Q4 2021 Conocophillips Earnings Call

February 3, 2022

Good morning, and welcome to the Q4 2021 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 I'll now turn the call over to Mr. Mark Keener D. P Investor Relations Marc you may begin.

Thank you generic welcome to all of our listeners today first let me introduce the members of our team who are on today's call.

Ryan Lance our chairman and CEO , Bill Bullock Executive Vice President and Chief Financial Officer, Domenic, Maclin Executive Vice President of strategy sustainability and technology.

Tim Leach Executive Vice President lower 48, and Nicola <unk> Executive Vice President for global operations.

Brian and Bill will lead off today's call with some prepared comments after which the team will be available to take your questions.

Before I turn the call over to ride a few quick reminders in conjunction with this morning's release, we posted supplemental materials.

Excuse me did include fourth quarter and full year 2021 highlights earnings and cash flow summaries preliminary reserve replacement information price realization analyses and updated 2022 guidance and sensitivities.

Our call we may make 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 filings with the SEC.

And finally, we will also make reference to some non-GAAP financial measures today reconciliations to the nearest corresponding GAAP measure can be found in this mornings release and on our website with that I'll turn the call over to Rob.

Thank you Mark So 2021 was a truly remarkable year for Conoco Phillips, our operating performance around the globe was outstanding we generated strong returns on capital for our shareholders.

And closed on two significant highly accretive acquisitions in the heart of the Permian Basin.

Our exceptional results last year directly attributable to the talent and dedication of our global workforce.

Produced one 6 million barrels per day in <unk>.

First production online at GMT two in Alaska.

Montney, well pad and the Malachi phase II and S&P phase II projects in Malaysia.

Also completed the <unk> project in Norway, and achieved all of this with excellent cost schedule and safety and environmental performance.

Financially, we achieved a 14% full year return on capital employed or 16% on a cash adjusted basis.

<unk> generated $15 7 billion and CFO with over $10 billion in free cash flow and.

And we returned 6 billion to our shareholders, representing 38% of our cash from operations.

We also continued our rigorous portfolio optimization work completing the truly transformative concho and shell Permian acquisitions, and further high grading our asset base around the world.

In the Asia Pacific region, we exercised our preemption right to acquire an additional 10% in AP LNG and announced the sale of assets in Indonesia for $1 4 billion.

In the lower 48, we generated $3 billion in proceeds from the sale of non core assets last year and last week, we signed an agreement to sell an additional property set outside of our core areas for an additional $440 million.

Collectively these transactions reduce both the average cost of supply and the ghd intensity of our more than 20 billion barrel resource base.

And we're well down the road toward achieving our $4 billion to $5 billion in dispositions by 2023.

In early December consistent with our 10 year plan and capital allocation priorities, we announced a returns driven capital budget for 2022 that is expected to deliver modest growth. This year. We also introduced a new variable return of cash or V rock tier to our distribution framework and provided a full year.

Our target of $7 billion in total returns of capital to our shareholders.

Based on current prices on the forward curve, we've increased the target to $8 billion with the incremental $1 billion coming in the form of increased share repurchases and a higher variable return of cash.

<unk> 30 per share of <unk> announced for the second quarter represents a 15% increase over our inaugural variables returned to shareholders that we paid.

This quarter.

Now to put the $8 billion in perspective, it equates to an increase of more than 30% from the $6 billion returned last year and a greater than 50% increase in projected cash returned to shareholders.

Our three tier distribution framework provides a flexible and durable means to meet our returns commitment through the price cycle.

And truly is differential to others. In this sector is our returns commitment is based on a percentage of CFO and not free cash flow.

And as you know we are guided in everything we do by our Triple mandate.

We must reliably and responsibly deliver oil and gas production to meet energy transition pathway demand.

Need to generate competitive returns on and of capital for our shareholders and achieve our Paris aligned net zero ambition by 2050.

Just as I am very proud of the excellent operational and returns focused performance we delivered in 2021.

Equally pleased about the progress we have made in support of the third pillar of our mandate.

We increased our medium term emissions intensity reduction target to 40% to 50% by 2030 and expanded it to include both gross operated and net equity production.

As a reminder, we're also committed to further reducing our methane emissions and achieving our zero routine flaring ambition by 2025.

And as highlighted in our December release, we've allocated $2 2 billion of this year's capital program for projects to reduce the company's scope, one and two emissions intensity and investments in several early stage low carbon opportunities that address and use emissions.

We strongly believe that this level of focus on and performance toward fully realizing our triple mandate has conocophillips very well positioned to not just survive through the energy transition, but to thrive regardless of the pathways that tastes.

While we're on the topic of energy transition I'd like to touch on the macro environment.

Commodity prices today reflect global energy demand returning to pre pandemic levels, along with supply being impacted by decreased investment in oil and gas over the past couple of years.

Concerning about inventory levels.

And the amount of available spare production capacity in the system. All of these factors demonstrate the ongoing importance of our sector to the global economy today and for the foreseeable future.

It's becoming increasingly clear that the energy transition isn't going to happen with the flip of the switch.

People and businesses around the globe need as a managed an orderly transition, but that's not what the world is seeing to this point.

Supply and demand balances are fragile at the moment likely driving continued volatility in the current commodity price situation in Europe may be providing a cautionary signal.

The simple reality is that most alternative energy sources still have a long way to go towards becoming as scalable reliable affordable and accessible as the world needs them to be.

Which brings me back to our triple mandate and the importance of performing well across all three of the pillars for our shareholders and for the people of world, who need and use our products.

Now with that let me turn the call over to Bill and he will cover the fourth quarter and our 2022 outlet.

Thanks Ryan.

Looking at fourth quarter earnings, we generated $2 27 per share and adjusted earnings.

This performance reflects production above the midpoint of guidance and strong price realizations as well as some commercial and inventory timing benefits, partially offset by slightly higher costs and DD&A.

Lower 48 production averaged 818000 barrels of oil equivalent per day for the quarter, including 483000 from the Permian.

213000 from the Eagle Ford and a 100000 from the Bakken.

As previously communicated our Permian and overall lower 48 production were both increased roughly 40000 barrels of oil equivalent per day in the quarter due to the conversion from two to three stream accounting for the acquired Concho assets.

At the end of the year, we had 20 operated drilling rigs and nine frac crews working in the lower 48 <unk>.

Including those developing the acreage we recently acquired from shell.

As Brian touched on earlier operations across the rest of the portfolio also ran extremely well last year with our GMT two project in Alaska, producing first oil in the fourth quarter as planned.

Turning to cash from operations, we generated $5 5 billion and CFO , excluding working capital, resulting in free cash flow of $3 9 billion in the quarter.

For the full year 2021, we generated $15 7 billion and CFO $10 4 billion of free cash flow and returned $6 billion to shareholders.

In addition to the asset dispositions, Brian covered we also sold 117 million shares we held in synovus in the year generating $1 1 billion of proceeds that we used to fund repurchases of our own shares.

This left us with a little over $90 million in other shares at the end of the year, which we intend to fully monetize by the end of this quarter.

We ended the year with over $5 billion in cash maintaining our differential balance sheet strength, even after completing the all cash acquisition of Shell's Delaware Basin assets.

So to recap it was not only a strong quarter, but one that also bodes very well for 2022 in future years.

We continue to optimize the portfolio our businesses are running very well around the globe.

And we have had.

Overall reserve replacement ratio of nearly 380%, establishing an incredibly powerful platform for the company as we head into this year and beyond.

Our cash flow performance and leverage to prices have substantially improved over the past couple of years as demonstrated by our fourth quarter results and I expect it will continue to improve as we begin including the newly acquired Delaware assets in our consolidated results this quarter.

Now demonstrating this point and appreciating that it's helpful for the market to have an accurate sense of our stronger CFO generating capacity.

At a <unk> price of $75, a barrel with a $3 differential to Brent and Henry hub price of $3 17 75.

We estimate our 2022 full year cash from operations would be approximately 21 billion.

Which reflects us reentering, a tax paying position in the U S. This year at those price levels.

Our free cash flow for the year would be roughly $14 billion.

And of course, we continue to be unhedged across our global diverse production base.

So we expect to fully capture the upside of the current price environment.

We provided updated sensitivities in today's supplemental materials to help estimate how much earnings and CFO are projected to change this year with market price movements.

So to sum it up all that we've shared with you today underscores our readiness to reliably generate very competitive returns for our shareholders as we thoughtfully move forward as a responsible valuable E&P player in the energy transition.

That is our triple mandate, it's what we have conoco pulse built for and are ready to deliver.

Now with that let's go to the operator to start the Q&A.

Thank you we will now begin the question and answer session.

I have a question. Please press Star then one 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 one on your Touchtone phone.

And our first question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

Hi, Good morning, good afternoon, everyone. Thanks for taking your question.

You bet good morning team.

Morning first question, maybe for you Ryan.

Early in the year, but you have the confidence to increase the expected cash return by $1 billion.

You provided an update on your macro view earlier in the call.

Really the primary driver for increasing the cash return level and can you provide an update on how inflation is trending for conoco given continued strong oil prices as well as <unk>.

Recent industry commentary from service companies.

Yes, Thanks Jeanine.

The primary reason, we are increasing our returns of capital to our shareholder from the seven that we announced here just a few weeks ago to $8 billion now. So again it represents a pretty significant increase year on year, but it's a reflection of kind of our view and as we step back and take a look like we will each quarter.

Thinking about where the forward curve is that where the market's at where our capital is at where the balance sheet is at.

Recognition of a strengthening commodity price market.

And that's a reflection of that strengthening since.

The December timeframe, when we announced our capital budget for the year.

We're seeing a bit more inflation as a result of the strengthening commodity price that we see and I'd say, it's primarily in the Permian basin as well, but the kind of spreading a bit to the lower 48.

Prior we were probably in the.

Mid <unk>.

Mid single digit kind of inflation across the whole company I would say now we are in the mid.

Mid to mid level single digit kind of inflation rates. So we're seeing the seeing the impact of that it's on certain commodities as spend like.

Tubular is.

Trucking labor chemicals OTC G. Those kinds of things in the primarily in the more active parts of the lower 48 like like the Permian today.

The whole world, though we see much lower inflation and thats the benefit of our global diversified portfolio, but we are seeing the.

A little bit higher pressure at these higher commodity prices than maybe what we would have said, even a month and a half or two months ago.

Okay, great. Thank you for all that detail.

Second question is on the shell acquisition.

It Hasnt really been very long since it closed but can you provide any color on opportunities related to the integration or any efficiency gains and I guess, we're thinking for example, just using concho as a playbook you were very successful capturing low hanging cost savings related to the supply chain related to marketing optimization that added.

Joshua number but for the shell deal you have a higher percentage of non operator, non operator interest in.

That could have any impact of similar optimization. So are there other unique opportunities with shell assets. Thank you.

Jeanine this is Tim.

Yes, let me let me address those questions.

As a reminder, we closed the <unk> acquisition on December one to 70 days. After we made the announcement of the transaction.

A smooth and safe transition of operator ship in personnel over the time, so that's been a huge success.

Plan to continue running four rigs on that property. The same activity rate that shell was running through the remainder of this year, but we've moved our personnel our rigs on and.

Since we've taken up operator ship, we've quickly transitioned to our style of.

Well drilling design casing design.

As generated lower cost we've also switched to.

Our fracking design, which.

It provides better economics.

Using our style of profit fluids.

Specs and cluster spacing.

So all of those are kind of the blocking and tackling of us putting our style of operations.

Those properties.

I'd tell you that the biggest opportunity in the near term is transitioning from one mile wells to two mile Wells and Thats with our partners out there in the field.

All of those companies that were partnered with we have done deals with in the past.

Core up and drill longer laterals, so I think thats the.

Low hanging fruit, we're in conversations with all of them we've made transactions.

Some of those properties already.

For frame of reference the difference between drilling a two mile lateral on those properties and a one mile lateral everything else being held the same as a 50 basis point improvement on rate of return on well economics, which generates about a 30% improvement in cost of supply.

The other thing that we're working on that.

Pretty excited about.

The shell shell deal in and of itself has allowed us more freedom for overall property management.

May have read in the last couple of weeks that we sold some non core assets on the new Mexico shelf and on the Central Basin platform.

The kind of efficiency, we get from those kind of property management for example that one transaction that allowed us to sell 25% of our operated well bores and it only affected 2% of our production in the Permian, So that kind of efficiency will flow through the entire organization.

<unk> is just one example of how I think we're making things better.

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

Good morning team. Thank you Ryan you were quoted recently talking about U S production profile I think your.

Your point was that entry to exit this year.

Might grow 800000 barrels a day I guess thats a crude.

Love your perspective on how Youre seeing the.

U S production profile.

As you think about yourself and peers.

It's tough for us to get the same store.

It seems.

Store sales growth rate for conoco in the Permian because of course, you've done some acquisitions here, but just as you think about the growth rate in 'twenty two versus 21 for your own asset base. How are you thinking about that in the Permian.

Yes, I can let Tim to talk about specific specifically the lower 48 in the acid, but I'd say the macro yeah I was quoted at a recent.

Discussion with several of our peers that we put the entry to exit at about 800000 barrels a day this year and I think yes.

And in light of the last couple of announcements that I've heard Neal I would actually be moving that number up now.

I'd say were eight to 900000, probably barrels a day growth this year from the U S and probably a similar kind of number coming out next year. This year dominated by the privates.

Some influenced by the publics, but clearly next year, probably having that swap a bit.

The publics kind of regenerating and coming out of a maintenance capital mode in 2021 and re energizing just like we are we plan to add some activity in both in all three of the big three the Bakken the Eagle Ford and the Permian as well so I can let Tim.

Maybe talk a bit about how he sees that how that manifest in our portfolio.

Normalized basis, yes.

I don't really have a whole lot to add other than just.

Remind you that underlying decline rate on the Permian is pretty substantial.

No.

The increase in activity that we've seen from the privates and such.

Generate more production that you've seen that show up in the numbers.

But I think.

Companies like ours, and other large companies kind of think more of a sustainable growth rate because that's really where you get your efficiency is as a <unk>.

Disciplined kind of growth that allows you to move down the learning curve and lower your cost of supply.

In our 10 year plan of a growth rate for our.

The Permian in the high single digits.

And that is a result of that disciplined growth.

Yeah.

I do think there'll be more consolidation so for a company like us you've seen our operated production grow more than 35% in the Permian since we did the shell deal and other things so I think there'll.

There'll be some production moving around based on the consolidation.

Thanks, Tim and Ryan that actually that was my follow up here, which is he has developed a core competency are you seeing that either the market around M&A between the Foster Creek transaction and then of course.

Concho.

The shell assets, how do you think of kind.

Go Phillips in terms of further consolidation and the role it can play, particularly in the lower 48.

Well I've said before deal that I think further consolidation make sense I think you have to get more assets in responsible hands like like Conoco Conocophillips. We spent a lot of time talking about our triple mandate and the value proposition that we have and how we just think about the business.

And I think getting more assets.

That in responsible hands is going to make sense.

Clearly with the addition of Concho and shell, we've got a lot on our plate and then the bar is quite high inside the company. So.

We're not immune to what's going on and we watch the market. We're we're on top of everything thats going on and it takes a lot to make us better.

As a company and we've got to see that any any assets that we look at make us a better company make our 10 year plan a better plan.

And if we apply what we think is.

A better way of drilling and completing these wells can we can we add value to the assets that we might be looking at so yes, we are.

We're always we're always looking and we're we've been ruthless high grades of the portfolio. So as you mentioned, even dating back to the Foster Creek Christina Lake transaction that we did that.

We're ready to start us down this path.

And the $4 5 billion that we've committed to sell and high grade by the end of 2023, as well and we're well on the pathway to do that so we're always trying to lower the cost of supply in the portfolio lower the GHT intensity.

We can do that through organic investments and we can do that potentially through inorganic if they compete.

Okay.

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

Yeah. Thanks, good morning.

Good morning, Roger.

I guess, maybe come back to the <unk>.

Commentary about switching from one mile to the two mile laterals.

Positive.

The increase in percentage of three mile laterals and I was just wondering as you think about that aspect of it whether or not you've tried that yet whether or not it makes sense.

On your acreage and any sort of.

What that might do in terms of a further impact on decreasing the cost of supply.

Yeah, Roger we just in the southern Midland Basin just completed.

Drilling project that <unk>.

Included several.

Three mile in 135 mile lateral that we've drilled in record time and have been very pleased with the results in the production from that so I think thats it.

The big opportunity for the future.

It's another challenge for your lease configuration, that's why it's good to have big blocky acreage blocks.

Yeah.

No doubt in that.

That leads into my next question, which is Janine said earlier very early in your shale Permian acquisition, but I was curious.

<unk> seen on the swap side you mentioned, the one thing in the Mexico, but I mean like a.

A real improvement in terms of acreage alignment, where you can become more active.

Yes.

Have one big partner in several other pretty sizeable partners that we've done business with for a long time on swapping and trading the good news is that.

This is a win win for both parties everybody wants to be able to drill longer laterals, where they have bigger interest in their own operations. So.

We have already accomplished some of this I can't tell you if I think it's going to be a lot of small blocking and tackling or a few big trades, but.

Things are moving pretty rapidly in a good direction.

Yeah.

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

Thank you good morning, happy new year everybody.

Brian you want to come back to comments about the Permian.

Can I ask you philosophically are you concerned.

About the U S going back to that level of growth given.

The recent history of growth for growth's sake.

We will know how <unk> responded to that.

In global market, which despite the post COVID-19 recovery still has a relatively pedestrian long term growth outlook.

And how does that play into your strategy.

Yes, Doug Thanks, No I mean, I think that fits very not not so much the back of our mind, but right at the front of our mind I am absolutely concerned about I think.

The one change maybe relative to.

Late 2014 and 15 the last time, we were kind of at these levels is just what is the spare capacity fitting in the OPEC plus group.

So quite a different number back at that point in time and you can we can all debate what that number is in there.

Fact that the inventories are down quite a bit globally and certainly here in the U S. So I think there is a.

A little bit of time that we have associated with that but certainly if we.

We're getting back to the level of growth in the U S that if youre not worried about it you should be.

And be thinking about there.

Well I hope I hope your peers are listening.

My follow up is I don't know if youre able to give this yet and maybe a question for bill but.

With all the portfolio changes going on one of our favorite kind of.

As the breakeven analysis, you guys do the sustaining capital that goes along with that.

Are you able to give us an update on a post tax basis, given that youre not bought to paying full cash taxes.

Yes, Doug it's Dominic here.

With that a little bit I mean.

I would just take you back to the numbers we showed in our 10 year plan that all included.

Tax modeling.

Most of the price and the prices that we had there so.

Got it.

That mid cycle price about $30 <unk>.

Even so.

The higher prices.

Obviously, we would have a little bit higher taxes, but I think that demonstrates the.

The competitiveness of the <unk>.

The portfolio, So bill I don't know if anything to add to that.

No that's well said Dominic.

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

Yes. Thanks.

With proxy season coming up could you guys talk a little bit about the shareholder proposition on your scope three emissions.

And where you all stand on that right now.

Yeah. Thanks, Scott. This is Dominic again, so we have engaged very extensively with our shareholders on the resolution as you would expect so.

We've met with around half of our stockholder base and that represents about 80% actually of our institutional investor base.

So we'll have a lot more detail coming in our proxy statement, but at a summary level.

I'd say, we had a lot of support for being the first U S based oil and gas company.

Set a Paris aligned zero ambition on our scope, one and two emissions for the progress that we're making towards that and that includes the $200 million of capital allocation, we announced for this year, which will go to our scope, one and two emissions reduction effort as well as some low carbon.

Business opportunities.

All stockholders with very few exceptions did not express and expectation for Conocophillips as an E&P upstream only company to set the scope III target and Thats because it was really a general recognition that this would amount to a prescribed shift.

Responsible Paris aligned production to other less accountable sources and also the NDA submissions will only be addressed effectively if all in many consumers the cost of valley chain industrial consumer as commercial consumers retail consumers that they also address scope, one and two emissions. So.

But we also were able to emphasize that we are not ignoring scope III.

We are continuing to actively advocate for an economy wide pricing carbon and of course, that's so important to address both the supply side, but so important the demand side.

We're also engaging in our supply chain on their emissions and their production plans and were making some early stage investments in low carbon business opportunities that address and use emissions and of course, we've talked a lot about that and we're pursuing those thats carbon capture and storage and hydrogen. So we believe a Paris aligned E&P company with a.

Focus on reliable low GHT intensity and low cost to supply production has a valuable and really a crucial role to play in the energy transition. So of course, we are continuing dialogue with our shareholders, but that's really an update as to how that dialogue has progressed.

I appreciate that it was very very zero as a follow up can I ask on Norway, Obviously you.

You've got the <unk> project online and it seemed like gas volumes are very robust. This quarter is that just you had ramping up to full capacity or are you guys pulling some other dials given the strength in prices for gas over there.

Yes, Scott this is Nick <unk> on.

<unk>, we did bring all the wells online in May of last year that assets producing at.

As expected and then we did a lot of work with our non operated folks and just trying to make sure we maximize gas production through the end of 2021 and Thats, what youre seeing come through the bottom line.

So, yes assets or assets are performing well toward two as expected and some additional gas flowing through 2021.

Okay.

Thank you. Our next question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.

Yes, hi, Thank you for taking my question. My first question just a bit of a follow up on the activity levels planned for 2022, I was hoping you could elaborate a little bit more on the cadence and some of the moving pieces, particularly in the big three in the press release, you gave some information on rig count and Frac crews, but any additional color by basin.

How you see things playing out as the year progresses.

Yes, Phil this is Tim again.

The cadence of activity.

We've talked about before is kind of backend weighted in the year and it's.

<unk>.

Cadence that we think will give us efficiency gains but right.

Right now we're at two.

<unk> drilling rigs and nine frac spreads and we.

Would add approximately four more drilling rigs in the lower 48 throughout the balance of the year.

One of those is standing up in the Bakken.

<unk>.

I think the rest are in the Eagle Ford and the Permian, So it's kind of a <unk>.

A measured pace.

We're being.

Being very disciplined and <unk>.

As we said in the last quarter, it's a constrained pace in the Permian and we have lots of flexibility and capacity, but we.

We think this will give us the greatest efficiency.

And I would add Phil what we talk a lot about is setting our scope early in the year with our teams and not wanting to whipsaw that scope. So just wanted him to go execute it as efficiently as they possibly can so.

On our operated scope, we want that to be we want them to know right at the beginning of the year, what we what we expect them to go do and hope to execute that that assumes that our flexibility.

That makes sense. Thank you.

Quick follow up for Bill very much appreciate the cash flow.

Color for 2022.

I did have one follow up question there.

Do you have anything pending in the first quarter for.

Olivia for income tax and royalty payments one of your peers that operates there mentioned something on their call.

And I presume that your guidance would be kind of ex any working capital of course, so it but just any clarification there. Thank you.

Yes sure Bill so on Libya, we are now current with our income tax payments and Libyan and current through the month of January .

We'd expect that to continue through the year.

Was there a particular payment in January .

There was so we became current for the year on January is about $900 million was paid in January that was catching up on taxes from last year that was shown in working capital as you look at our financials for the year.

So not a surprise on that.

Got it in the guidance of $21 billion would be excluding that right.

Correct because the CFO .

Okay. Thank you.

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

Yeah. Thanks, maybe if I could just.

A couple of detailed follow ups on the regarding the operating expense guidance of $7 3 billion for 2022.

I mentioned, the number of factors pushing that higher year on year.

Sure.

Maybe any any rough breakdowns and roughly how much of that is coming from.

Portfolio change versus two to three industry three stream switch versus how much is driven by inflation.

Hey, Brian It's Dominic again thanks.

Thanks for the question, yes, so just to sort of provide a little bit of context, I think you remember that.

Last Q3 last year, we achieved a 6 billion run rate target, we set when we announced our acquisition of Concho and that was a $1 billion improvement cost structure versus the 2019 pro forma adjusted op costs of <unk> 7 billion.

So we're continuing to benefit from that that's been a major advantage.

On the transaction and through the work we've done over the last couple of years as we look to this year. So obviously, we increase we've said 70 373, and that's really that's from incorporating.

Sure. So obviously, we've got costs that come with those properties.

<unk> historical control production for two to three stream, we've got some impact to that and we do have some anticipated inflation I would say in terms of general breakdown.

I would say about half of the increase is from the shale Permian.

And the other continental production two to three stream accounting than anticipated inflation would represent the rest about equally split something like that so.

But we're very pleased with the progress we've made on our costs.

And I would put that a little bit in context, Ryan too. We were just a reminder that.

Got a pro forma Concho, we were at about the seven ish billion dollar level and we had one 5 million barrels a day of production so that kind of level now at one 8 million barrels a day of production for 2022. So I just wanted to put some context around sort of where we've come and where we're at.

That's very helpful. Thanks.

Maybe one follow up on realizations I mean realizations continue to trend.

Towards relative highs across much of your mix and we appreciate this is the slide that you have included in the deck.

Any thoughts on what you may be doing as an organization that is helping to drive that and looking forward.

Is that something that we should expect to continue or should we.

I expect those to widen back out at some point going forward.

Yes sure Ryan This is bill looking at our realizations in the supplementary deck.

Data total realizations as a percentage of Brent.

You'll notice that they increased to 82% versus fourth quarter versus 77% in third quarter, and Thats really driven by a 45% increase in Henry hub and about 120% increase of our gas prices in Europe versus just a 9% increase in Brent since that relative outperformance by those that are driving that.

<unk> of overall realizations I'd.

I'd say on our crude realizations at those continue to remain strong they're all within historical ranges.

As you go through there I would expect those to continue as we go through the year.

And particularly as we continue to optimize our deliveries there and then gas realizations is really the one that you saw the big change on this shouldnt be a surprise to folks that the change here on lower 48 really was as our gas realizations move back to kind of the 90% level versus 115% that's.

Driven by conversion of the Concho volumes from two to three stream.

That we signaled on the on the third quarter call. It's in line with what we were expecting.

So I would expect that what youre seeing as realizations here for fourth quarter or.

Are a pretty good indication of where we expect to be.

Thank you. Our next question comes from Josh Silverstein from Wolfe Research. Please go ahead. Your line is open.

Yes. Thanks, guys just had a question on the asset divestitures, the $4 5 billion there as they start coming in are the proceeds going right to debt reduction or could this potentially accelerate the return of capital profile, whether it be via the buyback or dividend.

Because that you have about $1 2 billion of short term debt, but don't think there is a lot of big maturities over the next few years.

No, it's pretty pretty ratable maturities over the next few years I can have bill can give you the specifics on that but no I think cash is cash.

Josh we will look at the cash flow that's coming in and we look at the proceeds that we're getting in as well and I think if you look at our past history, we've been sharing pretty significant.

Percentage of both our cash and our proceeds back with our shareholder on an annual basis. So it's it's all fungible cash and we watch the balance sheet as well.

We have a 5 billion gross debt reduction target and we're <unk>.

Tracking Bill Bill can maybe provide a little bit of color on that with respect to the balance sheet sure Ryan Yeah, We're right on track to achieving our $15 billion gross debt target by 2026 and <unk>.

As you noted we do have some debt maturing this year about $800 million.

That we're expecting to repay that when it matures.

And then as we've said previously we're in.

Looking at potential debt.

Debt refinancing and that would depend on multiple factors, including cost to retire cost issue new debt and how we decide to manage that overall portfolio. We're looking at those factors and you could expect to see Us Act.

Sometime relatively soon to take advantage of that supportive market if all things.

Stay where they've been app.

And as Brian pointed out we don't mind, putting cash on the balance sheet.

Got it thanks for that.

Just a question on the asset base and the portfolio mix.

You're increasing your position in the AP LNG, it's an asset that you already have a stake in but how do you think about <unk> position within the global gas market and is this an area of the portfolio, where you may want to get bigger given what's happening with Europe and Asia prices.

Well I mean, we're pretty long longer term, we're bullish on LNG prices, both in Europe , and Asia, given the trend of energy transition in what the plant, it's going to be going through and the role that gas is going to play on that so yes.

Inform some of our decision to preempt on the sale of some of the AP LNG assets. It's why we're interested in the north field expansion in Qatar.

It's LNG that services, both Europe and Asia.

And then looking at.

Well what role we play in terms of that here in the U S as well as <unk>.

<unk> of our cost of supply model, it's kind of indifferent to gas and oil and if we if we see a structural advantage to gas developing over the next few years. It will show up in our cost of supply.

Model N will attract additional investment, but that's the basis again the basis of the foundation for how we allocate capital, whether it's geographically or by product type or by by geology.

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

Alright, thank you.

Hey, guys.

Good morning, Paul.

Why is that.

Davidson.

The tablet.

From the fourth to the first quarter it seems that you're going to ask so which production. Yes. Paul you had 175 to 200, Alaska production is also going to be higher.

So it.

It seems like with all other offset.

First quarter production should be higher than your guidance.

Most of that I mean, we assume that the Permian.

Magazine production May also be somewhat higher so they offset that.

For the first quarter core <unk>.

Guidance to come down to the $1 75 to $1 79.

The second question, Yes, just I mean, it's not such a big deal but.

I think you and total yes, it's going to take over at the show.

No.

Interesting.

You already have the ownership there.

The high.

Hi, <unk>.

And also with that the political volatility.

I want to understand the rationale behind why that.

That M&A would be interesting to you.

Yes, let me go production first and.

It can have a dominick add a little bit of color to it as well I think what Paul at a high level I'm not worried about production at all we're going to be just fine.

Kevin described earlier, it's a bit of a backend ramp in our in our lower 48, that's always going to be lumpy on a quarter by quarter basis, depending on when you get the frac spreads out to complete the wells and when the when they come online, what's probably missing from people.

Planned turnaround in Qatar in the first quarter.

It wasn't in the fourth quarter. So there's a few ins and outs with with respect to that so I think thats maybe around round the edges why why if youre looking at just sequential production from the fourth quarter to the first quarter, you might see a little bit of differences.

On your the Olivia question, Paul We were approached satellite has wanted out of Olivia and it's a partnership after.

Total bought marathons interest it remained total conoco Phillips and has as the two parties in the in the venture and Olivia.

We were approached and said would we want to participate with total too.

Take pick up that has interest in there.

It's a pretty good deal take all your points.

It's relatively low margin, it's a contract that is.

Just the gross margin contract, we recognize that the deal is quite attractive on a cost of supply basis for us and frankly, we'd like to control of the partnership is not necessarily interested in an outside partner coming into to take some of that.

And then clearly with total and Conoco Phillips Olivia there may be some opportunity to have some different kinds of conversations with Olivia is going forward.

Okay.

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

Good morning, if I think about that.

US growth rate of eight to 9 million barrels a day and the lion's share of that being in the Permian you can start to see the day, where Permian gas takeaway gets exhausted. How do you guys think about your gas takeaway to meet your growth targets and how do you see the whole basin shaking out.

Yes, I can start and.

Anybody else can chime in.

Well with our commercial team is where we're all over this Bob and.

Yes, we are.

We see the potential for some of that again I think.

We're in really good shape based on the position that could we have and the infrastructure. We have we can evacuate gas south we can go west and we can come into the Katy hub and into the Gulf coast as well, so, but we're watching it pretty closely because we got to make sure you know industry wide. We don't go back to flaring as an industry and all those kinds of thing.

So we've got to build the gas.

Infrastructure and offtake capacity has to be there to support these macro offtake in the oil side coming out of the broader Permian basin, and maybe I can have bill a little bit of color from our commercial team, yes sure Ryan.

Youre exactly right Bob that watching the takeaway capacity out of the Permian Basin is something thats important to do particularly as more production is coming on and particularly as associated gas starts ramping up.

We're probably a couple of years away before you start hitting that that capacity, but it's important to keep an eye on I think as we look at a couple of things to note first we.

We are currently moving several multiples of what our current production is across the Permian Basin. We've got a very skilled commercial organization in terms of how we move that volume. So we have flow assurance for Conocophillips production and then you've seen in the market. There has been a couple of recent.

Proposed pipelines coming out.

That would put additional takeaway capacity, both down to kind of the Corpus Christi area in the Houston area and I think those are going to be important to keep an eye on as we look at where the market goes but flow assurance is something we definitely keep an eye on for our physical production.

Great. Thanks for that a quick follow up what's your appetite or philosophy around revisiting the capital program sort of mid year results.

Well.

We watch it every month every day Bob.

So we're looking at.

The the inflationary pressures that might be in the system.

Looking at what our partners are validating us for what the operated by other activity level and certainly they see these kinds of prices in that.

Pressure on the OBO spend is there. So we look we look at that every year, where obviously, we can we can impact that through our operated scope should we choose to go do that but again, we like the steady program nature on our operated scope. So I guess the messages we watch it absolutely and we've got lots of levers in the in the.

Toolbox to two to manage to an outcome should we choose to go do that but that'll be conversations.

Things that will come out in the next couple of quarterly calls as we kind of watch the macro what's the activity level watch the inflationary forces that might be out there and what sort of offsets that we're seeing on the efficiency side, because as we integrate the shell assets into the portfolio that Tim talked about we still have those opportunities as well so there's a lot there.

A number of moving parts, but absolutely we'll be all over it in.

And update the market as necessary.

For the remaining quarters.

Thank you. Our next question comes from John Freeman from Raymond James. Please go ahead. Your line is open.

Good afternoon.

So John first question I had hi, the first question I had was just on the.

The inflation topic.

Just to make sure I understand what's kind of built in on the guidance a couple of hundred million dollars.

Scott in the budget for furniture.

Current inflation is.

Can you give us some ideas like pretty much almost all of what you would have in the from a service cost inflation standpoint.

That locked in or are there certain items that as you go through the year you're still exposed.

I guess the spot market for certain items.

Okay.

No were not fully locked in on that side and the service side. So though we are exposed like most everybody is too.

What you describe as spot condition or what's happening in the service side of the industry and again, it's predominantly in four or five categories of spend those are the ones that we watch.

Pretty closely interestingly TCG.

<unk> started it.

A ton of into 2000 and has now come back down to 1300, so for rolled steel and.

But we get we.

We get updates frequently from our supply chain organization chemicals, because a lot of them originated out of Europe are up right now with the supply chain constraints that are in that so yeah, and then local kind of impacts with trucking and labor.

Sand and some of those things, we watch them pretty pretty closely but they're probably.

And fighting a bit more as I said earlier than what we would've thought just eight weeks ago, when we put out our our capital guidance for the year. We've included some inflation to your point and we're watching that because we're also generating efficiency as a company and we will.

We will update that as the year progresses.

And so Ryan is there I know that at least.

A few of your peers that are and we will put out slides say well X percent of our our service items are sort of locked in for a given your army is there any ballpark kind of a round number.

Could you give us in terms of what's locked in versus what's still exposed.

No I don't wed have to get back with you on that John you cut out on the first part of your question sorry, but.

That's a follow up.

Yes, sure and then just the last question for me.

Just thinking about maybe longer term perspective, when we look at the three tiers.

Were you all been sort of returning.

Returns to shareholders. If you kind of exclude the Sanofi shares sale, then you're just sort of look at kind of your base cash flow, you've kind of had that ordinary dividend and the buybacks, it's sort of been relatively equal and then anything you get incremental has gone to the type of <unk> do you think of like.

Tier one and tier two is that's kind of the framework that you like when you sort of think about your 10 year plan or something where that was a relatively kind of equal or do you see those kind of shifting over time.

Well, we don't necessarily think of it as equal look at that we actually think about what's an affordable ordinary dividend through the bottom end of the cycle, we want to make sure that we can.

Affordable reliable, it's transparent it's growable.

Relative with the S&P 500, so we look at the ordinary dividend and we think about it at the bottom end of the cycle, but we also have our view of the mid cycle price and some combination of dividend and repurchasing our shares at what we believe is a mid cycle price is what we'd like to be able to do for our shareholders and more importantly make sure that.

It represents at least 30% of our cash going back to the shareholder and in our mid cycle price. The combination of those two things does that and the kind of proportions that you described but and then on top of that we recognize the torque that we add to the upside with these higher commodity prices and we're doing this we're swapping into the synovus shares.

The strength of the Synovus share price has allowed us to swap into more conocophillips shares which will be complete in the first quarter of this year. So all that kind of weighs in than what's what's left to hit our 30% target and above.

Coming through that third tier that we introduced last year called <unk>, which is a cash variable return back to the shareholders. So that's how we're using we think the three tiered system is durable it's reliable and it.

And it recognizes the reality of the volatility that we're seeing in this business.

And so that's why we we put a three tiered system together, we like Ratably buying our shares through the cycles and we think there is still a good deal.

We like an ordinary dividend, that's predictable and reliable and we like we want to recognize that we've got a lot of torque to the upside and shareholders deserve a significant amount of that cash over 30% at least or more.

And then these up cycles like we're experiencing today.

Sooner, we probably have time for just one more.

Absolutely. Thank you our last question comes from Neal Dingmann from him.

Sorry, <unk> Securities. Please go ahead your line is open.

Thank you all for excuse me in.

One last I guess two quick ones if I could just again, it's notable the amount of cash you all are kicking off obviously and my question is given the returns in the Castro kicking up why not and I know you guys have been opposed to this but why not maybe lock in some of this would at least collars or something along that nature.

Yes.

We're unhedged.

Neil.

We think shareholders buy our shares because of the upside that it represents in the in the commodity price inventory that we have to the upside in the way we set up the company. So we prefer to remain unhedged.

Frankly hedging would do little help so we have a very strong balance sheet with helps us on the downside and shareholders ought to expect full exposure to the upside that we're experiencing today.

No great point, Okay, and then just lastly on divestitures.

Tim mentioned I know you've done a couple a couple of small ones, Mike Mike sort of two questions around that is there anything sort of that you'd sort of considered noncore that might be in that sort of near term divestiture category and then secondly.

Why even do any given how strong your balance sheet is now is there does it does it.

The requirement to put it in the non sort of core does that does that make it more difficult and less likely to sell given how strong the balance sheet is.

Thank you.

Not really but just wanted to take advantage of the strong markets. We're seeing today and we recognize that we've made two pretty transformational transactions over the course of all of last year and it has raised the bar in our whole company on cost of supplies. So there's things that we're probably not going to invest in that we recognize others will invest and so.

That's been part of our mantra and our drumbeat for.

For the last 10 years in this company. So we're constantly trying to high grade the portfolio and we see again, we see some more opportunities to do that across the lower 48, primarily the Permian.

As we as we think about what's going to be competitive in the current portfolio.

Thank you I'm not showing any further questions at this time I would like to turn the call back over to Mark.

Thank you, Eric and thanks to all who dialed in for todays call engineer I'll pass it back to you for your wrap up thank you.

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

Okay.

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Yes.

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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 I will now turn the call over to Mr. Mark Keener D. P Investor Relations Marc you may begin.

Thank you generic welcome to all of our listeners today first let me introduce the members of our team who are on today's call. We are Ryan Lance our chairman and CEO Bill Bullock Executive Vice President and Chief Financial Officer, Domenic, Maclin Executive Vice President of strategy sustainability and technology, Tim Leach.

Executive Vice President lower 48, and Nicole's Executive Vice President for global operations.

Brian and Bill will lead off today's call with some prepared comments after which the team will be available to take your questions.

Before I turn the call over to Ryan a few quick reminders in conjunction with this morning's release, we posted supplemental materials.

Gives me did include fourth quarter and full year 2021 highlights earnings and cash flow summaries preliminary reserve replacement information price realization analyses and updated 2022 guidance and sensitivities.

During our call we may make 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 filings with the SEC.

And finally, we will also make reference to some non-GAAP financial measures today reconciliations to the nearest corresponding GAAP measure can be found in this mornings release and on our website.

With that I'll turn the call over to Ryan.

Thank you Mark so 2020 , one was a truly remarkable year for Conoco Phillips, our operating performance around the globe was outstanding we generated strong returns on capital for our shareholders.

And closed on two significant highly accretive acquisitions in the heart of the Permian Basin.

Our exceptional results last year directly attributable to the talent and dedication of our global workforce.

Produced one 6 million barrels per day, and Brian first production online or GMT two in Alaska, The third montney, well pad and the Malachi phase two in S&P phase III projects in Malaysia.

So we completed the tour to project in Norway.

All of this with excellent cost schedule and safety and environmental performance.

And actually we achieved a 14% full year return on capital employed or 16% on a cash adjusted basis.

And generated $15 7 billion and CFO with over $10 billion in free cash flow and.

And we returned 6 billion to our shareholders, representing 38% of our cash from operations.

We also continued our rigorous portfolio optimization work completing the truly transformative concho and shell Permian acquisitions, and further high grading our asset base around the world.

In the Asia Pacific region, we exercised our preemption right to acquire an additional 10% in AP LNG and announced the sale of assets in Indonesia for $1 4 billion.

In the lower 48, we generated <unk> 3 billion in proceeds from the sale of noncore assets last year and last week, we signed an agreement to sell an additional property said outside of our core areas for an additional $440 million.

Collectively these transactions reduce both the average cost of supply and the ghd intensity of our more than 28 billion barrel resource base, and we're well down the road toward achieving our 4% to 5 billion in dispositions by 2023.

Target of $7 billion in total returns of capital to our shareholders.

Based on current prices on the forward curve, we've increased the target two 8 billion with the incremental $1 billion coming in the form of increased share repurchases and a higher variable return of cash to.

The <unk> 30 per share of <unk> announced for the second quarter represents a 15% increase over our inaugural variable return to shareholders that we paid.

This quarter.

That will put the $8 billion in perspective, it equates to an increase of more than 30% from the $6 billion returned last year and a greater than 50% increase in projected cash returned to shareholders.

Our three tier distribution framework provides a flexible and durable means to meet our returns commitment through the price cycle.

And truly is differential to others. In this sector is our returns commitment is based on a percentage of CFO and not free cash flow.

And as you know we are guided in everything we do by our Triple mandate.

We must reliably and responsibly deliver oil and gas production to meet energy transition pathway demand.

We need to generate competitive returns on and of capital for our shareholders and achieve our Paris aligned net zero ambition by 2050.

Just as I am very proud of the excellent operational and returns focused performance. We delivered in 2021 I'm equally pleased about the progress we have made in support of the third pillar of our mandate.

We increased our medium term emissions intensity reduction target to 40% to 50% by 2030 and expanded it to include both gross operated and net equity production.

As a reminder, we're also committed to further reducing our methane emissions and achieving our zero routine flaring ambition by 2025.

And as highlighted in our December release.

We've allocated $2 2 billion of this year's capital program for projects to reduce the company's scope, one and two emissions intensity and investments in several early stage low carbon opportunities that address and use emissions.

We strongly believe that this level of focus on and performance toward fully realizing our triple mandate as conocophillips very well positioned to not just survive through the LNG transition, but to thrive regardless of the pathways that tastes.

While we're on the topic of energy transition I'd like to touch on the macro environment.

Commodity prices today reflect global energy demand returning to pre pandemic levels, along with supply being impacted by decreased investment in oil and gas over the past couple of years.

Concerning about inventory levels.

And the amount of available spare production capacity in the system. All of these factors demonstrate the ongoing importance of our sector to the global economy today and for the foreseeable future.

It's becoming increasingly clear that the energy transition isn't going to happen with the flip of a switch.

People and businesses around the globe need as a managed an orderly transition, but thats not what the world is seeing to this point.

Supply and demand balances are fragile at the moment likely driving continued volatility in the current commodity price situation in Europe may be providing a cautionary signal.

The simple reality is that most alternative energy source is still have a long way to go towards becoming as scalable reliable affordable and assess accessible as the world needs them to be.

Which brings me back to our triple mandate and the importance of performing well across all three of the pillars for our shareholders and for the people of world, who need and use our products.

Now with that let me turn the call over to Bill and he will cover the fourth quarter and our 2022 outlook.

Thanks Ryan.

Looking at fourth quarter earnings, we generated $2 27 per share and adjusted earnings.

Lower 48 production averaged 818000 barrels of oil equivalent per day for the quarter, including 483000 from the Permian.

213000 from the Eagle Ford and 100000 from the Bakken.

At the end of the year, we had 20 operated drilling rigs and nine frac crews working in the lower 48, including those developing the acreage we recently acquired from shell.

As Brian touched on earlier operations across the rest of the portfolio also ran extremely well last year with our GMT two project in Alaska, producing first oil in the fourth quarter as planned.

Turning to cash from operations, we generated $5 5 billion and CFO , excluding working capital, resulting in free cash flow of $3 9 billion in the quarter.

For the full year 2021, we generated $15 7 billion and CFO $10 4 billion of free cash flow and we returned $6 billion to shareholders.

In addition to the asset dispositions, Brian covered we also sold 117 million shares we held in synovus in the year generating $1 1 billion in proceeds that we used to fund repurchases of our own shares.

This left us with a little over $90 million in other shares at the end of the year, which we intend to fully monetize by the end of this quarter.

We ended the year with over $5 billion in cash maintaining our differential balance sheet strength, even after completing the all cash acquisition of Shell's Delaware Basin assets.

So to recap it was not only a strong quarter, but one that also bodes very well for 2022 in future years.

We continue to optimize the portfolio our businesses are running very well around the globe.

And we have had.

Overall reserve replacement ratio of nearly 380%, establishing an incredibly powerful platform for the company as we head into this year and beyond.

Our cash flow performance and leverage to prices have substantially improved over the past couple of years as demonstrated by our fourth quarter results and I expect it will continue to improve as we began including the newly acquired Delaware assets in our consolidated results this quarter.

Now demonstrating this point and appreciating that it's helpful for the market to have an accurate sense of our stronger CFO generating capacity.

Had a W. Ti price of $75, a barrel with a $3 differential to Brent and Henry hub price of $3 17 75.

We estimate our 2022 full year cash from operations would be approximately 21 billion.

Which reflects us reentering, a tax paying position in the U S. This year at those price levels.

And our free cash flow for the year would be roughly $14 billion.

And of course, we continue to be unhedged across our global diverse production base.

So we expect to fully capture the upside of the current price environment.

We provided updated sensitivities in today's supplemental materials to help estimate how much earnings and CFO are projected to change this year with market price movements.

That is our triple mandate, it's what we have conoco calls built for and are ready to deliver.

Now with that let's go to the operator to start the Q&A.

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

And our first question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

Hi, Good morning, good afternoon, everyone. Thanks for taking your question.

You bet good morning Jeanine.

Our first question maybe for you Ryan.

Early in the year, but you have the confidence.

Thank you Kathy.

The $8 million you.

You provided an update on your macro view earlier in the call and that's really the primary driver for increasing the cash at <unk> level and can you provide an update on how inflation is trending for conoco given.

We heard some of the general recent industry commentary from service companies.

Yes, Thanks Jeanine.

Is the primary reason, we are increasing our returns of capital to our shareholder from the seven that we announced here just a few weeks ago to $8 billion now. So again it represents a pretty significant increase year on year, but it's a reflection of kind of our view and as we step back and take a look like we will each quarter.

Thinking about where the forward curve is at where the market's at where our capital is at where the balance sheet is out so it's a <unk>.

The recognition of a strengthening commodity price market and.

And that's a reflection of that strengthening since the.

The December timeframe, when we announced our capital budget for the year.

We're seeing a bit more inflation as a result of those strengthening commodity price that we see and I'd say, it's primarily in the Permian basin as well, but the kind of spreading a bit to the lower 48.

Prior we were probably in the <unk>.

Mid <unk>.

Mid single digit kind of inflation across the whole company I would say now we are in the mid.

Mid to mid level single digit kind of inflation rates. So we're seeing the seeing the impact of that it's uncertain commodities of spend like.

Tubular is.

Trucking labor chemicals, Oh, TCG those kinds of things in there primarily in the more active parts of the lower 48 like like the Permian today.

Around the whole world, though we see much lower inflation and thats the benefit of our global diversified portfolio, but we are seeing a little bit higher pressure at these higher commodity prices than maybe what we would have said, even a month and a half or two months ago.

Okay, great. Thank you for all that detail.

Second question is on the <unk> acquisition.

It Hasnt really been very long since it closed but can you provide any color on opportunities related to the integration or any I.

I guess, we're thinking for example, just using cash.

Joe as a playbook you were very successful capturing low hanging cost savings related to the supply chain related to marketing optimization that added upfront number.

Number.

But for the shell deal you have a higher percentage of non operated non operated interests.

That could have any impact of similar optimizations. So are there other unique opportunities with shale assets.

Yes.

Jeanine this is Tim.

Yeah, Let me, let me address those questions.

As a reminder, we closed the <unk> acquisition on December one to 70 days. After we made the announcement of the transaction and we've had a smooth and safe transition of operator ship in personnel over the time. So that's been a huge success we plan to.

To continue running four rigs on that property. The same activity rate that shell was running that through the remainder of this year, but we've moved our personnel our rigs on and <unk>.

Since we've taken up operator ship, we have quickly transitioned to our style of.

Well drilling design casing design, which has generated lower cost we've also switched to.

Our fracking design, which.

It provides better economics.

Using our style of profit fluids specs and cluster spacing. So all of those are kind of the blocking and tackling of us putting our style of operations on those properties, but I would tell you that the biggest opportunity in the near term is transitioning from.

One mile wells to two mile Wells and Thats with our partners out there in the field all.

All of those companies that were partnered with we have done deals with in the past.

Core up and drill longer laterals, so I think thats the.

Low hanging fruit, we're in conversations with all of them we've made transactions.

On some of those properties already.

Just for frame of reference the difference between drilling a two mile lateral on those properties and a one mile lateral <unk> everything else being held the same as a 50 basis point improvement on rate of return on well economics, which generates about a 30% improvement in cost of supply.

The other thing that we're working on that I'm pretty excited about.

The shell shell deal in and of itself has allowed us more freedom for overall property management.

May have read in the last couple of weeks that we sold some non core assets on the new Mexico shelf and on the Central Basin platform.

That kind of efficiency, we get from those kind of property management for example that that one transaction that allowed us to sell 25% of our operated well bores and it only affected 2% of our production in the Permian, So that kind of efficiency will flow through the entire organization.

<unk> and <unk> is just one example of how I think we're making things better.

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

Good morning team. Thank you Brian you were quoted recently talking about the U S production profile I think your point was that entry to exit this year.

Micro 800000 barrels a day I guess thats accrued.

Love your perspective on how Youre seeing.

The U S production profile.

As you think about yourself and peers.

Tough for us to get the same store.

As in store sales growth rate.

For Conoco in the Permian because of course, you've done some acquisitions here, but just as you think about the growth rate in 'twenty two versus <unk> 21 for your own asset base. How are you thinking about that in the Permian.

Yes, I can let Tim to talk about specific specifically with lower 48 in the asset, but I'd say the macro yeah I was quoted at a recent.

Discussion with several of our peers that we put the entry to exit at about 800000 barrels a day this year and I think.

And in light of the last couple of announcements that I've heard Neal I would actually be moving that number up now.

Because I think we were even a bit surprised by the strength of some of the numbers that we were hearing but I think importantly, we would place and that is a crude and condensate number. It doesn't include Ngls. So you know I'd say, we're eight to 900000, probably barrels a day growth. This year from the U S and probably a similar kind of number.

Coming out next year this year dominated by the privates.

Some influenced by the publics, but clearly next year, probably having that swap a bit in.

The publics kind of regenerating and coming out of a maintenance capital mode in 2021 and <unk>.

Reenergizing just like we are we plan to add some activity in both in all three of the big three the Bakken the Eagle Ford and the Permian as well so I can let Tim.

Talk a bit about how he sees that how that manifest in our portfolio.

Normalized basis, yes.

I don't really have a whole lot to add other than just.

Remind you that underlying decline rate on the Permian is pretty substantial and so.

The increase in activity that we've seen from the privates and such will generate more production that <unk> seen that show up in the numbers.

But I think.

Companies like ours, and other large companies kind of think of it more of a sustainable growth rate because that's really where you get your efficiency is as a <unk>.

Disciplined kind of growth that allows you to move down the learning curve and lower your cost of supply and we talked in our 10 year plan of a growth rate for our.

Permian in the high single digits.

And that is a result of that disciplined growth.

Yeah.

There'll be some production moving around based on the consolidation.

Hi, Joe.

The shell assets, how do you think of kind.

Philips in terms of further consolidation and the role it can play, particularly in the lower 48.

And I think getting more assets like that in responsible hands is going to make sense.

Clearly with the with.

With the addition of the Concho and shell, we've got a lot on our plate and then the bar is quite high inside the company. So.

We're not immune to what's going on we watch the market. We're we're on top of everything that's going on and it takes a lot to make us better.

As a company and we've got to see that in any assets that we look at making US a better company make our 10 year plan, a better plan and if we apply apply what we think is.

Better way of drilling and completing these wells can we can we add value to the assets that we might be looking at so yes, we are.

We're always we're always looking and we're we've been ruthless high grades of the portfolio. So.

As you mentioned, even dating back to the Foster Creek Christina Lake transaction that we did that.

We're ready to start us down this path and.

We can do that through organic investments and we can do that potentially through inorganic if they compete.

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

Yeah. Thanks, good morning.

Good morning, Roger.

I guess, maybe come back to the call.

Elements area about switching from one mile to the two mile laterals.

Todd.

An increasing percentage of three mile laterals and I was just wondering as you think about that aspect, whether or not you've tried that yet whether or not it makes sense.

On your acreage.

Any sort of idea of what that might do in terms of a further impact on decreasing the cost of supply.

Yeah.

Yeah, Roger we just in the southern Midland Basin just completed.

Drilling projects that.

Included several.

Three mile in 135 mile lateral that we've drilled in record time and and have been very pleased with the results in the production from that so I think thats it.

The big opportunity for the future.

It's another challenge for your lease configuration, that's why it's good to have big blocky acreage blocks.

Yeah.

No doubt in that.

And my next question, which is Janine said earlier very early in your shale Permian acquisition, but I was curious.

You've seen on the true swap side, you mentioned, the one thing in the Mexico, but I mean like a.

A real improvement in terms of acreage alignment, where you can become more active.

Yes.

Have one big partner in several other pretty sizeable partners that we've done business with for a long time on swapping and trading the good news is that.

This is a win win for both parties everybody wants to be able to drill longer laterals, where they have bigger interest in their own operations. So.

We have already accomplished some of this I can't tell you if I think it's going to be a lot of small blocking and tackling or a few big trades, but.

Things are moving pretty rapidly in a good direction.

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

Thank you good morning, happy new year everybody.

Brian I wanted to come back to your comments about the Permian.

When I asked you philosophically are you concerned.

But the U S going back to that level of growth given.

The recent history of growth for Growth's sake, and we all know how <unk> responded to that.

Global market, which despite the post COVID-19 recovery still has a relatively pedestrian long term growth outlook.

And how does that play into your strategy.

Yes, Doug Thanks, No I mean, I think that fits very well not so much of the back of our mind, but right at the front of our mind I am absolutely concerned about I think the.

The one change maybe relative to.

Late 2014 and 15 the last time, we were kind of at these levels is just what is the spare capacity is sitting in the OPEC plus group.

So quite a different number back at that point in time and you can we can all debate what that number is in and the fact that the inventories are down quite a bit globally and certainly here in the U S. So I think there is a <unk>.

A little bit of time that we have associated with that but certainly if.

We're getting back to the level of growth in the U S that if youre not worried about it you should be.

And be thinking about here.

Well I hope I hope your peers are listening.

My follow up is I don't know if youre able to give this yet and maybe a question for bill but.

With all the portfolio changes going on one of our favorite kind of outputs is the breakeven analysis you guys do the sustaining capital that goes along with not.

Are you able to give us an update on a post tax basis, given that youre not bought to paying full cash taxes.

And Doug it's Dominic here.

To help with that a little bit I mean.

I'll just take you back to the numbers we showed in our 10 year plan that all included.

Tax modeling.

The price and the prices that we had there so.

We were in that mid cycle price were about $30 <unk>.

Breakeven.

So.

The higher prices.

Obviously, we would have a little bit higher taxes, but I think that demonstrates the.

The competitiveness of the <unk>.

The portfolio. So bill I don't know if you got anything to add to that.

No that's well said Dominic.

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

Yes. Thanks.

With proxy season coming up could you guys talk a little bit about the shareholder proposition on your scope three emissions in and where you all stand on that right now.

Yeah.

Yeah. Thanks, Scott. This is Dominic again, so we have engaged very extensively with our shareholders on the resolution as you would expect so we've met with around half of our stockholder base and that represents about 80% actually of our institutional investor base.

So we'll have a lot more detail coming in our proxy statement, but at a summary level.

Say, we had a lot of support for being the first U S based oil and gas company to set a powerful line net zero ambition on our scope, one and two emissions and for the progress that we're making towards that and that includes the $200 million of capital allocation, we announced for this year, which will go to our scope one and two emissions reduction.

As well as some low carbon.

Is this opportunities.

All stockholders with very few exceptions did not express and expectation for Conocophillips as an E&P upstream only company to set the scope three targets.

And Thats because it was really a general recognition that this wouldn't mind to really is just a prescribed shift.

<unk>.

<unk> Paris aligned production to other less accountable sources and also the NDA submissions will only be addressed effectively if all the many consumers across the value chain and industrial consumer as commercial consumers retail consumers that they also address since scope, one and two emissions. So.

But we also were able to emphasize that we are not ignoring scope III.

We are continuing to actively advocate for an economy wide pricing carbon and of course, that's so important to address both the supply side, but so important the demand side.

We're also engaging in our supply chain on their emissions and their reduction plans and we're making some early stage investments in low carbon business opportunities that address and use emissions and of course, we've talked a lot about that and we're pursuing those as carbon capture and storage and hydrogen. So we believe a Paris aligned E&P company with a.

On reliable low GHT intensity and low cost to supply production has a valuable and really a crucial role to play in the energy transition. So of course, we are continuing dialogue with our shareholders, but that's really an update as to how that dialogue has progressed.

I appreciate that it was very very thorough as a follow up can I ask on Norway, Obviously you.

Got the Tor project online and it seemed like gas volumes are very robust. This quarter is that just it ramping up to full capacity or are you guys pulling some other dials given the strength in prices for gas over there.

Yes, Scott this is Nick.

On <unk>, we did bring all the wells online in May of last year that assets producing as expected and then we did a lot of work with our non operated folks and just trying to make sure we maximize gas production through the end of 2021 and Thats, what youre seeing come through the bottom line.

So, yes assets or assets are performing well towards two as expected and some additional gas flowing through 2021.

Okay.

Yeah.

Thank you. Our next question comes from Phil Gresh from Jpmorgan. Please go ahead. Your line is open.

You see things playing out as the year progresses.

Uh huh.

Phil This is Tim again.

The cadence of activity as we talked about before is kind of backend weighted in the year and it's.

<unk>.

A cadence that we think will give us efficiency gains but.

Right now.

Drilling rigs and nine Frac spreads and we are.

It would add approximately four more drilling rigs in the lower 48 throughout the balance of the year.

One of those is standing up in the Bakken and I.

I think the rest are in the Eagle Ford and the Permian, So it's kind of a.

<unk> pace than we are.

We're.

Being very disciplined and.

As we said in the last quarter, it's a constrained pace in the Permian and we have lots of flexibility and capacity, but we.

We think this will give us the greatest efficiency.

And I would add Phil what we talk a lot about is setting our scope early in the year with our teams and not wanting to whipsaw that scope. So just wanted to go execute it as efficiently as they possibly can so.

On our operated scope, we want that to be we want them to know right at the beginning of the year, what we what we expect them to go do and hope to execute that that assumes that our flexibility.

That makes sense. Thank you.

Quick follow up for Bill very much appreciate the cash.

Cash flow.

Color for 2022.

I did have one follow up question there.

Do you have anything pending in the first quarter for <unk>.

Libya for income tax and royalty payments one of your peers that operates there mentioned something on their call.

And I presume that your guidance would be kind of ex any working capital of course some of it but just any clarification there. Thank you.

Yes, sure Phil So on Libya, we are now current with our income tax payments and Libyan and current through the month of January .

We'd expect that to continue through the year.

Was there a particular payment in January .

So not a surprise on that.

Got it in the guidance of $21 billion would be excluding that right.

Correct because the CFO .

Okay. Thank you.

Okay.

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

Yeah. Thanks, maybe if I could just.

A detailed follow ups on the regarding the operating expense guidance of $7 3 billion for 2022, you mentioned a number of factors pushing the higher year on year.

Maybe any any rough breakdowns and roughly how much of that is coming from.

Portfolio change versus tier three industry, three extreme switch versus how much is driven by inflation.

Hey, Brian It's Dominic again.

Thanks for the question, yes, so just to sort of provide a little bit of context, I think you remember that.

Last Q3 last year, we achieved a 6 billion run rate target, we set when we announced our acquisition to Concho of Concho and yes that was a $1 billion improvement cost structure versus the 2019 pro forma adjusted op costs of <unk> 7 billion.

So we're continuing to benefit from that that's been a major advantage.

On the transaction and through the work we've done over the last couple of years as we look at this year. Obviously, we increase we've said 70 373, and that's really that's from incorporating.

All shale assets, obviously, we've got costs that come with those properties.

Converting historical Concho production for two to three stream, we've got some impact to that and we do have some anticipated inflation I would say in terms of general breakdown.

I would say about half of the increase is from the shale Permian.

The other the continental production two to three stream accounting than anticipated inflation would represent the rest about equally split something like that so.

But we're very pleased with the progress we've made on all costs.

And I would put that a little bit in context, Ryan too you know we were just a reminder that.

Kind of pro forma Concho, we were at about 70 ish billion dollar level and we had one 5 million barrels a day of production so that kind of level now at one eight.

In barrels a day of production for 2022, so I just wanted to put some context around sort of where we've come and where we're at.

That's very helpful. Thanks.

One one follow up on realizations realizations continue to trend towards.

Towards relative highs across much of your mix and we appreciate that the slide that you have included in the deck.

Any thoughts on what you may be doing as an organization that is helping to drive that and looking forward.

Is that something that we should expect to continue or should we.

I expect those to widen back out at some point going forward.

Yes sure Ryan this is bill.

Looking at our realizations in our supplementary.

Data total realizations as a percentage of Brent.

Youll notice that they increased to 82% versus fourth quarter versus 77% in third quarter, and Thats really driven by a 45% increase in Henry hub and about 120% increase of our gas prices in Europe versus just a 9% increase in Brent since that relative outperformance by those that are driving that.

Percent of overall realizations I'd.

I'd say on our crude realizations at those continue to remain strong they're all within historical ranges.

As you go through there I would expect those to continue as we go through the year.

Driven by conversion of the Concho volumes from two to three stream.

That we signaled on the on the third quarter call. It's in line with what we were expecting.

So I would expect that what you are seeing as realizations here for fourth quarter or.

Are a pretty good indication of where we expect to be.

Thank you. Our next question comes from Josh Silverstein from Wolfe Research. Please go ahead. Your line is open.

Because that you have about $1 $2 billion of of short term debt, but don't think there is a lot of big maturities over the next few years.

No, it's pretty pretty ratable maturities over the next few years I can have bill can give you the specifics on that but no I think cash is cash.

Josh we will look at the cash flow that's coming in and we look at the proceeds that we're getting in as well and I think if you look at our past history, we've been sharing pretty significant.

<unk> of both our cash and our proceeds back with our shareholder on an annual basis. So it's it's all fungible cash and we watch the balance sheet as well.

We have a 5 billion gross debt reduction target and we're tracking.

Tracking Bill Bill can maybe provide a little bit of color on that with respect to the balance sheet sure Ryan Yeah, We're right on track to achieving our $15 billion gross debt target by 2026.

As you noted we do have some debt maturing this year about $800 million.

That we're expecting to repay that when it matures.

And then as we've said previously we're in.

Looking at potential debt.

Sometime relatively soon to take advantage of that supported market if all things.

Stay where they've been app.

And as Brian pointed out we don't mind, putting cash on the balance sheet.

Got you thanks for that.

Just a question on the asset base and the portfolio mix.

You're increasing your position in AP LNG, it's an asset that you already have a stake in but how do you think about <unk> position within the global gas market and is this an area of the portfolio, where you may want to get bigger given what's happening with Europe and Asia prices.

Inform some of our decision to preempt on the sale of some of the AP LNG assets. It's why we're interested in the north field expansion in Qatar.

LNG that services, both Europe and Asia.

And then looking at.

Well what role we play in terms of that here.

The U S as well as <unk>.

The beauty of our cost of supply model, it's kind of indifferent to gas and oil and if we if we see a structural advantage to gas developing over the next few years. It will show up in our cost of supply.

It'll end will attract additional investment, but that's the basis again the basis of the foundation for how we allocate capital, whether it's geographically or by product type or by by geology.

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

Alright, thank you.

On the guidance.

Good morning, Paul.

Yeah.

And that may be <unk>.

The tablet.

From the fourth to the first quarter, it seems that you're going to add scale, which production yes.

175 to 200.

<unk> production is also going to be higher.

So it seems like Oh at the offset the first quarter production should be higher than your guidance.

Most of that I mean, we assume that the Permian.

<unk> production also being somewhat higher so I mean, when they offset that in order for the first quarter.

Guidance to come back to the $1 75 to $1 79.

The second question is just I mean, it's not such a big deal but.

I think you and total yes, it's going to take over at the show.

Interesting.

You already have the ownership there, but given the.

Hi, <unk>.

And also with that the political volatility.

Just want to understand the rationale behind why that debt.

Kyle M&A with the interest that to you.

Yes, let me go production first.

It can have a dominick add a little bit of color to it as well I think what Paul at a high level I'm not worried about production at all we're going to be just fine.

Evan described earlier, it's a bit of a backend ramp in our in our lower 48, that's always going to be lumpy on a quarter by quarter basis, depending on when you get the frac spreads out to complete the wells and when the when they come online what's probably missing from people. You know there is a planned turnaround in Qatar in the first quarter.

It wasn't in the fourth quarter. So there is a few ins and outs with with respect to that so I think thats maybe around round the edges why why if youre looking at just sequential production from the fourth quarter to the first quarter, you might see a little bit of differences.

On your the Olivia question, Paul. It's we were approached satellite has wanted out of Olivia and its partnership after.

Hotel by marathons interested remained.

Conoco Phillips and has as the two parties in the in the venture in Libya.

We were approached and said we want to participate with total too.

Take pick up that has interest in there.

It's a pretty good deal take all your points.

It's relatively low margin that's a contract that is.

Just the gross margin contract, we recognize that but the deal was quite attractive on the cost of supply basis for us and frankly, we'd like to control of the partnership is not necessarily interested in an outside partner coming into to take some of that.

Clearly with total and Conoco Phillips Olivia there may be some opportunity to have some different kinds of conversations with olivia's going forward.

Okay.

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

Good morning, if I think about that U S growth rate of eight to 9 million barrels a day and the lion's share of that being in the Permian you can start to see the day, where Permian gas takeaway against.

Exhausted, how do you guys think about your gas takeaway to meet your growth targets and how do you see the whole basin is shaking out.

Yes, I can start and.

Nobody else can chime in bill with our commercial team is where we're all over this Bob.

And yes, we are we see the potential for some of that again I think we're in we're in really good shape based on the position that we have and the infrastructure. We have we can evacuate gas south we can go west and we can come into the Katy hub and into the Gulf coast as well, so, but we're watching it pretty closely because we got to make sure.

Industry wide, we don't go back to flaring as an industry and all those kinds of things so.

We've got to build the gas.

You are exactly right Bob that watching the takeaway capacity out of the Permian Basin is something thats important to do particularly as more production is coming on and particularly as associated gas starts ramping up.

We're probably a couple of years away before you start hitting that that capacity, but it's important to keep an eye on I think as we look at a couple of things to note first we or we are currently moving several multiples of what our current production is across the Permian Basin. We've got a very skilled commercial organization in terms of how we move that volume.

So we have flow assurance for Conocophillips production and then you've seen in the market. There has been a couple of recent.

Proposed pipelines coming out that that would put additional takeaway capacity both down to kind of the corpus Christi area in the Houston area and I think those are going to be important to keep an eye on as we look at where the market goes but flow assurance is something we definitely keep an eye on for our physical production.

Great. Thanks for that a quick follow up what's your appetite or philosophy around revisiting the capital program and sort of mid year results.

Well.

We watch it every month every day Bob.

So we're looking at.

The the inflationary pressures that might be in the system. We're looking at what our partners are validating us for what the operated by other activity level and certainly they see these kinds of prices and that that pressure on the OBO spend is there. So we look we look at that every year, where obviously, we can we can impact that through our operated.

Scope should we choose to go do that but again, we like the steady program nature on our operated scope. So I guess the messages we watch it absolutely and we've got lots of levers in the in the toolbox to.

Two to manage to an outcome should we choose to go do that but thats that that'll be conversations and things that will come out in the next couple of quarterly calls as we kind of watch the macro what's the activity level watch the inflationary forces that might be out there and what sort of offsets that we're seeing on the efficiency side because as we integrate the.

The shell assets into the portfolio that Tim talked about and we still have those opportunities as well. So there's a lot. There's a number of moving parts, but absolutely we'll be all over it.

And update the market as necessary.

For the remaining quarters.

Thank you. Our next question comes from John Freeman from Raymond James. Please go ahead. Your line is open.

Good afternoon.

So John first question I had hi, the first question I had was just on the.

The inflation topic.

Just to make sure I understand what's kind of built in on.

On the guidance a couple of hundred million dollars.

The budget for our current inflation is.

Can you give us some ideas like pretty much almost all of what you would have in the from a service cost inflation standpoint.

Is that locked in or are there certain items as you go through the year you're still exposed.

I guess the spot market for certain items.

Okay.

No no we're not fully locked in on that side and the service side. So though we are exposed like most everybody is too.

What you describe as spot condition or what's happening in the service side of the industry and again, it's predominantly in four or five categories of spend those are the ones that we watch.

Pretty closely interestingly.

<unk> started in 1000 ton went into 2000 and has now come back down to 1300, so for rolled steel and.

But we want you know we get updates frequently from our supply chain organization chemicals, because they have a lot of them originated out of Europe are up right now with the supply chain constraints that are in that so yeah, and then local kind of impacts with trucking and labor.

Sand and some of those things, we watch them pretty pretty closely but they're probably in.

<unk> a bit more as I said earlier than what we would've thought just eight weeks ago, when we put out our our capital guidance for the year. We've included some inflation to your point and we're watching that because we're also generating efficiency as a company and we will.

We'll update that as the year progresses.

And so Ryan is there I know that at least there's a few.

A few of your peers that are and we will put out slides say well X percent of our our service items are sort of locked in for a given your army is there any ballpark kind of round number you could use in terms of what's locked in versus what's still exposed.

No I don't I don't we'd have to get back with you on that John you cut out on the first part of your question sorry, but.

That's a follow up.

Yes, sure and then just the last question for me.

I'm just thinking about maybe a longer term perspective, when we look at the three tiers.

Were you all been sort of attorney.

Returns to shareholders. If you kind of exclude the synovus shares sale, then you're just sort of look at kind of your base cash flow, you've kind of had that ordinary dividend and the buybacks as sort of relatively equal and then anything you get incremental as long as it kind of Iraq do you think of like.

Well, we don't necessarily think of it as equal look at that we actually think about what's an affordable ordinary dividend through the bottom end of the cycle, we want to make sure that we can it's affordable it's reliable it's transparent it's growable, it's competitive with the S&P 500, So we look at the ordinary dividend and we think about.

At the bottom end of the cycle, but we also have our view of the mid cycle price in some combination of dividend and repurchasing our shares when we believe is a mid cycle price is what we'd like to be able to do for our shareholders and more importantly make sure that it represents at least 30% of our cash going back to the shareholder.

Our mid cycle price the combination of those two things does that and the kind of proportion that you described but and then on top of that we recognize the torque that we have to the upside with these higher commodity prices and we're doing this we're swapping into the synovus shares on the strength of the synovus share price has allowed us to swap into more conoco.

Philip shares, which will be complete in the first quarter of this year.

So all that kind of weighs in than what's what's left to hit our 30% target and above is coming through that third tier that we introduced last year called <unk>, which was a cash variable return back to the shareholders. So that's how we're using we think the three tiered system is durable it's reliable and it.

And it recognizes the reality of the volatility that we're seeing in this business and so that's why we we put a three tiered system together, we like Ratably buying our shares through the cycles and we think there is still a good deal.

And in these up cycles like we're experiencing today.

Sooner, we probably have time for just one more.

Absolutely. Thank you our last question comes from Neal Dingmann from.

Im sorry <unk> Securities. Please go ahead your line is open.

Thank you all for excuse me and.

Just one last I guess two quick ones if I could just again, it's notable the amount of cash you all are kicking off obviously and my question is given the returns in the Castro kicking up why not and I know you guys have been opposed this but why not maybe lock in some of this with at least collars or something along that nature.

Yes.

We're unhedged.

Neil.

We think shareholders buy our shares because of the upside that it represents in the in the commodity price inventory that we have to the upside.

And the way we set up the company. So no we are.

We prefer to remain unhedged.

Frankly hedging would do little health. So we have a very strong balance sheet with helps us on the downside.

Shareholders ought to expect full exposure to the upside that we're experiencing today.

No great point, Okay, and then just lastly on divestitures.

Tim mentioned and I know you've done a couple a couple of small ones might my sort of two questions around that is there anything sort of that you'd.

Considered noncore that might be in that sort of near term divestiture category and then secondly.

Why even do any given how strong your balance sheet is now is there does it does it.

The requirement to put it in the non sort of core does that does that make it more difficult and less likely to sell given how strong the balance sheet is.

Thank you.

No not really we just wanted to take advantage of the strong markets. We're seeing today and we recognize that we've made two pretty transformational transactions over the course of all of last year and it has raised the bar in our whole company on cost of supplies. So there's things that we're probably not going to invest in that we recognize others will invest and so you know.

That's been part of our mantra and our drumbeat for.

So the last 10 years in this company. So we're constantly trying to high grade the portfolio and we see again, we see some more opportunities to do that across the lower 48, primarily the Permian.

As we as we think about what's going to be competitive in the current portfolio.

Thank you I'm not showing any further questions at this time I would like to turn the call back over to Mark.

Thank you, Eric and thanks to all who dialed in for todays call engineer I'll pass it back to you for your wrap up thank you.

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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