ConocoPhillips
Q1 2021 Earnings Call Transcript

Published: 4 May 2021

[Operator:]

Welcome to the First Quarter 2021 ConocoPhillips Earnings Conference Call. My name is Hilda, 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. Please note, that this conference is being recorded.

[Ellen DeSanctis:]

Thank you, Hilda. Hello, and welcome this morning to our listeners. I'll first introduce the members of our ConocoPhillips executive team who are on today's call. We have Ryan Lance, our Chairman and CEO; Bill Bullock, our Executive Vice President and Chief Financial Officer; Tim Leach, our Executive Vice President of Lower 48; Dominic Macklon, our SVP of Strategy & Technology; and Nick Olds, our SVP of Global Operations. Today, several of our executives will make prepared remarks, and then the team will take your questions. Before I turn the call over to Ryan, a few quick reminders. In conjunction with this morning's press release, we posted a short deck of supplemental material that includes first quarter highlights, earnings and cash flow summaries, operational highlights and updated sensitivities. We also announced this morning that ConocoPhillips will host a virtual market update on June 30th. So save that date, we will be providing details on that meeting shortly. In today's call, we will make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in today's press release and in our periodic SEC filings. And finally, we'll also refer to some non-GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and on our website. And with that, I'll turn the call over to Ryan.

[Ryan Lance:]

Thank you, Ellen. And welcome to all our call participants. It's a very busy but exciting time at ConocoPhillips. With the Concho transaction now closed, our entire workforce is on a mission to emerge from last year's extreme sector volatility and the transaction integration activities as the strongest competitor in our business. Reviewing 2021 as a catalyst moment like we did in 2016 to improve every aspect of our business and again, step out from the pack by taking our disciplined, shareholder-friendly value proposition to the next level. We're taking actions across every aspect of the company to improve our underlying drivers, and our first quarter results represent an early indication of our progress. Some of the actions we're taking are transformational such as capturing synergies, others are chipping away at core drivers to improve efficiency and returns, such as the debt reduction plans we announced this morning. Here's what everyone in our organization is focused on. First, we believe a safe company is a successful one. With the Concho transaction, we've combined two industry-recognized safety leaders, which has aided our overall integration. And again, I want to recognize our workforce for their exceptional handling of the many challenges presented by the Winter Storm Uri last quarter.

[Bill Bullock:]

Thanks, Ryan. Well, we're certainly off to a good start in 2021. In today's posted materials, there's a summary of highlights from the first quarter, and I'll cover just a few of those items. As we foreshadowed on our March 31 market update, the financial results reflected some one-time contra-related items. Adjusted for these known items, underlying financial performance was very strong. Adjusted earnings were $0.69 per share versus $0.45 per share in the first quarter last year. Production came in at the high end of the range, and all producing segments generated positive earnings in the quarter. As shown in the cash waterfall in the supplemental materials posted on our website, first quarter cash from operations was $2.1 billion and free cash flow was $0.9 billion. These figures include the cash flow impacts related to previously announced contra-related items, which reduced both CFO and free cash flow by about $1 billion. But even with the roughly $1 billion in one-time transaction-related impacts, our CFO of $2.1 billion very nearly covered capital, dividends and buybacks. We returned 46% of CFO to shareholders in the quarter in the form of our ordinary dividend and share repurchases. And we ended the quarter with $7.3 billion of cash and short-term investments.

[Tim Leach:]

Thanks, Bill. We're just a few months into the ConocoPhillips-Concho integration process. And like Ryan and our other leaders, I'm more excited now than ever to tell you about our vision for the company and a great progress we've already made. I'll do a quick recap of the Lower 48 from the first quarter, which was nothing short of historic, not only because of a fast-paced integration activity, but because of Winter Storm Uri. Overall, the storm impacted Lower 48 production by about 50,000 barrels a day for the quarter. However, facility damage from the storm was negligible, and we quickly resumed production in March. It was a heck of a test for our expanded Lower 48 region. They passed with flying colors. Total Lower 48 production for the quarter was 715,000 BOEs per day, which includes 405,000 in the Permian, 187,000 in the Eagle Ford and 86,000 in the Bakken. We exited the first quarter with 15 drilling rigs, 11 in the Permian and four in the Eagle Ford. And we had seven frac spreads, five in the Permian and two in the Eagle Ford. It doesn't get a lot of attention, but I also wanted to mention that during the quarter, we executed several innovative pilots across the Lower 48, including more than 40 twin frac wells, electrification of our frac spreads and additional V5 completions. The point is, while we're executing the base business, we're also combining the experience of both companies by conducting numerous tests that should yield future efficiency gains. My entire Lower 48 organization is excited about the role we can play in making ConocoPhillips, a company that can supply the cheapest, cleanest barrels to the market, successfully navigate the price cycles, achieve the highest level of execution efficiency and continue to lead the industry on the innovation front. From a size and scale perspective, our Lower 48 is clearly differentiated in the industry. With the acquisition of Concho, the Lower 48 grew to be about half of ConocoPhillips production and among the largest domestic producers. We have a high quality set of assets, with a low cost of supply resource base made up of core positions in the three premier tight oil basins in the world.

[Nick Olds:]

Thanks, Tim. While there's clearly a lot going on in our Lower 48 business, we believe ConocoPhillips has a significant advantage over our independent peers because we also have diverse global businesses that generate significant free cash flow. Today, our Alaska and International businesses comprise about 50% of our company's operated 1.5 million barrels per day production. I'll take this opportunity to recap some of the achievements from the first quarter and bring you up to speed on activities we have underway around the globe. So starting in Alaska, I'm pleased to report that Greater Mooses Tooth 2 project has made significant progress over the past several months, and facility and construction costs are about 10% below budget, as we finish our third and final construction season. The project is expected to be online by the end of this year at approximately 10,000 barrels a day, with peak production of 35,000 barrels a day that will leverage our existing Alpine infrastructure. We're also back to development drilling on the Slope. After suspending virtually all activity in 2020, we are restarting four rigs across our operated assets in Alaska. In the Western North Slope, we restarted drilling at CD5 and commissioning activities on the new extended reach drilling rig. The ERD rig will play a significant role in augmenting Alaska's base business, allowing us to drill wells in excess of 35, 000 feet, accessing low cost supply resources, while minimizing surface disturbance. So our base Alaska business is performing very well and we've built a strong momentum coming out of 2020. And of course, it's been an eventful quarter for Willow. Let me give you a quick update on where that project stands. We continue to progress the front-end engineering and design work, while at the same time taking actions to address the legal challenges that have been recently raised. The 600 million barrel oil discovery remains very competitive in our portfolio, but we won't take final investment decision or make significant long lead investments until the litigation risks have been resolved. Now moving to Canada. At Montney, we continue to optimize our development plans to incorporate the liquids-rich acreage we acquired from Kelt, mid last year. We're leveraging our Lower 48 unconventional resource expertise and reduced drilling costs by 25% over the first four pads. This part of our business doesn't get a lot of external attention yet, but it's worth noting, that's currently produced an approximately 30,000 barrels a day, of which 50% is liquids. We continue to be excited about our future in this premier 300,000 acre unconventional position. At Surmont, we continue to take actions to reduce costs, improve netbacks and reduce emissions, and we're seeing encouraging improvements on all three of these fronts. So in summary, Canada remains an important part of our business, with quite a lot of upside and learning curve opportunities. Now moving to our Europe, Middle East and North Africa segment. In Norway, we've made good progress on several projects, which benefit from the fiscal incentives implemented by the Norwegian government last year. We're nearing completion of Port 2 and are on track to make final investment decisions on both Tommeliten Alpha and Kobra East Gecko later this year, and work continues to assess our recent discoveries at Barca and Slagugle. In Qatar, our QG3 asset continues to deliver very strong performance and generate free cash flow and we continue to advance our evaluation of the North Field expansion opportunity. We're still very interested in participating in this project if it fits our financial framework. So we'll keep you posted as this plays out. Moving on into our Asia Pacific region. APLNG is running extremely well. Production continues to be strong, which when combined with ongoing focus on reducing capital, operating and financing costs has brought the cash breakeven down to $25 per barrel Brent. APLNG distributed almost $100 million to the company in the first quarter of 2021 and is expected to distribute about $200 million in the second quarter. Finally, in Malaysia, we have several low cost of supply, high margin bolt-on projects at various stages of development. The Malikai Phase 2 project achieved first oil in this year and SMP Phase 2 and Gumusut Phase 3 are on track for first oil in late 2021 and '22, respectively. So that's a brief update of our global operations. In summary, we have a lot of exciting work underway that will continue to enhance free cash flow generation. Now I'll turn it back to Ryan for some short closing comments.

[Ryan Lance:]

All right. Thanks, team. To wrap up, let me go back to how I started today's call. We're viewing 2021 as a catalyst as an opportunity to further own every part of the business and continue leading this sector the aspect of the company to improve and we're looking forward to sharing more on that and what that means for our shareholders when we get together with you again on June 30. So now with that, let's open it up to Q&A.

[Operator:]

Thank you.