Q2 2023 ConocoPhillips Earnings Call

August 3, 2023

Okay.

Welcome to the second quarter 2023, Conoco Phillips earnings Conference call. My name is Liz and I will be your operator for today.

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 one one on your Touchtone telephone.

I will now turn the call over to Phil Gresh, Vice President Investor Relations, Sir you may begin.

Thank you Liz and welcome to everyone.

Two our second quarter 2023 earnings conference call on the call today are several members of the Conocophillips leadership team, including Ryan Lance Chairman and CEO , Tim Leach advisor to the CEO Bill Bullock Executive Vice President and Chief Financial Officer, Domenic, Maclin Executive Vice President of strategy sustainability and technology.

G. Nick <unk> Executive Vice President of lower 48, Andy O'brien Senior Vice President of Global operations, Kirk Johnson Senior Vice President at lower 48 assets and operations in Wiltshire, Rowe Senior Vice President corporate printing planning and development.

Brian and Bill will kick off the call with opening remarks, after which the team will be available for your questions. A few quick reminders first along with today's release, we published supplemental financial materials and a slide presentation, which you can find on the Investor Relations website.

During this call we will be making forward looking statements based on current expectations. Actual results may differ due to factors noted in today's release and in our periodic SEC filings.

We will make reference to some non-GAAP financial measures reconciliations to the nearest corresponding GAAP measure can be found in today's release and on our website. So with that I will turn the call over to Ryan.

Thank you Phil and thank you to everyone joining our second quarter 2023 earnings conference call. It was certainly another busy quarter for Conocophillips in April we hosted our analyst and Investor meeting in New York City, where we laid out our 10 year strategic and financial plan and we committed to you that we would keep work.

Looking to make the plan, even better and we've done that again this quarter.

We executed an agreement to purchase the remaining 50% of Afirma, which we expect to close in the fourth quarter Surmount has a long life low decline and low capital intensity assets that we know very well.

And the current $80 per barrel <unk> price environment, we expect incremental free cash flow from the additional 50% interest to approach $1 billion in 2024.

We expect first production in early 2024 from pad 267, our first new path since 2016, NBC debottlenecking potential out the facility to further improve our cash flows.

We also continue to progress our global LNG strategy.

In the quarter, we finalized the acquisition of our interest in the Qatar North field South of joint venture.

And in North America, we executed agreements for $2 2 million tons per annum of offtake at this tomorrow LNG project on the West Coast of Mexico and.

And in Germany, we can confirm we have secured a total of $2 8 million tons per annum of regasification capacity at German LNG.

And while it's only been a few months since <unk> at Port Arthur We are further progressing our offtake placement opportunities in both Europe and Asia.

Now shifting to the quarter, while commodity prices were volatile conocophillips continued to deliver strong underlying performance. Once again, we had record global in lower 48 production and we raised our full year production guidance for the second straight quarter.

This was achieved through continued capital efficiency improvements as the midpoint of our full year capital guidance remains unchanged.

We continue to deliver on our returns focused value proposition.

We have distributed $5 8 billion through dividends and buybacks year to date, putting us well on track to achieve our planned 11 billion return of capital for 2023 and.

And we did this while funding the shorter and longer term organic growth opportunities that we see across the entire portfolio.

So in conclusion our.

Deep in our durable and diversified asset base continues to get better and better.

And we are well positioned to generate competitive returns and cash flow for decades to come.

Now, let me turn the call over to Bill to cover our second quarter performance in more detail.

Thanks Ryan.

Diving into second quarter performance, we generated $1 84 per share and adjusted earnings.

We recognize that this result was below consensus, which we primarily attribute to transitory price capture headwinds and lower 48 natural gas.

In Alaska crude.

Now based on strip pricing for the second half, we expect price capture to normalize and be consistent with our previous full year guidance of $22 billion and CFO at $80 <unk> and our published full year sensitivities.

Moving to production, we set another record in the second quarter, producing 1 million 800.

5000 barrels of oil equivalent per day, representing 6% underlying year over year growth.

With solid execution across the entire portfolio.

Planned turnarounds were successfully completed in Norway in Qatar.

And lower 48 production was also a record averaging 1.063 million barrels of oil equivalent per day, including 709000 from the Permian.

235000 from the Eagle Ford.

And 104000 from the Bakken.

Lower 48 underlying production grew 8% year on year.

With new wells online and strong well performance relative to our expectations across our asset base.

Moving to cash flows.

Second quarter CFO was $4 7 billion.

We had an average <unk> price of $74 per barrel.

This includes AP LNG distributions of $405 million.

And then the second quarter. We also received $200 million in proceeds primarily related to a prior year disposition.

Okay.

Second quarter capital expenditures were $2 9 billion, which included $624 million for long cycle projects.

Now through the first half we have now funded $700 million for Port Arthur LNG of the planned $1 1 billion for the year.

Which we expect to lead to a step down in overall capital in the second half.

We also expect to see a step down in lower 48 capital on the second half of the year.

And as a result, we have narrowed our full year capital guidance range to 10, eight to $11 2 billion.

With no change to the midpoint.

Regarding returns of capital, we returned $2 $7 billion to shareholders in the second quarter.

This was a $1 3 billion in share buybacks and $1 $4 billion in ordinary dividends and <unk> payments.

And we announced our fourth quarter be rock at <unk> 60 per share, which has us on track to deliver our $11 billion target for total return of capital in 2023.

Turning to guidance, we forecast third quarter production to be in a range of 1.78 to 1.82 million barrels of oil equivalent per day, which includes 20000 barrels a day of planned seasonal turnarounds, primarily in Alaska and Europe .

We have also increased the midpoint of our full year production guidance.

Our new full year range is one eight to $1 eight 1 million barrels of oil equivalent per day.

15000 barrels per day from the prior midpoint of $1 78 to 1.8 million previously.

For AP LNG, we expect distributions of $400 million in the third quarter and one 9 billion for the full year.

Okay.

Consistent with our higher production guidance for the year, we have raised our full year adjusted operating cost and our DD&A guidance by $100 million each to eight three and $8 2 billion respectively.

We have also lowered our corporate cost guidance by $100 million.

To $800 million.

Due to higher interest income.

And finally as a reminder, all guidance excludes any impact from announced but not closed acquisitions, such as surmount any P&G.

So to wrap up we had another solid operational quarter, we're confident in our outlook leading to our increase in full year production guidance.

We continue to progress our strategic initiatives across the portfolio and we expect to return of $11 billion to shareholders. This year.

Now that concludes our prepared remarks.

I'll turn it back over to the operators start the Q&A.

Thank you we will now.

Now begin the question and answer session.

In the interest of time, we ask that you limit yourself to one question and one follow up on that.

If you have a question. Please press star one one on your Touchtone phone.

Wish to be removed from the queue. Please press star one again.

If youre 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 one on your Touchtone phone.

Our first question comes from Neil Mehta with Goldman Sachs.

Wanted to build on slide seven here on price realizations as you mentioned, a little weaker than that in lower 48 gas and Alaska. You had mentioned some of the stuff is transitory and it's moving in your direction. In Q3 can you provide a little more color there.

Yeah, absolutely Neal So obviously second quarter was a bit challenging on our capture rates and as you noted is particularly lower 48 gas in Alaska crude now.

I'll give you some details on each but the punchline here is that we're already seeing lower 48 gas differentials and Alaska crude pricing returning to more normal levels in the third quarter and as I mentioned based on strip and differentials for the rest of the year, we remain comfortable with our framework reference up 22 billion and CFO at $80 <unk>.

And $3 Henry hub that we provided at the beginning of the year, along with our published full year price sensitivities.

But let me let me start with lower 48 gas our slide show that our second quarter capture rate was 68% of Henry hub, that's down from 85% in the first quarter, which compares to our expectation of roughly 80% capture for the full year that we laid out a couple of quarters ago and as you.

You, probably recall I said that we expected lower 48 capture to be volatile quarter to quarter. This year and we are certainly seeing that.

Now the 68% rate in the second quarter was mostly driven by what we're seeing is still wide Permian differentials relative to Henry hub for the first half of the year as well as the absence of some strength in Socal and Bakken that we saw in the first quarter, which really explains the quarter to quarter.

Change.

Now looking at third quarter.

Differentials have narrowed.

Back to more normal.

Ranges.

And that's with some pipeline takeaway of improvements and additional Debottleneck pulling ahead, and socal is looking a bit better as well, but clearly the story here is Permian disk, that's what matters most.

Now in Alaska crude this one's a bit more unique to conoco Phillips capture rates slipped to 97% in the second quarter from 101% in the first quarter.

And that's largely timing related.

With some of our second quarter cargos, they were priced when a N S was trading at a discount to Brent, but as you can see on the screen right now a N S is back to a premium to Brent more towards historic levels. So I'd say when we look at this and pull it altogether. We remain encouraged by our recent capture rates and we're confident in our full year estimates and sits.

<unk> and we're pretty constructive on the second half of the year Neil.

Thanks, Bill really appreciate that the follow up is small bump here Ian production guidance been two quarters in a row, where lower 48 crude oils come in strong.

About 560000 barrels so.

Just curious on the driver of the bump was it in the lower 48 or is it throughout the portfolio and just your thoughts on on production momentum over the course of the year.

Yeah. Thanks, Neil it's Dominic here, Yeah, we were.

We're pretty pleased with production performance I think it's really across the board, we're seeing everything performed well, but certainly it is a little 48 that is stunning out little bit more and even and Nick will talk to that in a minute. So you're right. Yeah. That's the second quarter that we've increased our in a row our production.

<unk> guidance were up 25000 Boe.

Equivalent.

Since the beginning of the year, what's interesting about 80% of that increase is actually oil and.

So our full year underlying growth is expected to be 3% to 4% this year.

And that would be 7% to 8% in the lower 48 now there is a lot of focus on product mix right now and in the sector. You know so let me just say that we expect our product mix to be consistent over the year also so those growth numbers really work on both the BOE and available bases and we can get some noise on mix.

Quarter to quarter in the lower 48, depending which particular pads brought online across all basins, but that will average out over the year to a consistent product mix. So for example, if you look at our.

Our second half 2022 compared to first half of this year, we've had very consistent product mix and lower 48 around 54% oil so.

Yeah, we're pleased with the production progress like I say, it really are the Permian and the.

Fortinet is driving that so Nick do you want to talk a little bit of Butler, yeah. Thanks, So much.

Good morning, Neil.

Yeah. So there's probably two main reasons for that driver for the top end of the range or lower 48, first we had modest acceleration of activity kind of late Q1 and two Q.

Therefore, accelerating some wells online and then strong well performance now the acceleration that I mentioned was resulting of improved drilling and completion efficiency. So as I've mentioned at the analyst and Investor meeting, we continue to realize improved efficiencies in 2023, therefore accelerating some of the wells.

So that's point number one and then if you look at the overall strong well performance, we're seeing that across the board. So we're either at the 2022 performance or exceeding our type curves in certain areas as well. So that's as Dominic mentioned very encouraging I will point out a couple of points on the drilling and completion.

Efficiency, that's making a large difference we continue to realize efficiency improvements for example in our Permian real time drilling intelligence group.

Neal we have $24 seven real time monitoring where we can optimize the rig program. We can troubleshoot across the entire Permian rig fleet, and then share best practices across the rigs as well, that's resulting in a 10% improvement in RFP.

And then we continue to high grade rigs across the lower 48 to drive and improve operational efficiency and then on the fracking side similar frac remote frac and we're testing out some new technology down in and Eagle Ford continue to drive efficiencies so very encouraging.

Well done thanks, Nick Thanks Dominic.

Our next question comes from the line of Steve Richardson with Evercore ISI.

Hello. Thank.

Thank you I was wondering if you could talk a little bit about the Mexico Pacific Offtake agreement.

Conceivably you have a lot of.

Looking at these types of deals. So why was this the right project for you and also you know what what do you see the path to sort of RFID and timing, there, but would love to hear a little bit more about that and how it fits in the broader strategy.

Well, maybe a fever I'll take some of the broader strategy and will now turn specifically over to bill for the Zoro project itself, but now as we tried to lay out a game kind of looking at a high level, we think from a energy transition perspective and just.

Competency, but what we're really good at on the LNG side, we wanted to expand that piece of our business. We set out a couple of years ago to go do that I think that's consistent with the Qatari volumes of course getting port Arthur J F E and then and now this tomorrow opportunity specifically on the West Coast, we saw in service through trying to build up more.

A bigger LNG business inside the company and are taking opportunities as they come available both on the.

The equity side at Port Arthur but more importantly on the offtake side and trying to service some of the growing demand that we see coming out of Europe and Asia.

Bill Bill can talk more specifically about this tomorrow project.

Yeah sure. So you know as we talk today and we're really focused on building up both our market and our.

Originating highly competitive supply on a pretty stair step basis, and we're making excellent progress on both those fronts, Steve So as Ryan mentioned, we secured a $2 8 million tons of re gas in Germany that that supports our 2 million ton offtake from our LNG S pays with Qatar that leaves <unk>.

Eight for our commercial LNG business and putting that in perspective, that's 16% Port Arthur LNG right there.

And we are continuing to make excellent progress advancing off take into Europe , we've been progressing discussions with several Asian buyers, So really happy and pleased with how we're moving forward with with developing market and against that backdrop, we are pretty thrilled to be adding $2 2 million tons of offtake on the west coast of Mexico.

So that's obviously pending successful F I D.

By Mexico Pacific, but Youll recall at aim we mentioned that we're really interested in adding west coast LNG into our portfolio. This particular facilities adds diversity to our off take options.

The Panama Canal is supportive of volumes into Asia and from a supply perspective, it really does complement our offtake from port Arthur very nicely and create some excellent optimization opportunities.

You probably noticed it's got strong backing from very credible Counterparties. In addition to Conoco Phillips and it supports a dedicated pipeline from the Permian. So that that's always appreciate it provides further takeaway optionality from a base on which I think is helpful for wallboard pricing and it also is using conoco Phillips optimized cascade.

Technology, So there's quite a few reasons why we like having capacity at <unk> now note that it is an off take agreement there is not an equity component to this one it is simply offtake.

And I think the most important point that Ryan has already mentioned is we continue to see really strong demand for LNG and so this fits quite nicely as we're kind of ladder, our build out of market and supply.

That's great color Bill Ryan Thank you Bill.

Bill I Wonder if could just follow up quickly on <unk>.

A little while since you exercised but wondering if you could give us your latest thoughts on funding of that transaction and how youre thinking about it.

Yeah happy to so let me just start with some overall context for how we're thinking about our cash balances and the acquisition of the additional 50% interest. We ended the second quarter with little over $7 billion of cash and short term investments.

And as we talk today that really provides strategic flexibility and it supports our investments in these mid and longer cycle projects in our shareholder distribution commitments and when we look forward at the current strip.

We expect that our organic sources and uses for the remainder of the year are going to be pretty balanced Steve.

And that our ending cash absent fair amount would be flattish with what we're seeing right now.

As Ryan mentioned surmount has a long life asset it's got a really great resource base and it's one of these ideal assets to think about funding with debt because of its long dated cash flows you can match, our assets and liabilities pretty well with something like this so for the surmount transition transaction specific.

It's a bit tactical, but it's likely that we will use that for a majority of the funding for <unk>.

And then I just wrap up by pointing out you know Ryan said in his remarks at the pricing that we're seeing right now we.

We see strong intimate incremental CFO from that 50% increase in working interest to surmount that starting to approach $1 billion of incremental CFO next year at 80 Bucks. So.

We're quite happy with the <unk> acquisition and quite comfortable with our funding plans.

That's great thanks very much.

Our next question comes from the line of Doug Leggate with Bank of America.

Before for getting me on.

Tom I Wonder if this is probably for you I wanted to follow up on the question about well performance productivity.

Terrific.

Protein production performance the rays, you've introduced today, but I want to ask a slightly different way.

Your partner in the Permian are specific to the Permian I should say.

Has been spoken about I don't want to call. It some magic magic formula or source or whatever but they're well productivity is off the charts and you obviously had a big beneficiary of that I'm wondering.

If you can comment as to whether there was any osmosis towards clinical was operated production. Then if you could maybe contrast, and compare any differences you see.

Between your 60% ownership position in the JV on your legacy position and the opportunity there around the country.

Yeah, Doug This is Nick I'll take a stab at it I think youre looking at the non operated versus operated split is that where you're going with what exactly yeah. Yeah. That's exactly right yeah yeah.

Yeah. So if you just take a look at that second quarter.

Top end of the range performance from lower 48, as I mentioned, we had strong performance both on accelerating the wells, but also strong well performance that's roughly split between operated and non operated and obviously when you look out in the Delaware Oxy has a large component, but we have a number of other JV partners that are contributing.

Rebidding that as well, but oxy has a big component.

Maybe you said it was multiple difference between the productivity in the JV in your legacy assets.

You know we constantly.

Doug look at all benchmarking. So we received the the balance from our on our non operated positions. We evaluated has to meet our cost framework I'd say in general we're fairly aligns theres always a little bit of difference in spacing and stacking and completion design, but we're roughly in.

In line and obviously the positions that we have in the operated position is.

Is really in the core.

Less than 12 billion barrels of resource less than 40, averaging 32, we got great legacy positions out in the Delaware.

Great. Thank you for that Ryan My follow up is probably for you.

You're not even $1 billion of cash flow from Stormont fantastic deal for you guys again, congratulations on not.

Evolve the LNG portfolio, even since your analyst day.

But yet we still have one.

One of the lowest ordinary dividend yields in the sector that you can clearly cover at very very low oil prices. So I'm just wondering if I could.

Ask you again to share your thoughts on whether some of that.

Increase in free cash power of the portfolio translate to a more ratable or a higher ordinary dividend, which frankly, we think you kept better recognition for.

Thanks, Doug you've been you've been a consistent messenger on this particular point sorry predictable.

Give you give you credit for your tenacity that's for sure.

Look yes.

We recognize that we're acquiring from assets again significant free cash flow potential that 60 to $80, even even in a mid cycle price I guess the thing I'd say first and foremost dog of.

No you shouldn't question Conoco Phillips, whose commitment to.

Giving a significant amount of our cash flow back to our shareholders. So no about six seven years, we've averaged.

45% this year, depending on your outlook for prices, we're probably closer to 50%. So first and foremost we're going to be competitive on giving a significant amount of our cash back to shareholders and again that CFO not free cash flow now to your point, even at a constant price, we're going to be generating more more free cash flow as we come out of the <unk>.

June surmount activity, our framework really hasnt changed.

But we want on the base dividend is something that is.

We said, we see a lot of value being able to grow that at a top quartile rate overtime over the long term and we tend to go do that.

We set our framework around a mid cycle price and you may defer or argue with our mid cycle price, but we've tried to set a framework around a mid cycle price water by some of our shares back through the cycle. So we don't get caught pro cyclically and then we introduce that third tier of Iraq to address when prices are well above mid cycle you'd argue 80 bucks as well up a new site.

So I think our cash yield is competitive.

Your point is you know we may get more credit if we put a lot more into the base dividend.

We just think that growing the base dividend and a top tier amount annually.

Give us a lot of credit as well it doesn't obviously raised the fixed cost for the company, but the improvements are we can afford a bit more but we're focused on sort of the framework that we outlined and watching a pretty volatile commodity prices. So I'd just remind people just a month ago <unk> was back in the sixties. So.

We're trying to set a framework that we know works through the mid cycle and we set a framework that rewards shareholders.

It recognizes the torque that the company has to the upside when prices are much higher we like the three tiered framework, we'll look at it again as we finish this year and go into 2024, we'll look at where our shares are trading we're looking at where the commodity prices are at we will try to separate channels.

Appropriate way.

But you can you can count on us delivering a significant amount of our cash flow back to our shareholders as we've done over the last.

Six seven years.

I appreciate your patience with my question again, Thanks Ryan.

Thanks, Doug.

Okay.

Our next question comes from the line of Sam Margolin with Wolfe Research.

Sam Your line is now open.

Alright, thanks, so much.

Okay.

First of all I apologize if this is a little early but I wanted to ask about.

2024 capital, if I can and maybe focus on Willow.

There should be a natural tailwind and capital because.

The step up in Willow is less in the port Arthur payment.

But I just wanted to see if theres anything we should know about project lifecycle at Willow debt.

That creates a different shape.

And over over the development for 24, thank you.

Yeah. Thanks, Salim, it's Dominic here.

So.

It is a bit early for us to be talking about 'twenty four but.

Yeah.

There hasnt really been any change since.

To the long term framework, we've had and what we talked about it aimed back in April .

We showed the unexpected capital range, depending on how oil prices and inflation was trending.

Given that <unk> is back to around $80.

Forward curve is about the as we have been anticipating frankly.

We'd expect to be at the higher end of that range that we talked about back in back in April So a similar capital level for next year to this year.

I think one other dimension I would talk about is how.

How much growth in the lower 48.

Growth do we need as a company that we want but that's always an outcome. Although plywood always focus on returns of course with tons on and off capital, but one of the things. We're looking at next year is do we keep 48 relatively flat is performing very well this year or do we add a little bit of activity. That's one of the things we're thinking about in terms of the longer.

This cycle capital yes.

LNG spend is will be rolling off from this year over the next few years, just as Willow picks up.

We expect our longer cycle capital to average around 2 billion pretty flat for the next few years here.

So that would probably give you the point is in terms of the general direction for next year like I say, it's pretty early but that gives you a good sense of where our heads are at on that so.

Understood. Thanks, and this is a follow up on your point on lower 48.

And particularly sort of the phasing of your development, because now with Mexico Pacific.

And port Arthur you've got quite a bit of it.

Calculation from North America for gas.

It integrates with your marketing team and he was a supply agreement, which you talked about at the aim and.

I wonder if thinking about those projects and their impact on <unk>.

Maybe even NPV of your some of your plenty.

Plenty in positions with respect to realizations.

It's a factor or if these are evaluated for you totally separately. Thanks.

Yes, I mean, we.

We don't really relate those investments specifically and directly but it's obviously all helpful. In terms of demand for North American gas so.

That's that's in our minds certainly as we think about the overall value equation of LNG in North America.

Got it thank you.

Our next question comes from the line of Devin Mcdermott with Morgan Stanley .

Hey, Thanks for taking my question.

So I wanted to build on on what Sam was asking about.

And some of the comments you made just on inflation or deflation trends you had some benchmarks baked into the multi year guidance at the Investor meeting earlier. This year, we've seen some signs of deflation in U S shale and some still rising costs in other pockets internationally on a net basis across your portfolio was wondering if you'd talk a little bit about the trends you see.

Being here in the back half of 'twenty, three and then how that plays into the 2024 outlook to the extent you can comment.

Yes, thanks, Kevin.

Don't want again here. So yeah, obviously, it's something we're watching incredibly closely with everybody else in the industry I think.

We are seeing some areas of deflation in the lower 48 going into second half I would say however, we still expect our overall company capital inflation to average out in the mid single digits. This year versus last year on an annual basis, but just to talk a little bit about what we're seeing I mean, certainly I think as we've said before <unk>.

We've seen some significant price relief on any oil price related commodities fuel and chemicals and things we've seen some material reductions in sand and proppant rig rates have softened a bit and that's obviously driven by the gas space and so you're starting to see some high performance rigs.

Come in and compete with the.

The oily basin. So that is we are seeing some day rates come come down there and I would say I think.

Yes.

Getting to see some examples of frac spread rates coming down in some basins. So.

So that's all looking positive.

Activity internationally and offshore is picking up it's probably as high as it's been for many years. So we are seeing some some pressure on labor rates. So we're watching that but overall certainly seeing some deflation going into the second half I know that's a big part of the reason, we see a lower capital run rate for the second half for the for the first half.

That's an important part of it.

And that's all reflected in our annual capital guidance that we have narrowed to 10 eight to $11 $2 billion 11 billion still a mid point so.

But certainly we're seeing we're seeing turning the corner here.

With.

Inflation and moving into deflation again.

Great. Thanks, and then I wanted to separately come back to the LNG strategy one of the other opportunities that you had talked about at the Investor meeting was brownfield expansion at Port Arthur and we've seen with some other U S. Gulf coast projects very compelling economics on the additional trains that can get added can you just talk a little bit about how you are.

Thinking about the commercialization process, there and conoco's appetite for taking further off take off a further expansion at that facility.

Yes. This is bill.

About this a bit at aim so as we think about port Arthur LNG.

We're pretty happy with the level of equity that we have right now in the project when we took equity or debt that has some pretty unique reasons for taking it for the options that we secured there and so as we look forward it would have to make.

They have to be some.

Pretty unique reasons, why we take additional equity now.

As we have mentioned that our agreements are structured for future phases continue to benefit our investment in the first phase.

And.

So we're pretty pretty positive on that.

As you know we've got some pre defined options on that were certainly evaluating options.

But I think that you should kind of happened in your mind that we're not expecting to spend additional capital there at this point in time.

Great. Thank you.

Our next question comes from the line of John Royall with Jpmorgan.

Thanks for taking my question can you hear me.

Yes, we can.

Okay, sorry, yes.

Like.

The tax rate on your corporate segment earnings took a big step up in Q2.

I was just hoping you could speak to the tax rate on corporate and then I think it impacted just the overall blended rate.

Stepped down a bit into Q. So just maybe a little bit of color on that as well will be helpful. In just what we should expect moving forward with the tax rate.

Yes. This is bill Oh. This is really just a pre tax income mixed story.

Our estimated annualized effective tax rate.

Has moved down to 35% for the year and that compares to last time I provided guidance tee off mid to upper Thirty's when.

We talked to some time last year on our effective tax rates.

And this reflects a shift in the mix of our forecast annual pre tax income from some higher tax jurisdictions with lower tax jurisdictions.

It's really largely driven by Norway, given the reduction that we've seen recently in EU gas prices relative to last year. So obviously these tax rate changes they create some quarterly noise as they flow through I'd say noncash catch up adjustment when they happen.

And so that's why you see our second quarter tax rate was 33, 6% versus first quarter of 36% and that puts our year to date right at this 35%.

A level matching our current expectation of full year now that that noncash adjustment that's going to flow through the corporate and other segment you can see that on our supplementary disclosures you can see it's a it's a $200 million positive swing quarter on quarter in that corporate segment.

Now.

So that's pretty straightforward, it's really just a mixed story now when you think about deferred tax deposits Taylor.

Tailwind that you saw on the cash flow statements quarter on quarter.

<unk> was a bit lower that was because of the income statement adjustment I just talked about but the bottom line is for the second half of the year at 35% annualized effective tax rate is a reasonable run rate for book tax at our current commodity prices.

And the deferred tax tailwind of about $200 million for the second quarter. That's also a good run rate for the remainder of the year now obviously that can move around a lot if theres some discrete items that come up and as you know they often do but it's a pretty good run rate at this point in time.

That's really helpful. Thanks, Bill and then well.

Our next question is on Bakken production, you were up well over 100 <unk> what was the driver of the strength there and should we be thinking about Bakken is.

Plateauing somewhere above that kind of mid to high 90 that we used to think about or is there any stickiness to the strength in <unk>.

Yeah, John this is Nick.

Yes, you look at our operational performance from the rigs and Frac crew that we have in Bakken just performing extremely strong.

Like other assets in the portfolio, you're going to see a little bit of lumpiness from quarter to quarter.

And you can think of Bakken at plateau.

So 100000 barrels a day for several years is a good number I would refer you to.

They aim presentation, where we talked about Eagle Ford and Bakken essentially sustaining production for 330000 through the decade that'll give you a good long term view, we like the asset is competitive low cost of supply and we continue to find opportunities and looking to increase the overall inventory in that asset.

Thank you.

Our next question comes from the line of Roger read with Wells Fargo.

He broke off but I'll assume on the only Roger on the call. Good morning, guys. Good morning Roger.

Anyway I just.

I wanted to come back around <unk> had.

Some opportunities here on the investment in the acquisition front with Fairmont and.

The.

The deal here in Mexico. So I was just sort of curious as you look at.

So let's call it the M&A opportunity versus the organic opportunity what.

How are you comparing those two how are the opportunities looking on those.

Thinking returns right where to put your incremental dollar.

Yeah, right now I think.

We're pretty focused on the organic side Roger but.

Just because of the resource space right now and the stuff that we're executing is got pretty compelling opportunity for the company to focus most of their.

Most of our capital and our allocation towards our organic side of the business when it's performing as well. It is as we're delivering efficiencies that Nick talked about in the lower 48, and what Andy is delivering around the rest of the world that just looks to be compelling opportunities for the company, but with that said you got to hang around the hoop.

And you catch these rebound a little bit because you know we never know what our partners in some of these assets make different strategic decisions, which is clearly what our partner at APL and <unk> done or is doing.

Thats clearly what our partner at Fairmont.

And is doing so we know these assets really well and we've tried to were consistent in the framework around cost of supply that we described a number of years ago of how we can kind of match up inorganic opportunities with organic opportunities and that's why we want to have the financial strength that we do with cash on the balance sheet.

And the ability to fund these projects when they when they come available, but you just never know when your partner makes the kinds of decisions that they have made and we want when we know the assets well and we can get it for a deal that is very competitive.

As you talked about vis vis Fairmont and AP LNG for that matter, we're gonna be all over those when those opportunities present themselves, we never quite know when they do but so were mostly focused on the organic side of the portfolio, but we wanted to have the firepower and be there and we watch everything we pay attention to everything that's going on in the market we know what we.

Like we know what we can afford to pay more importantly.

When we can we can bring those two together, we want to be able to execute those when those opportunities present themselves and that it was really opportunistic with both apiology in Soma.

We had partners who made strategic decision to go on a different direction and that was to our advantage. So we wanted to take advantage of that.

Absolutely. Thanks for that and then just as a follow up question on the agreement to go the <unk> route on the West Coast of Mexico, what is the situation with takeaway capacity to get there presumably from the Permian just what pipelines are or what.

Pipelines might need to be.

Instructed in order to make this project to bring it to fruition.

Yeah. Roger this is bill.

So.

Two points first up the $2 2 million times from <unk> that is an off take agreement is not an equity investment. So I just think it's important to make sure that that's clear.

And then for the specific question about the pipelines.

I'd really direct you to the operator, Mexico Pacific for a detailed answer but they've had several press releases out including one in July that announced a 20 year agreement with Cfe, that's the Federal Electric Commission.

In Mexico to supply, Mexico Pacific with natural gas delivered from the Permian Basin via Cfp's pipelines in Mexico, and so that's that's the best source of information for you on that and of course that takeaway from the Permian is helpful for wallboard differentials and pricing overall.

Okay.

Okay. Thank you.

Our next question comes from the line of Ryan Todd with Piper Sandler.

Brian Your line is now open.

Oh, sorry, I cut out there for a second I missed it.

Maybe one and one follow up question on on the <unk>.

LNG off take or at least a broader question on offtake agreements is there.

You've got that off take agreement now you've got the 5 million tonnes from Port Arthur is there when you look at it.

Your interest in off take agreements and LNG is there a relative size in terms of.

How much feels appropriate and the portfolio relative to equity gas production, either on a global basis or.

In the U S relative to kind of U S gas versus off take agreements how are you thinking about.

Partially which is it should we expect to see you look at additional off take agreements or do you feel like you've got pretty good balance at this point in the portfolio.

Yeah, that's a really interesting question. So as we've laid out we think about this is building up in kind of a ladder of fashion you have to have the market placement with.

The LNG offtake that you secure we feel very comfortable with where we're at in that progress.

Even just since aim in April so thats, why youre seeing as being pretty confident with our west coast volumes here.

But you should expect that to kind of develop as a ladder. So you don't get out ahead of your skis, we do see pretty strong demand on that.

But I think we're getting pretty close to critical mass here over time, So Oh, I think we're pretty comfortable with where we're at right now we're continuing to look for capacity on the west coast, but a lot of those things are more longer dated out in time right now.

Great. Thank you and then maybe.

And I apologize I'm not sure. If you said something I missed I missed the first minute of the prepared comments, but.

Any any comment on what the latest update on Alaska, particularly regarding the outstanding legal or permitting issues that would dictate timing there at willow.

Yeah.

Yeah, Hi, this is Andy.

So yeah, so Alaska.

On the legal front.

As you'll recall, we had the two lawsuits.

Challenging the federal government's approval for the project.

So probably the lead the main update since we last spoke is we're pleased that.

Our schedule has been agreed now.

And we expect to see a ruling on that in November as we can.

Previously communicated that given the prior rulings on this the <unk>.

<unk> being challenge is narrow and we believe that the BLM the cooperating agencies conducted a thorough process.

I know you know satisfied all the legal requirements. So we're kind of very much now looking forward for the court's ruling in November as we start to plan for our 2020 full winter season.

Okay. Thank you.

Our next question comes from the line of Lloyd Byrne with Jefferies.

Hey, Thanks for squeezing me in.

I just have a couple of quick questions.

Long cycle, you've talked about long cycle development.

And then deflation holiday and weather.

Maybe you could take that to Willow UNFI, either what seemed like peak inflation and some important cost will come down. So wondering whether you have a cost update there or I guess, what do you expect cost to come down.

I understand that.

Jack but.

Yeah, Hey, Lloyd this is Andy again, so when it was a longer term projects and it is a little hard to comment on sort of deflation or inflation through 2029.

Because it is important to frame, where there's not a turnkey contract.

Now as we are entering into individual contracts those contracts do have terms linked to agreed indices that can move up and down with inflation.

Probably just a couple of other things I've mentioned is that we haven't seen the same kind of inflation in Alaska as we've seen in the lower 48 over the last couple of years.

So as we said Hey, you know what I think in terms of the capital range that still holds we expect the capital range to be in the 7% to seven and a half billion dollars that that really hasnt changed now the capex. The first production and its always just also worth emphasizing.

All of our projects Willow has got some inflation factored into those estimates. So we understand the project really well, though this kind of activity as it is but a lot of this is sort of typical activity. We do in Alaska and we haven't seen the same kind of inflation that we have having the lower 48, So I think the 7% to seven and a half.

Billion.

Although we provided at Amey is still a good a good estimate.

Thinking is in terms of the Capex to first production.

Okay great.

And then let me just go back to sell malls.

You answered a few questions on it but.

It kind of fell into your labs, and whether the exercise of the welfare changes any strategic capital decisions elsewhere in the portfolio. It feels like it gives you a lot of flexibility.

Going forward, but I was just wondering if it changes the timeline.

Montney or anything like that.

So as you said seven one of the things that we really like about seven months.

Low capital intensity assets. So it really doesn't change that much in terms of allocating capital to other projects, it's just providing us.

A lot more cash flow. So I think the plan we outlined at aim I know it doesn't really change how we how we consider the other projects.

We have we have the benefits of <unk>.

Another long cycle asset with low capital intensity.

Great.

Thank you guys.

Our next question comes from the line of.

Alastair Syme with Citi.

Thanks, very much I wanted to sorry buckle on LNG again.

Wonder if you could talk.

Talk about the three opportunities we've taken on in the last 12 18 months about how they.

Compare on a cost of supply basis.

To put together costs in fiscal <unk>.

How it all comes together.

Thank you.

Yes sure.

If you like.

Go ahead bill.

Okay.

Yeah sure. So if you look at the projects that we've picked up so in Qatar.

Those are.

Really nice projects that we have pursued for a long period of time those.

Very well on our cost of supply we're quite happy with those.

Port Arthur we've talked about pretty extensively we've talked about how at port Arthur.

On an integrated basis that we would expect.

Low to mid teens returns up overall, but with really steady cash flow and low risk returns on that equity component and then <unk> is not an equity investment.

Although there's still an inherent cost of supply associated with it.

In terms of how youre thinking about the market position.

Yes sure so.

That comes down to what your cost is applying to your portfolio. We think that so far is quite competitive because it's on the west coast.

Particularly when you compare that to.

Gulf Coast LNG, because you're on the other side of the Panama Canal.

And so it's a quite quite.

Quite competitive supply location for deliveries, particularly into Asia and fits very nicely in terms of if you think up in acquisition cost per LNG, it's very competitive.

And I would add for the yes, we look at the liquefaction fee and a reason for choosing port Arthur and obviously MTO is what we believe is a.

So a very very competitive liquefaction fee.

Hiding some of the costs through the Panama Canal and places it.

Premium to Asian buyers.

Okay.

Thank you.

My follow up probably Goldman Thank you hinted.

The question on 2020 core Capex.

All the working lower 48 activity levels and I was just sort of wondering sitting behind that is it.

Something about deflation.

Deflation youre seeing or is it related to what you're seeing on well productivity.

Yes, it's really.

Looking at the performance in lower 48, this year I mean, it is doing very well.

A very efficient machine running.

As we think about returns we think about the growth that we are likely to see from the lower 48, even at relatively flat levels.

We will see growth, we anticipate even if even at maintaining flat activity level. So we're just looking at overall in saying.

Looking at the macro and so on and just saying how much growth do we think is appropriate. So that's just something that we're considering we haven't made any decisions on that yet.

But yeah, it's just a case of fine tuning that as we think about 2024.

Alright, thanks for that.

Operator, we have time for one more question.

This question comes from the line of Josh Silverstein with UBS.

Hey, good morning, guys.

So in Mexico, as well you guys have the option and an uptick in that I think potential equity agreement at Costa tool as well what are the key differences between the two products and why.

The first one with Mexico Pacific versus the coastal <unk> project.

Yes, I think the key difference is a timing issue right now is that Mexico Pacific is available right now.

It's getting ready to take F idea, it's in a good location.

With a very competitive tariff.

<unk> been as we're marketing today that would be accretive and in the money based on on the tariff rates. So we're looking at.

So we do have options for ACA energy is coastal xul on the west coast to through our interest in Port Arthur Phase.

One, but that's more longer dated that that project is not yet ready to consider taking <unk> and theirs.

A bit of time to go on it so it's a timing issue.

When they start up.

Can you hold that option for the West coast.

And then as you guys are putting together your portfolio are you trying to optimize the exposure you have to both the Atlantic and Pacific basins, and maybe discuss some of the key differences you see or risks you see between both sides.

Yeah, So certainly as we put the portfolio together, we're looking at.

A diversified portfolio of offtake.

We.

We are actively developing placement into Europe , we're developing long term deliberate opportunities into Asia, and we're considering some sales F O b at the facilities that are in the money right. Now we also are thinking about these.

And a time horizon basis, with a with a mix of shorter and longer term dates as a portfolio and we will be using our commercial organization to optimize across that value chain. So so yes. We are looking at actively building out both European and Asian market and doing that through a variety of <unk>.

Formats.

And time Horizons.

Great. Thanks.

Thank you.

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

Okay.

Yeah.

Hum.

[music].

Yeah.

Okay.

Yeah.

[music].

Okay.

[music].

Okay.

Yes.

Yeah.

Uh huh.

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

Sure.

[music].

Yes.

Okay.

[music].

Okay.

Sure.

Yes.

Okay.

[music].

Yes.

[music].

Yes.

Yeah.

[music].

Yes.

[music].

Yes.

[music].

Yes.

Okay.

[music].

Yeah.

Okay.

[music].

Yes.

Sure.

Yeah.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Yeah.

Okay.

[music] right.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Sure.

Okay.

Yes.

[music].

Okay.

Yes.

[music].

Great.

[music].

Got it.

Sure.

Okay.

Yes.

Okay.

Yes.

Yeah.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Sure.

Okay.

Thanks.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Hum.

Okay.

Sure.

Okay.

Great.

Okay.

Yes.

[music].

Okay.

Sure.

Okay.

Thanks.

Okay.

[music].

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Yeah.

Hum.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

Yes.

Sure.

Yes.

[music].

Okay.

Q2 2023 ConocoPhillips Earnings Call

Request a DemoDemo

COP

ConocoPhillips

Earnings