance of return of capital with respect to the ordinary dividend and then but we want that ordinary dividend to be resilient through the cycle. So we don't want it we want to be able to afford it at the lower end of the cycle, which we demonstrated last year through the pandemic and then we recognize as we get additional torque that we.
Described with higher prices with our cash flow is going to grow and our returns to our shareholders should grow as well you should expect that to come in at a minimum it is going to be 30%. So it's not a free cash flow based model, we think about it as a CFO based model and as I said in my opening remarks, we continue to watch what the best distribution channel and maybe it's a combination.
Maybe it's a hybrid down the road, we will continue to watch that but today, we feel like our shares are a great buy in the market. So the channel that we've chosen right now at this 10 seconds as to the strong ordinary dividend, yielding what it is today combined with returning.
Meeting, our threshold with greater than 30% through the share buyback channel.
Got it thank you.
Thank you we have another question from Doug Leggate. Please go ahead. Your line is open.
Thank you.
I apologize folks.
The real Don.
There's a number of calls calling on Ryan.
Yeah.
I understand but I hate.
We need to get you guys to coordinate a little better I'm kidding.
Therefore, all yours.
So what kind of sidelined.
Forgive me I'm going to.
Dividend question, Jack I wanted to profit.
A couple of.
Example, so BP announced the dividend increase their shares are up 6% shell announced the dividend increase no shares on the day were up fairly significantly.
I guess my point is that it seems to us at least the market recognition.
Volume tends to be too.
The dividend channel more than the buyback channel you guys have done a phenomenal job of resetting your portfolio you were spending.
Million dollar prior to the dividend and today, you've got better free cash flow on a third of the spending why not go back to.
A bigger dividend that the market will pay you for.
Well, Doug I think.
We've learned through the past history, and you referenced that the reductions that we made coming out of the downturn.
2014.2015 in that.
That experience is there and we got to make sure. The ordinary dividend is reliable it's consistent it's predictable it's transparent it's growable overtime and it works through the cycles and through the cycles as an important.
Distinction here, so a lot of the people that you've talked about raising the dividend <unk> come out of a period, where they cut it pretty dramatically.
It would be growing it back to a place that works through the cycles.
We feel like we've done that heavy lifting over the course of the last 4 to 5 years and we're at a place now where we're comfortable with the ordinary dividend in and like I said, we want to be competitive with the S&P 500, as we go forward, but I pivot back to you don't want to but what's important is the shareholder is going to get 30% of our cash flow or more on an ongoing basis.
So you will get it and maybe today cash return of to your point, a little bit more in favor than buybacks I can point to a couple of years ago, where that wasn't the case I don't know what the case will be 6 or 12 months from now, but we're open to it we're looking at it we're evaluating it and you'll hear more from us about about that.
That particular piece of it as well, but today I think our shares are a pretty good volume.
Forgive me if I keep putting on this issue, but I think your portfolio capital efficiency can support it in our view.
I don't think we're getting rewarded for it so I'll keep funding on that volume if thats. Okay. Thanks, So much for taking my question I hear you Doug. Thank you.
Yes.
Thank you and we have no further questions at this time I would like to turn the call back over to Ellen.
Thanks, Darren and thanks to all of our participants this morning really appreciate the questions and.
Europe more than welcome to check in with US at any point after the call and look forward to engaging with you over the next few months.
Thank you and thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.