conocophillips (cop) earnings report: q2 2015 conference...
TRANSCRIPT
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page1of22
ConocoPhillips(COP)EarningsReport:Q22015ConferenceCallTranscriptThefollowingConocoPhillipsconferencecalltookplaceonJuly30,2015,12:00PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
EllenDeSanctis;ConocoPhillips;VP-IR,CommunicationsRyanLance;ConocoPhillips;Chairman,CEOMattFox;ConocoPhillips;EVP-E&PJeffSheets;ConocoPhillips;EVP-Finance,CFO
OtherPart icipants
GuyBaber;Simmons&CompanyInternational;AnalystDougTerreson;EvercoreISI;AnalystDougLeggate;BankofAmericaMerrillLynch;AnalystPaulSankey;WolfeResearch;AnalystRyanTodd;DeutscheBank;AnalystBlakeFernandez;HowardWeil;AnalystEdWestlake;CreditSuisse;AnalystPaulCheng;BarclaysCapital;AnalystRogerRead;WellsFargoSecurities;AnalystEvanCalio;MorganStanley;AnalystAlastairSyme;Citigroup;AnalystJohnHerrlin;SocieteGenerale;AnalystJasonGammel;MacquarieResearchEquities;AnalystNeilMehta;GoldmanSachs;AnalystJamesSullivan;O lympicGlobalAdvisors;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Welcometothesecond-quarter2015ConocoPhillipsearningsconferencecall.MynameisChristineandIwillbeyouroperatorfortoday'scall.
(OperatorInstructions)
Pleasenotethatthisconferenceisbeingrecorded.
IwillnowturnthecallovertoEllenDeSanctis,VPInvestorRelationsandCommunicationsConocoPhillips.
EllenDeSanctis (VP-IR,Communications):
Thankyou,Christine.Andhellotoallofourparticipantstoday.WithmeonthecallareRyanLance,ourChairmanandCEO;JeffSheets,ourEVPofFinanceandChiefFinancialOfficer;andMattFox,ourEVPofE&P.
Ryanisgoingtoopenthecallthismorningwithsomecommentsaboutthegeneralbusinessenvironment
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
andthenwe'llturnthecallovertoJeffandMattfortheircustomarysecond-quartercomments.Q&Awillfollowthat.Andwearegoingtoaskthatpeoplelimittheirquestionstooneplusonefollowup.
Wewillmakesomeforward-lookingstatementsthismorningandobviouslyourfutureperformancecoulddifferfromourprojectionsduetorisksanduncertainties.Thosearedescribedonpage2ofthismorning'smaterialandinourperiodicfilingswiththeSEC.Thisinformation,aswellasourGAAPtonon-GAAPreconciliationsandothersupplementalinformationcanbefoundonourwebsite.
Nowit'smypleasuretoturnthecallovertoRyan.
RyanLance (Chairman,CEO):
Thankyou,Ellen.Andthankyouallforjoiningthecalltoday.AsEllensaid,beforewediveintothesecondquarterresults,Iwanttotaketheopportunitytoprovidesomebroadcommentsaboutourapproachtothebusinessinthecurrentpriceenvironment.
Letmegiveyouthepunchlineofthesecomments.Thedividendissafe.Letmerepeatthat.Thedividendissafe.Thebusinessisrunningwell.Wehaveincreasingflexibilityandcanachievecashflowneutralityin2017andbeyondattoday'sstripprice,aroughly$60perbarrelBrent.Andwehaveauniqueformulaforsustainableperformanceandaportfoliothatcandeliver.
Nowletmeputalittlebitofmeatonthebones.Weakpriceshavecertainlydealtusandtheindustryasignificantheadwind.Buttherealityiswedon'tcontrolprices.Thatsaid,therearemanythingswedocontrol,likehowmuchcapitalwereturntotheshareholders,howmuchandwherewespendthecapital,andthecostofrunningthebusiness.RestassuredConocoPhillipsislaserfocusedonthethingswecancontrol.
Wecutourcapitalearlyinthecycle,notjustforthisyearbutforthreeyears.Wetooka$1billioncost-cuttingchallenge.Andwerecentlyreducedspendingfornewdeepwateropportunities.Wedidthiswhilecontinuingtomeetouroperationaltargets,raisingourdividendmodestlytocontinuetomeetourcommitmenttoourshareholders.Ourabilitytomakethesedecisionsisnotaccidental.Overthepastfewyears,we'vebuiltasizableportfolioandresourcebase,flexibility,options,andchoices.It'sahugeadvantageattimeslikethese.Justasimportantly,we'renavigatingthissharpdownturnwithafocusnotjustontheshort-termmeasuresbutalsoafocusonthemediumandthelong-termhorizons.Thisisreallyimportant,frankly,it'shardtodo.
IfyouturntoSlide4,letmeprovidesomeperspectiveonhowwe'resimultaneouslymanagingacrossthesethreetimehorizons.First,theshort-termisallaboutsafelyexecutingthebusiness.Thatmeansdeliveringonourcurrentperformancetargets.AsJeffandMattwillcover,we'remeetingorexceedingourshort-termgoals.
Andasyousawinthismorning'sannouncement,we'reloweringourguidanceonoperatingcostsandreducingourcapitalguidancefor2015.Thatrepresentsasignificantbenefittonetcashflowfortheyear.Wealsorecentlyincreasedourquarterlydividend.Theincreasewasverymodest,representingabout$25millionimpactin2015.Whileeverydollarmatters,webelievethiswasanimportantmessageforourshareholders.
Atthesametimewe'realsopayingcloseattentiontothemediumterm.Andthemediumtermforusisallaboutmanagingthepathtocashflowneutralityin2017.Inadditiontotheshort-termitemsIjustmentioned,wecontinuetofocusonwaystoincreaseourcapitalflexibility.Ifthecurrentpriceenvironmentpersists,wehavetheflexibilitytoreduceournear-termcapitalspendbelow$11.5billionandstillachievemodestgrowth.Staytunedformoreonthisasweseewherethecommoditypricesheadlaterintheyear.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page3of22
Alsowe'refocusedonmaintainingourbalancesheetstrength.Wehaveadditionalcapacityandampleaccesstoliquidity.Andaswe'vecontinuouslysaid,weexpectaCompanyofoursizewouldgenerateabout$1billionofassetsalesannuallyfrompruningtheportfolio.That'sanadditionalsourceofcashandgoodbusiness.Finally,weannounceda$1billionoperatingcostreductionchallengefor2016.We'reontracktomeetorexceedthattarget.Theseactionswillhelpourmedium-termperformancebutalsodrivesustainableimprovementsbeyond2017.
Thatbringsmetothelong-term.Theactionswearetakingtoassurelong-termsuccessincludemaintainingourcapitalflexibility,loweringthecostofsupplyacrosstheportfolio,andshorteningthecycletimeofourinvestments.Thesearecriteriathatareguidingourdecisions.Andthesewerethedriversbehindtherecentdecisiontoreduceourdeepwaterspending,whichMattwilldiscussinmoredetail.
Sothat'showwe'remanagingthebusinessthroughthisperiod,bysimultaneouslyfocusingontheshort-,medium-andlong-termhorizons.Andwe'redoingitinawayIbelievemeetsourcommitmentstoourshareholdersandhonorsourprioritiesofagrowingdividend,astrongbalancesheetandgrowthwecanafford.
UltimatelyourgoalistopositiontheCompanyforsustainableperformanceandthispointisdemonstratedonthenextslide.Weknowwhat'soneverybody'smind.Whatifpricesstaylowerforlonger?Well,theleftsideofthischartlaysoutouranswer.Webelievewecanachievecashflowneutralityin2017andbeyondthroughexercisingcapitalflexibilityevenat$60barrelBrent.
Wecanexerciseadditionalcapitalflexibilityfromvarioussources,deflationcapture,deficiencyimprovements,discretionindevelopmentprograms,uncommittedmajorprojects,deepwaterreductionsandadditionalefficiencies.Andwebelievewecanachieveour2017productiontargetgivingtherampfromourmajorprojectsbetweennowandthen,themajorityofwhichisfromcapitalwe'vealreadyinvested.Andthisisallbeforetacticalassetsales.
Finally,therightsideofthechartshowsagraphicfromourAprilanalystmeeting.Atthatmeetingwediscussedthequalityandcostofsupplyofourcapturedresourcebase.Todaywehaveover44billionbarrelsofidentifiedresource,overhalfofwhichisaveryattractivecostofsupply.16billionbarrelsiseitherprovenreservesorhasacostofsupplythat'slessthan$60perbarrel.That'salmost30yearsofresourceatcurrentproductionrates.
Sowehavetheopportunitiestoinvestcapitalincapturedeconomicprogramswithlittleresourcerisk.Thisshouldacceleratevalueforshareholderswhileincreasingthepredictabilityofourbusiness.That'showwecansustainoursuccessforthelong-term.
Ihopethesecommentsprovidedsomeperspectiveonourapproachtothebusinessinthisenvironment.Thebottomline,we'reverysolid--it'saverysolidanddisciplinedplan.I'mgoingtocomebackwithsomeclosingcomments,butletmeturnitnowovertoJeff.
Jef f Sheets (EVP-Finance,CFO):
Thanks,Ryan.SoI'llwalkthroughourresultsforthequarterandthenprovidesomeupdatesonour2015guidance.I'llstartwithoursecondquarterfinancialperformance.That'sonslide7.
AsRyanmentioned,weoperatedwellthisquarterwithproductionhittingthehighendofguidance.Wereportedadjustedearningsof$81million,or$0.07ashare.Theseresultsincluded4%volumegrowthand14%loweroperatingcostscomparedtothisquarterlastyearafteradjustingforspecialitems.ThestoryfortheCompanyandthesectorthisyearcontinuestobelowcommodityprices.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
Wedidseeaslightincreaseintotalrealizedpricesinthesecondquartercomparedtothefirstquarterwhichimprovedoursequentialearnings,butyear-over-yearourrealizedpriceisdownnearly45%.Secondquarteradjustedearningsbysegmentareshownonthelowerrightsideofthischart.Segmentadjustedearningsareroughlyinlinewithoursensitivitiesandthefinancialdetailsforeachsegmentcanbefoundinthesupplementaldataonourwebsite.
Ifyou'llturntoslide8,I'llreviewourproductionresults.Oursecondquarterproductionaveragednearly1.6millionBOEperdaycomparedto1.56millionBOEperdayinthesecondquarterof2014.That'sgrowthof4%or69,000BOEperday,whichcameprimarilyfromliquidsandfromdomesticgassalesatAPLNG,whichwillturntoLNGovertime.
Thewaterfallalsoshowsthedifferencebetweendowntimeanddispositionsinthesecondquarterofthisyearversusthesameperiodlastyear,whichwas30,000barrelsperday.ThatreflectsmostlydowntimeinCanadafromforestfiresnearFosterCreekandinMalaysiaasaresultofthe[comusive]turnaround.
Nowifyou'llturntothenextslide,I'llcoverourcashflowwaterfallforthefirsthalfoftheyear.Thischartprovidesasummaryofoursourcesandusesofcashthroughthefirsthalfoftheyear.Westartedtheyearwith$5.1billionincash.ThroughtheendofJunewegenerated$4.4billionfromoperatingactivitiesexcludingworkingcapital.Totalworkingcapitalinthefirsthalfoftheyearwasa$1.1billionuseofcashwiththelargestimpactrelatedtolowerpayablesassociatedwithreductionsinourcapitalspending.
Wedonotexpecttoseesignificantadditionalworkingcapitalchangesassociatedwithinvestingactivitiesthroughtheremainderof2015.Inthefirsthalfoftheyear,wereceived$600millionfromdispositionproceeds.Aswepreviouslysaid,withaportfolioofoursizeyoucouldseeabouta$1billionofassetsaleseveryyearaswecontinuallyhigh-gradetheportfolio.Weincreaseddebtby$2.4billion.Thedebtincludedfixedandfloatingratebondtrancheswithanaveragematurityof5.6yearsandanaverageinterestrateof1.9%.
Forthefirsthalfoftheyear,wespent$5.7billionincapitalandthatwascomprisedof$3.3billioninthefirstquarter,reducingdownto$2.4billioninthesecondquarter.Aswe'llpointoutonthenextslide,we'reloweringourcapitalguidancefor2015from$11.5billionto$11billion.Thatputsusat$5.3billionincapitalforthesecondhalfoftheyear.Afterpayingourdividend,weendedthequarterwith$3.8billionincashonthebalancesheet.Soweremaininastrongbalancesheetpositionwithcashonhand,accesstoampleliquidity,aswellasthepotentialforincrementalcashfromtacticalassetsales.
I'llwrapupmycommentsonslide10withsomeguidancefortherestoftheyear.Weareontracktoachievethehighendofour2%to3%productiongrowthfortheyear.Ourthirdquarterproductionguidanceis1.51to1.55millionBOEperday,whichreflectssignificantturnaroundactivityinthequarter.
We'realsoprovidinganupdateonseveralofourfinancialguidanceitemswhich,intheaggregate,willprovideapproximately$900millioninbenefittonetcashflowin2015.Wenowexpectfullyear2015capitalexpendituresofaround$11billion,comparedtoourpreviousguidanceof$11.5billion.Thisreflectslowercapitalthat'sroughlyequalpartsprogramefficiencies,deflationinFX,andsomeactivitydeferral.
We'realsomakinggoodprogressonouroperatingcosttargetswhicharemostlycomingfromchangestothewaywerunourbusiness.Westillexpectouroperatingcoststoincreaseinthesecondhalfoftheyearaswecontinueourturnaroundworkandbringprojectsonline.Butgivenourrunratethroughthefirsthalfoftheyear,weareloweringouroperatingcostguidancefortheyearfrom$9.2billionto$8.9billion.Thatputsusaheadofscheduleasweworktowardsour$1billioncostreductiontargetin2016.
OurcorporatesegmentbenefitedfromL&Glicensingrevenuesduringthesecondquarterandwe'rechangingourfull-yearguidancetoanetexpenseof$900millionfrom$1billion.Andthere'snochange
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
toourDD&Aorexpirationdryholeandimpairmentguidance.
Thatconcludesthereviewofthefinancialperformanceandguidance.I'mgoingtoturnitovertoMattforanupdateonouroperations.
MattFox(EVP-E&P):
Thanks,Jeff.AsJeffandRyanmentioned,we'vehadanotherstrongquarteroperationallyandthebusinessisperformingwell.I'llquicklyrunthroughoursegmentresultsandthenturnitbacktoRyanforsomeclosingthoughts.
Inthelower48,second-quarterproductionaveraged556,000BOEperday.That'sa3%increasefromthesameperiodlastyearandrepresentsa9%increaseincrudeoilproductionoverthesameperiod.We'renowrunning13rigs,with6intheEagleFord,4ontheBakkenand3inthePermian.That'sdownfrom32rigsattheendofthe2014.
Webelievethisistherightpaceofactivityinthisenvironment.We'llre-assesstheselevelslaterintheyear,takingintoconsiderationmarketconditions,pilottestinformation,andthepriceoutlook.Withthereducedcapitalprogram,ourgrowthinthisregionhasstartedtoslow,andweexpectproductiontoseemodestdeclinesthroughtherestoftheyearconsistentwiththepriorguidance.
LookingattheGulfofMexico,ourappraisalworkiscontinuingwithactivityinthequarteratGila,ShenandoahandTiber.NextIwanttoprovideaquickupdateontherestofourGulfofMexicoprogramfollowingourdeepwaterannouncementearlierthismonth.AsRyanmentionedwerecentlyannouncedtheplantoreducespendingindeepwater,notablyintheGulfofMexico.
We'vetakenthestepofterminatingouragreementforadrillshipandweexpecttotakeachargeofupto$400millionasaspecialiteminthethirdquarter.Thedrillshipwasn'tscheduledfordeliverytotheGulfuntillaterthisyear,sonotalothaschangedforour2015drillingprogram.TwoexplorationwellsareexpectedtospudinthethirdquarteratMelmarandVernaccia.
AfterMelmar,wewillhavetworemainingslotsontheMaerskValiantdrillship.WeexpecttodrilltheSocorroprospectwithoneoftheseslotsandwe'recurrentlyevaluatingandhigh-gradingourdrillingprospectstofillthefinaloperatedslot.We'regoingthroughourbudgetingprocessfornextyearandwillprovidemoredetailonexpectedcapitalandoperatingcostsavingsfor2016whenweannounceourcapitalbudgetlaterintheyear.
NextI'llcoverourCanadaandAlaskasegmentsonslide13.Weproduced306,000BOEperdayintheCanadasegment,an8%year-over-yearincrease.ThegrowthcamefromournewwellsinWesternCanadaaswellasstrongperformancefromouroilsandsassets.
InMayweachievedamajormilestonewith[freshsteam]at[StarmontTwo].We'reontracktostartproducinginthethirdquarterandexpectproductiontorampupthrough2017.Ourotheroilsandsassetscontinuetoperformwellandwe'reseeingongoingramp-upacrossthecreekphaseF.Despitethe11-day(technicaldifficulty)duetoforestfires.Alaska'saverageproductionwas174,000BOEperday.
We'recontinuingtomakeprojectonourCD5anddrillsite2Sprojects,wherethefirstwellswerespuddedatbothprojectsduringthequarterandbothareontrackforfirstoilduringthefourthquarter.Aswementionedinthefirstquartercall,weresumedexportsfromKenaiLNGinApril.Sofarwe'vedeliveredtwocargoesandexpecttodeliverfourmorebytheendoftheyear.OurseasonalturnaroundactivitystartedatPrudhoeandKuparukinJuneandwillcontinueintothethirdquarter.
Let'sreviewourEuropeandAsiaPacificandMiddleEastsegmentsonslide14.InEurope,secondquarterproductionaveraged206,000BOEperday.WeachievedstartupofourEnochdhuproject,slightlyahead
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page6of22
ofschedule.We'realsomakingprogressonourAlderprojectwhichisexpectedtocomeonlineinlate2016.EkofiskTwoandEkofiskSouthproductioniscontinuingtorampupaswebringadditionalwellsonline.Andwe'vesafelycompletedourturnaroundactivityintheJ-AreaandtheEkofiskareaaheadofschedule.
However,westillhaveasignificantamountofturnaroundactivityplannedintheregionduringthethirdquarter.IntheAPMEsegment,weproduced349,000BOEperdayinthesecondquarter.That'san8%increasecomparedtothesecondquarteroflastyear,primarilyasaresultofnewproductionfrommajorprojectstart-upsinMalaysia.APLNGTrainOneisnearingcompletion.
WeachievedanothermilestonelastweekwhenwestartedloadingrefrigerantstotheLNGfacilityandweremainontrackforfirstcargointhefourthquarter.InChinawecompletedourBohaiappraisalprogramwithencouragingresults.InMalaysia,GomusutbeganamajorturnaroundinJunewhichwasjustcompletedinthepastfewdays.
Sotowrapupmycomments,thebusinessiscontinuingtoperformwell.We'rehittingourproductiontargets,loweringourcostsandmaintainingourfocusonsafety.Wehaveafewmoremajorprojectsandturnaroundstocompletethisyear,butwe'reontracktodeliveronourcommitments.
NowI'llturnthecallbacktoRyanforhisclosingremarks.
RyanLance (Chairman,CEO):
Thanks,Matt.Thatwrapsupoursecondquarterreview.Sohere'sthesummary.Thedividendissafe.Thebusinessisrunningextremelywell.Wecanachievecashflowneutralityin2017andbeyondattoday'sstripofroughly$60perbarrelBrentandwehaveauniqueformulaforsustainableperformanceandaportfoliothatcandeliver.
Clearlytheenvironmenttodayischallengingfortheindustry.Butwebelievewe'reenteringanewrealityforthebusiness.Thewinnerswillbethosecompanieswitharationalvision,highqualityassetbase,andastrongworkforceandacommitmenttoshareholders.Thewinnerswillbethosecompanieswhocanmanageshort-,medium-,andlong-termgoalssimultaneouslyandwe'resettingplansanddeliveringonthethingswecancontrolintheshort-term,payingcloseattentiontothedriversofmediumandlong-termperformance.WebelievethisbroadperspectivewillserveuswellandmakeusanevenstrongerCompanyinthefuture.
Sothankyouforlisteningtotheopeningremarks,andI'dbehappytoturnitbackovertotheoperatorforyourquestionsandouranswers.
QUESTIONS&ANSWERS
Operator :
Thankyou.(Operatorinstructions)
GuyBaber,Simmons&Company.
GuyBaber (Analyst-Simmons&CompanyInternational):
Thanksverymuchfortakingmyquestion.Ihadacouple.First,Iwasjusthopingtodiscussthedecision-makingprogressarounddeterminingwhethertoincreaseordecreaseunconventionalactivitylevelslaterthisyearandinto2016.Youmentionedthedevelopmentprogramdiscretion.Sojustwantedtodiveabitdeeperintothat.
Ithinkthepriorviewwastobeginincreasingtherigcountthebackhalfofthisyear,butoilpriceshave
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page7of22
obviouslyweakenedandyouobviouslyhavealotofflexibilitynextyearwith$2billioninmajorprojectsrollingoff.Socouldyouhelpusunderstandtheframeworkfordeterminingunconventionalactivityspendinglevelsaswegointonextyear?
RyanLance (Chairman,CEO):
Yes,Guy,thanks.AswerelayedoutinApril,wesawsomemodestincreasesinthepricesoverthenextcoupleofyearsinourpathtoworkingthemediumtermin2017.Inthatplanwehadsomerampingupofourunconventionalactivityassumedinthatplan.AsourcapitalflexibilityincreasedandourprojectcapitalwasrollingoffSurmontandAPLNG,we'regoingtodirectthattotheunconventionals,whichareshortercycletime,higherreturns,andbetteropportunitiesfortheCompany.
Iwouldsayifpricesthatwe'reseeingtoday,sub$60Brent,high$40sandlow$50s,wedon'thaveplanstoincreasethecapitalandrampupintheunconventionalsifthesekindofpricespersist.We'rewatchingthisspaceprettyquickly.AsMattsaid,we'llannounceourcapitallaterthisyear.That'sgoingtobeinformedbywherewethinkthecommoditypricesareandwherewethinkthey'llbein2016andthat'sgoingtothendictatehowmuchwerampupintheunconventionales.
GuyBaber (Analyst-Simmons&CompanyInternational):
Thanks,Ryan.Andthenmyfollowupwas,couldyoudiscussalittlebitmoresomeoftheassumptionsimplicitinthecommentyoucouldachievecashflowneutralityby2017,at$60abarrelBrent.Somorespecifically,couldyouperhapselaborateonwhatdeflationcapturewouldbeimplicitinthoseassumptions?AndanymoredetailyoucouldgivethereIthinkwouldbehelpfulasIthinkthat'saprettyimportantassertion.
RyanLance (Chairman,CEO):
Ithinkwhatwe'resayingrightnowisthat--whenwecameoutinApril,wetalkedaboutthecapitalrequiredtogenerateaflatproductionprofileforalongperiodoftimefortheCompany.Wethoughtthatwasabout$9billion.Ithinkthedeflationwe'veseentodateandtheadditionalinflationthatwouldhappeninalowerpriceworldthatyou'redescribing,ourflatcapitalgoesdownsomethingcloserto$8billion.
Ifthispriceweretopersistforanyperiodoftimewe'dexpectadditionaldeflationandmoreefficienciesgoingforward.Wehaven'tfactoredthatintotheanalysisnecessarily,butitisarecognitionwecanachieveflatproductionforalongperiodoftimeatan$8billioncapitallevel.
Operator :
DougTerreson,Evercore.
DougT erreson (Analyst-EvercoreISI):
Goodmorning,everybody.
RyanLance (Chairman,CEO):
Goodmorning.
DougT erreson (Analyst-EvercoreISI):
Ryan,IwantedtocontinueonGuy'squestionaboutthedownwardrevisionstooperatingandcapitalcostsandspecificallyyouhighlightedonslide5fourdifferentcategoriesandyoujusttouchedondeflationcapture.Alsowantedtoseeifyoucouldcommentonorgivealittlebitmoreinsightonwhat
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page8of22
youmeanbydiscretionanddevelopmentprograms,deepwaterreductions,programefficiencies,justafewmorespecificsthereifyouhaveany.
RyanLance (Chairman,CEO):
Yes,Doug,I'dbehappyto.Wedescribedthedeflationcaptureandefficiencywe'reseeingintheportfoliotolowerthecapitalrequiredtokeepflatproductionovertimeandthat'sclearlysomethingwe'ddialinifwesawthesekindsofpricespersist.Somethingwedon'ttalkaboutisassetsales.Wethinkintheportfolioofoursizewehaveanongoingrationalizationprogramthatkeepseliminatingthebottomendoftheportfolioandthat'scertainlythere.
We'vegotalotofflexibility.Theunconventionalsareshortercycletimeandwecanrampthoseupatdifferentspeeds,respondingtothecommoditypriceenvironmentwefindourselvesin.Aswetrytodescribetheactions,thelevers,andthetools,thosearesomeofthem.
Youmentionedthedeepwaterexploration.We'reworkingthroughthataswell.Wouldexpectthattobeincrementalintermsofcapitalsavingsandoperatingcostsavingsaswelookforwardatthiskindofpricelevel.
DougT erreson (Analyst-EvercoreISI):
Okay.Andthenfinallyoncashflow,whenusingconsensusestimates,divestituresandborrowingsinthequarter,itseemslikeyourdividendiscoveredfor2015.Onthispoint,Iwantedtoseewhereyourafter-taxborrowingcostswereontherecentborrowingsintheperiod.Andthenalsothestatusofanyotherfundingsourcessuchasarevolver,commercialpaperorwhateveryoudeemrelevant.SomaybeaquestionforJeff.
Jef f Sheets (EVP-Finance,CFO):
Sure,Doug.Aswementionedinourbriefremarksthere,wewereoutinthedebtmarketsinthesecondquarterandweissued$2.5billion[worthof]debt.Thatwasamixoffixedimplodingand,onaverage,thata1.8%,1.9%interestrateonapre-taxbasis.
Soyoucouldtax-affectthat.Soweendedthesecondquarterat$3.8billionincashonthebalancesheet.Probablytakes$800millionto$1billiontooperateourbusiness.Inadditiontothatwehaveabouta$6billionliquiditylinethat'sundrawncurrently.
DougT erreson (Analyst-EvercoreISI):
Okay,great.Thanksalot.
EllenDeSanctis (VP-IR,Communications):
Thanks,Doug.
Operator :
DougLeggate,BankofAmericaMerrillLynch.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Goodafternoon,everybody.Iguess,Ryan,firstofall,thankyouforyourremarksatthebeginningofthecallwiththedividend.Ithinkthat'sprettyclear.ButI'vegotacouplequestionsaroundthestrategyhowthatchangesinthelowoilpriceenvironment.Firstonereallyisonexploration.Soyou'vecutarig.Obviouslythisyearyouhadafairlylargecommitment.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page9of22
Whatdoesitsayabouttheexplorationstrategygoingforwardgiventheresourcedepththatyouhaveandgiventhatthat'sakeyareaofdiscretionaryspending?Areyoubackingawayfromexplorationpost2014?AndthenI'vegotafollowup,please.
MattFox(EVP-E&P):
Doug,I'lltakethat.Sothespecificannouncementwemadeearlierthismonthisonlyrelatedtocancelingthe[Enscro]drillship.Thatbyitselfisgoingtoresultinadecreaseinourdeepwaterexplorationcapitalby$300millionto$500millionforthenextthreeyearsasafunctionofwhatthespreadrateandtheequitypositionwouldbe.
We'restillgoingtobeconductingdeepwaterexploration,though,through2015andinto2016.WehavebeenappraisingourexistingdiscoveriesintheGulfofMexico,andWestAfrica,andhigh-gradingtheportfoliotofulfilltheremainingrigcommitmentswehave.Butmoretothestrategicquestionyou'reasking,wearelookingmorebroadlyatourdeepwaterportfolioandconsider(inaudible)forthatportfolio,butanythingthatwedoisgoingtohavetopreservevaluefromthediscoverieswe'vemadeintheportfoliowe'vebuiltupoverthelastfewyears.
Sothere'sstillastrategicquestiononthelong-termpositionofdeepwater.Wehaveaverystrongpositionintheunconventionals.Andasyoumentioned,averystrongpositionacrosstheresourcebaseasawhole.Sothestrategicemphasiswouldbemovingmoretowardsdevelopingtheexistingresourcebasebutthere'sstillasignificantroleforexplorationtoplayinbringingnewresourcesintotheportfolio.Sotherewillbemoretocomeinthisovertime,Doug,aswefirmupthoselonger-termstrategicimplicationsofthedeepwaterdecision.
DougLeggate (Analyst-BankofAmericaMerrillLynch):
Idon'tknowif(inaudible).Iguessthefollowupisprobablyforyouaswell,I'mguessingbecausetherehasbeen--IthinkwhenyouandIhadsometimetogetheroverthisyear,therewassometalkabout80,000barrelsadayofpotentialnoncoreproduction.Withyourcommentsabout--onehastoimaginethatthereisdisposalpotentialinsomeofyourexistingundevelopeddiscoveries.
Howshouldwethinkaboutthescaleofwhatyou'veenvisagedtobeyourdisposal(inaudible)thequestion,andhowwouldthatcapitalberedeployed?Woulditbuybackstock?Woulditshoreupthebalancesheet?Howwouldyouusethespending?I'llleaveitthere.Thankyou.
MattFox(EVP-E&P):
JeffandRyanbothmentioned,weexpecttobesomeformofdispositionsgoingoncontinuouslyintheportfoliojusttotrimupanditisnonstrategic.So,forexample,youmayhaveseenyesterdayorthedaybeforethatwe'regoingtomarketour[Kukenley]positioninAlaska.Ithinkit'squitewellknownthatwe'vehadapackageoutthereinCanadafornonstrategicassetsandgasassets.Wehavesomeassetsinthelower48thatfitthesamecriteria.
Sowedohavesometacticaldispositionsthatwe'recurrentlymarketingatthemoment.Sotheuseofthatcashwouldbetofundadividendandongoingcapitalprograms.
RyanLance (Chairman,CEO):
I'djumpintherealittlebit.Theprioritiesarethedividendtotheshareholder,thebalancesheet,thenagrowthwecanafford.
Operator :
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
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PaulSankey,Wolfe.
PaulSankey(Analyst-WolfeResearch):
Hi,everyone.You'vetalkedaboutthe2017cashflowneutrality,andan$8billionholdforthatnumber.Areyouimplyingthatyou'reactuallygoingtooutspendcashflowbetweennowandthen?Wereyouessentiallygoingasfastasyoucantogetthecashflowneutrality?
RyanLance (Chairman,CEO):
Ithinklargely,Paul,dependsonouroutlookonthecommoditypriceswhichwe'rewatchingprettycloselyrightnow.Wewouldhavesomeslightoutspendin2016ifwecontinuetorampupandholdthecapitalat$11.5billion,butthat'ssomethingwe'relookingatitdroppingdownatthecurrentpriceandcontinuingtoexercisetheflexibility.
Whatpeopletendtoforgetabout,though,startingin2016andgoinginto2017iswehaveprettysignificantrampinproductionfromSurmontPhase2andfromAPLNGandthat'scapitalandcostwespentthelastfourtofiveyears.Sowe'vegotproductioncomingonin2016and2017thatpeopletendtoforgetaboutthat'srightinfrontofus.Surmont2just--firststeamearlierthisyear,we'llhavefirstoilhereimminentlyandfirstcargoescomingoutofAPLNG.
SotheintentionistogettocashflowneutralityasquickaswecanWe'rejusttryingtodemonstratewe'vegotalotofflexibility,evenatthecurrentlowerpriceswe'reseeingtoday.
PaulSankey(Analyst-WolfeResearch):
Iunderstand.Iprobablyshouldhaveprefaceditbysayingifwehaveseemthestripwhichissomethingaroundwhatyou'retalkingabouthere,a$60outlookiswhatweseeonthefuturesmarket.
RyanLance (Chairman,CEO):
That'swhywetriedtoputthatintoourslideatthatkindofapriceleveltogiveyousomesenseofhowwewouldmanagethebusinessatthatkindofadeck.
PaulSankey(Analyst-WolfeResearch):
Ithinkyou'vebeenaskedthisandyou'vetriedtoanswerit,forgivemeifIslightlymissedwhatwasbeingsaid,butcanyourunoveragainthedeflationelementhere?Thelowerservicecosts.Iknowyou'vedonesomeexcellentworkinyourpresentationsshowinghowcostsarechanging.
WhenIwaswithMr.Hirschberg,hesaidthisisactuallylagging.Thisislastyear'sdata.Wouldyoumindgoingbackoverhowwegetfrom$11.5billion,$11billionrunratethisyearallthewaydownaslowas$8billion,seeminglysimplyifoilstaysat$60?
RyanLance (Chairman,CEO):
Yes.InAprilwetalkedaboutdeflationof$700millionthatweweretryingtocapture.Wenowseethatprobablycloserto$900million.Andobviouslyifthekindofstrippricesyou'retalkingaboutpersist,we'dexpectthattocontinuedownaswell,soaswelookoutofthat,the$8billionisreallytostayflat.The$9or$10or$11.5billiongrowsourproductionbasedontheamountswelaidoutinApril.
Sowe'vegotalotofflexibilitybetweenthe$11.5billionwelaidouttothemarketplaceinAprilversuswhatwe'recalling$8billiontostayflatproduction.Whatwe'retryingtodescribetofolksiswiththecapitalflexibility,thedeflationandtheefficienciesthatwe'recreatinginthebusinessisjustaddingtotheflexibilityonthecapitalsideoftheprogramandgivesusalotofchoiceaswegointothebackhalfof
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
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thisyearindecidingwhatkindofprogramwewanttoexecutein2016and2017onourpathwaytogettocashflowneutralityasquicklyaswecan.
PaulSankey(Analyst-WolfeResearch):
That'sgreat,Ryan.Thanks.AndifIcouldaddin,we'vehadtheideathatyou'dIPOtheexplorationbusinessandhaveitasastandalonebusiness.Iassumeyou'dwanttoretainsomeaccesstothatbusinessasopposedto,forexample,disposingitaltogether.Atthemoment,itfeelslikethepotentialforyoutospendinthatbusinessisgoingtobeundervaluingitessentially.
RyanLance (Chairman,CEO):
Yes,Ithinkthat'sright,butwe'relookingatallthealternativesrightnow,Paul,aboutthatbusiness.We'llhavemoretocomeonthatasweprogresslaterintheyearandintonextyear.
Operator :
RyanTodd,DeutscheBank.
RyanT odd (Analyst-DeutscheBank):
Great.Thanks.Maybeonemorefollowuponthecostissues.Theincremental$300millioncuttoOpExwesawonthis,isthat--wereyousaying--wasthatjustincrementalcapitaldeflation?Isthismoreofanissueofpace,ortobeclear,areyoutrendingtowardmuchlargerlevelsofcostreductionsonatwo-yearbasisthanyouwouldhaveexpectedearlier?
Jef f Sheets (EVP-Finance,CFO):
Icantakethatone,Ryan.We'redefinitelyrunningaheadofscheduleonwherewethoughtweweregoingtobeonreducingcosts.Aswementioned,it'sacombinationofdeflationinthebusiness,someminoramountofFXbenefits,butit'sreallymostlyrelatedtousfiguringoutwayswecandrivecostsoutofourbusiness.Wetalkedintermsofhavingthis$1billioncostreductiontarget;we'refeelingreallygoodaboutourabilitytoachievethatorgobeyondthat.
RyanT odd (Analyst-DeutscheBank):
Great.Thanks.Thenmaybeonthe--atAPLNGyoutalkedabouthopefullyacargoduringthefourthquarter.CanyoumaybetalkaboutwhataretheremainingstepsyouhavetoachievethereatAPLNGbetweennowandthefourthquartertogetthatfirstcargo?
MattFox(EVP-E&P):
We'reatthestagewherewe'rebeginningtoloadrefrigerants.Wehavetoprocess--that'scalledgoingthroughthemechanicalruns,gettingalltheir[crinks],sothecompressorsarerunningandeverythingisrunningwell.Andthatwholeprocessofthatintegratedcompletionandthenhookup,thecommissioningoftheplantisallinhandandthegasisthereintheupstreamsitetofeedtheplant.We'refeelinggoodabouttheabilitytogetthatinitialcargosometimeinthefourthquarter.
RyanT odd (Analyst-DeutscheBank):
Great.Thanksalot.
EllenDeSanctis (VP-IR,Communications):
Thanks,Ryan.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
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Operator :
BlakeFernandez,HowardWeil.
BlakeFernandez (Analyst-HowardWeil):
Folks,goodmorning.Thanksfortakingthequestion.I'msorry,I'mgoingtogobackoncoststructureaswell.Justcuriousaboutmaybethesustainabilityofsomeofthecostdeflationyou'rewitnessing.Obviouslyindustryingeneralseescostscomingdown,butI'mcuriouswhatstepsarebeingtakentoensurethesearemorestructuralsotheydon'tsimplyreinflateoncethecommodityfinallydoesrecover?
RyanLance (Chairman,CEO):
Blake,we'retakingaprettyhardlookkindoftoptobottomintermsofhowweruntheCompanyandwe'reconsidering--wherewecamefromasanintegratedCompanyandthesizescaleandcapabilitywehaveasthatCompany.LookingattakingtheopportunitynowtoabitrightsizerelativetohowanindependentcompanylikeConocoPhillipsfindsitselftoday.Sothere'sthingsthatwedoinourCompanythatwe'resortofaremnantoftheintegratedCompanyintermsofhowmuchfunctionalexpertisetohaveinthecenter,howmuchoversightversusthataccountabilitythatgoesouttotheBU.
We'vedoneaprettygoodjobbuildingthatmodel,ourlower48unconventionalbusiness.We'regoingtoextendthatacrossthewholeCompanywithlessofaonesizefitsall,andmoreofafitforpurposedesign,recognizingthatanassetinthelower48isdifferentthananassetintheNorthSeaorupinAlaskaoroffshoreAustralia.Soreallyouremployeesgetit.Theyunderstandit.Theyunderstandwherewe'reseeingandwe'realreadyseeingthebenefitsofthatshift.
We'vebeenworkingonthatoverthelasttwotothreeyearsaswe'vetriedtobuildthecultureofanindependentCompany.Nowcertainlywiththedownturn,itputsmoreofalaserfocusontheneedtoacceleratethatandmakeitmoreprominentthroughoutthewholeorganizationandthewholeCompany,andthenIthinkthatwillmakeitmuchmoresustainable.
BlakeFernandez (Analyst-HowardWeil):
Thanks,Ryan.ThefollowULisonthestrategicshifttowardshortercycletypeofprojects.IguesswhenIthinkofdeepwater,definitelylongerterm,highlycapitalintensivebuttheydocontributewelltoearnings.
WhenIlookatthelower48contributionforearnings,itseemstobeoneoftheareasthat'stheweakest.Asyoukindofshiftmoretowardtheshortercycleprojects,doyouanticipatethattohaveanegativeimpactonyouractualearningsprofileoristhataconcern?
Jef f Sheets (EVP-Finance,CFO):
IthinkI'lltakethatone.Whenyoulookatlower48earnings,currentlyadrivingfactorthereisreallythelevelofdepreciationthat'sbeingchargedcurrentlyaswedeveloptheunconventionals.Weareprobablyhavingdepreciationchargeswhichareone-thirdlargerthanthey'llbelongertermbecauseofthereserve-bookingscheduleandrelativeconservatismthat'sforceduponusaswebookaccordingtotherulesthatareoutthere.
Soaswegothroughtimeyou'regoingtoseedepreciationratescomedowninthelower48.That'sgoingtohaveasignificantimprovementintheearningsfromthatsegment.
Theotherthing,ofcourse,asyou'veheardustalkaboutandyou'veheardtheindustrytalkaboutisjustthecostlevelsthatit'stakingtodevelopreservesandtheunconventionalshavecomedown
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
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dramaticallyandthatwillreflectitselfinlowerdepreciationratesgoingforwardovertime.Soyes,wherewedohavefairlyweakearningscomingoutofourlower48segmentovertime,currentlyyouwillseethoseimproveaswegoforward.
Operator :
EdWestlake,CreditSuisse.
EdWestlake (Analyst-CreditSuisse):
Twoveryquickquestionsonthe$60breakevenagain.Sorry.Thatwouldbewhat2017production?Thesamethatyou'velaidoutinthepastoryou'rechangingthatproductiongrowth?
RyanLance (Chairman,CEO):
No,it'sthesame,Ed.
Jef f Sheets (EVP-Finance,CFO):
Imentionedalotoftheproductiongrowthiscomingfromthingsthatwe'vealreadyinvestedin.
EdWestlake (Analyst-CreditSuisse):
Okay.Andthenpresumably,evenonthatstayflat,therewouldstillbesomepositivecashmarginshiftsasyoustillbackoutsomeoftheoldergasproductionthatisstillinthatmixasyougetoutto2017evenonflatCapEx?
RyanLance (Chairman,CEO):
Absolutely,whenyoulookattheSurmontTwoadditionandtheAPLNGthat'scomingonatahighermarginthanalargepartofourportfoliowiththeNorthAmericangaspiecethatyoudescribed,Ed.
Jef f Sheets (EVP-Finance,CFO):
(Multiplespeakers)talkaboutmarginsintermsofflatpricecashmargins,oneofthethingswe'reseeingaswe'vetalkedaboutitaswell,ascostsarecomingoutofthebusinessaswellwhichimprovesmarginsacrosstheboard.
EdWestlake (Analyst-CreditSuisse):
Soit'skindofdividendplusalittlebit.AndthenonAPLNG,obviouslyeveryonehasobservedtheAsianLNGmarkethascertainlyfacedasortofdramaticdropindemandandthereisobviouslyalotofcargoescomingontocompeteforthatgasdemand.ClearlyfirstcargoisanimportantmilestoneandtheCapExwillfallfortheproject,andthereforethecashcontributionfromtheAPLNGassociateswillimprovewhichwe'llseenextyear.Canyoutalkalittlebithowyou'replacingthatproductintothemarketforTrainOneandTrainTwo,givenweakdemand?
RyanLance (Chairman,CEO):
Rightnowwe'reworkingthroughthat,Ed,andIknowthere'sbeenalotofspeculationinthemarketplacearoundthecontractandtheSPAwehavewiththebuyers.Wehavetwobuyers.WehaveaJapanesebuyerforTrainTwoandTrainOneisgoingtoChinatoSinopec.WehaveanSPA.Wehaveacontractwiththem.They'vegotdiversionaryrightswithinChina.
Withourapprovalwhichwe'veprovided,they'vegotdiversionaryrightsoutsideofChinaaswell.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
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We'reworkingwiththemtounderstandthevolumetheycantakeintothecountryin2016andaswegoforwardin2017,andIjustremindpeopleourcontractisatake-or-paycontract.Weexpectthey'regoingtolivetothetermsofthatcontract.
Operator :
PaulCheng,Barclays.
PaulCheng (Analyst-BarclaysCapital):
Hey,guys.Severalquickquestions.FirstoneisprobablyforJeff.Jeff,onthesecondquarter,whatisyourcostsavingrunrateandwhatdoyouexpectthoserunratesgoingtolooklikeinthethirdandthefourthquarter?
Jef f Sheets (EVP-Finance,CFO):
Notsurehowtointerpretyourquestion,Paul.Whenyousaycostsavings--
PaulCheng (Analyst-BarclaysCapital):
YouhaveaprogramthatreducecostsandI'mtryingtounderstandhowmuchofthatcostsavingisalreadyreflectedinyoursecondquarterresultandwhatistheincrementalimprovementwecouldexpectintheremainderoftheyearintonextyear?
Jef f Sheets (EVP-Finance,CFO):
I'lltakeyoubacktotheanalystpresentation.Wetalkedabout2014costlevelsof$9.7billion.Weweregoingtotakethatdownto$8.7billion.Thatwasthe$1billionweweretakingout.Wesaidwethoughtwe'dgethalfwaytherein2015.Sowegavecostguidanceof$9.2billion.
We'rewellalongthatpathiswhatwe'repointingouttodayandwe'veactuallyrevisedthat$9.2billiondownto$8.9billion.Sowe'regoingtocontinuetoseethataswegothroughtheyear.Youcanseewe'vehadsomereallyprettylowcostlevelsinthefirstpartoftheyear.
ThedifficultyIhavewithyourquestionisthereisvariabilityfromquartertoquarteraswegothroughtheyear.Butifyoulookatthewholeyear,we'rerunningwellaheadofwherewethoughtweweregoingtobefortheyear.
PaulCheng (Analyst-BarclaysCapital):
Doyouhaveanumberyoucanshareinthesecondquarter,whatisthecashoperatingcost?
Jef f Sheets (EVP-Finance,CFO):
Youcanlookatour(multiplespeakers)balancesheetis$2.1billionessentiallyinwhatwecallcashoperatingcost,whichisproductioncost,D&Acosts,andtheG&Aassociatedwithexplorationwas$2.1billion.
PaulCheng (Analyst-BarclaysCapital):
$2.1billion.Soannualizeditis$8.4billion,butyoutalkforthewholeyearis[$8.9billion].
Jef f Sheets (EVP-Finance,CFO):
Again,that'swhyIpointoutwehaveseasonalityinourcostsrelatedtoturnaroundactivitiesandwe'llhavesomecoststhatwillincreaseaswegothroughtheyearandasproductionrampsupinsomeofthe
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
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newprojects.
PaulCheng (Analyst-BarclaysCapital):
AndmaybethesecondquestionisforRyan.Ryan,IpresumethatnowyouhaveresetthisyeartheCapExat$11billion,sothenextseveralyearsthebasecaseat$11millionalso?Underwhatcommodityprice--let'sassumeifthecommoditypricestaywhereweare,whatistheCapExgoingtolooklike?Isitgoingtostickat$11billionorendupthatyou'regoingtoreduceit?
Tryingtounderstandthatwhat'sthecriteriayou'regoingtogofor?Becauseclearlyyou'renotgoingtoreachthecashflowneutralitythisyear.Sowhatcriteriaweshouldbelookingatthat[reset]yourCapExprogram?
RyanLance (Chairman,CEO):
AsIsaid,Paul,we'llsetacapitalbudgetlaterintheyearaswelookatwhatthecommoditypriceandwhatwecanafford.Whenwelaidoutaplanat$11.5billion,thatassumessomeslightmodestrecoveryinprices.Ifweseepricesaren'trecoveringandtheyremainattoday'slevelgoingforwardinto2016,youshouldn'texpectustobespendingthe$11million,$11.5million,[sic]$11.5millionwelaidoutinAprilorthe$11billionwe'retalkingabouttoday.
We'regoingtomanagethewholesystemtomakesurewereachcashflowneutrality.We'redoingtherightthingstogrowthebusinessandfundthemaintenancecapitalbutyoushouldexpectittobecomelowerandwe'llprovidemoreclarityaroundthataswegothroughthecourseoftheyearandwewatchwherecommoditypricesendup.
Operator :
RogerRead,WellsFargo.
RogerRead (Analyst-WellsFargoSecurities):
Thankyou.Goodmorning.
RyanLance (Chairman,CEO):
Goodmorning,Roger.
RogerRead (Analyst-WellsFargoSecurities):
IguessmaybetogetbacktosomeoftheinternalcostcuttingandthecommentaryaboutstructuringtheCompanymorelikeanE&Pasopposedtoalargeintegrated.Givenwhereyouareontheoperatingcostsavings,whatmoreshouldweexpecttoseefromastreamliningortheheadcountreductions,thatsortofstructure?
RyanLance (Chairman,CEO):
AsJeffsaid,we'rewellonourwaytothe$1billioncostchallenge.Wethinkwe'recertainlygoingtohitthat,probablyexceedthat.Theexplorationdecisionwemadeandannouncedearlier,asIsaid,that'sgoingtobeincremental,bothonacapitalandoperatingcostside.We'llhavesomeimpactontheorganizationaswethinkaboutthatgoingforward.Wethinkthere'srunningroombeyondwherewe'reat,butit'ssomethingwe'respendingalotoftimelookingat.
Withrespecttore-lookingathowweruntheCompany,that'sgoingtodeliversustainablereductionsforthelongerterm.Soit'snotjustabouttaking$1billionormoreoutofthecostsystemintheshort
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(technicaldifficulty)deflation.Itisaboutmakingthatasustainablecutovertime.Andthat'swhereourfocusisatrightnow.
RogerRead (Analyst-WellsFargoSecurities):
Okay,great.Thanks.AndforJeff,lookingatthecashflowstatementorthecashflowwaterfall,workingcapitalwasanegativetothispoint.Asyouthinkaboutlatterpartofthisyear,or2016,isthereanopportunitytopulloutofworkingcapitalaswellascashflowfromthebusinessaswellaspotentiallymoredebt?WhataresomeofthethingsweshouldthinkaboutmaybeassomeoftheselargeprojectsstarttocomeonlineastowhethertheyconsumeorfreeupcapitalinadditiontotheCapExchanges?
Jef f Sheets (EVP-Finance,CFO):
Ithinkfromaworkingcapitalperspectivewhatwe'veseeninthefirsthalfoftheyearisreallyjusttheeffectofacouplethings.Accountspayablecomingdownbecauseoftheloweractivitiesonthecapitalside.Thiswasreally--aswemovedourcapitalprogramdownfromthe[16,17]levellastyeartothis[11]thisyear.You'vegotthislageffectonworkingcapital.
Nowthatwe'redownatthelevelwe'regoingtobeatoncapital,wewouldn'texpectthateffecttocontinueinsubsequentquarters.Aspricescomedown,you'veseechangesinourtaxespayableaswellcomeoffandbeauseofcashforworkingcapital.That'sprettywelloutofthesystemnowalso.Sowewouldn'tanticipatethatbeingasignificantchangeinuseofcashgoingforwardforus.
AsImentionedonthecall,westillhavereallysolidaccesstothecapitalmarketstotheextentthatit'snecessarytogobeyondourcashbalancestofundourcapitalandourdividendintheperiodbefore2016whenwegettocashflowneutrality.Wecertainlyhavetheabilitytodothatinaveryeffectiveway.
Operator :
EvanCalio,MorganStanley.
EvanCalio (Analyst-MorganStanley):
Goodafternoon,guys.
EllenDeSanctis (VP-IR,Communications):
Hey,Evan.
EvanCalio (Analyst-MorganStanley):
MaybemyquestionisrelatedtotheUSearningspowercommentandoffshoreexplorationreduction,maybeforMatt.IknowyoulookatresourceupstreamgloballyandthesavingsandefficienciesonshoreUSonconventionalhavebeenmostnotabletodate.DoyouseethescopeforinternationaltosignificantlymovedownthecostcurvetocompeteforgreenfieldcapitalorinthisstripenvironmentdoyouseetheUSinyourUSunconventionalpositionaseconomicallysuperiorandeffectivelytakingmarketshare?
MattFox(EVP-E&P):
Ithinkcomingfromadeflationperspective,morethanhalfofthedeflationwe'veseenhasbeeninNorthAmericasofar.Historicallytheinternationalbusinesshasbeenslowertorespondfromadeflationperspective,sowestillexpecttoseemoreofthatcomeinoverthenextmonthsandinto2016intheinternationalside.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
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AsweseethatinEMEAthenwecanunderstandwhatimplicationsithasforcapitalcostandthathasimplicationsfortheviabilityofprojectsacrosstheportfolioasawhole.Soifwhatwe'reseeinginEMEAfromadeflationperspectivewillinfluencehowwethinkaboutcapitalallocationintheyearsahead.
EvanCalio (Analyst-MorganStanley):
Right.Andefficiencieshereaswell.Atcurrentstrippricing,what'sthebreakevenperiodononeofyour$8millionto$9millionEagleFordwells?Arewealittleoverayear?What's--
MattFox(EVP-E&P):
Ithinkwe'restillinthe12-to18-monthsortoflevelforbreakevenonanindividualwell.
EvanCalio (Analyst-MorganStanley):
That'sprettypowerful.IfIcouldslipinoneother,justaquestiononifyoucandiscussthechangestoworkingcapitalassociatedwithinvestingactivitiesinthequarter,thatwassequentiallyhigher.Whatdrovethatreclassification,theworkingcapitalchangefrominvestingactivity?
Jef f Sheets (EVP-Finance,CFO):
Yes,Ithinkyou'renoticingthatonthecashflowstatement.Thistimewebrokeworkingcapitaloutrelatedtooperatingactivitiesandinvestingactivities.Wedidthattoprovidemoreclarityonwhatwasreallydrivingthechangesinworkingcapital.Again,asI'vementionedacoupletimesnow,therealdriverhasbeentheslowdownandthecapitalinvestingactivities.
Operator :
AlastairSyme,Citi.
AlastairSyme (Analyst-Citigroup):
Hi,everyone.Jeff,Ithinkyounotedafewtimesaboutthebondofferingsinthequarter.ButIthinkI'mrightinsayingyou'restillonnegativecreditwatch.IwaswonderingwherethosediscussionssitinthecurrentenvironmentwiththevariousratingagenciesandhowvociferouslyyouwouldfeelyouneedtodefendaSingle-Arating.
Jef f Sheets (EVP-Finance,CFO):
We'recurrentlyratedisA-1withMoody'swhichisthehighestSingle-A.We'reatamiddleSingle-AwithStandard&PoorsandFitch.Allofthem,asyoumentioned,haveusonanegativeoutlook.Allthreeoftheagenciesconfirmedourratinginconjunctionwiththe$2.5billionbondofferingwedidinthesecondquarter.
Ithinkthepositionthey'reinisthey'rewaitingtoseehowcommoditypricesplayoutandwhatlevelsofincrementalborrowingwemightdobeforewegettocashflowneutralityin2017.Butaswe'vesaidbefore,aswelookatdifferentscenariosofwhatborrowingswemightdoandbeforewegettoneutralityin2017,we'restillverycomfortablethatthatlevelofborrowingisnotgoingtotakeusoutoftheSingle-Arange.Itcouldknockusdownanotchwithinthatrange,butwouldn'ttakeusoutofthatrange.
AlastairSyme (Analyst-Citigroup):
AnddefendingSingle-Awouldbeparamount,wouldit?
RyanLance (Chairman,CEO):
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
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Wethinkthat'stherightplaceforaCompanylikeourstobe.Justfitsstrategicallywiththedirectionwe'reheadingasaCompanytobeonethathasapriorityonshareholderdistributions,likewe'vetalkedaboutwiththedividendthatispursuingmodestgrowthandwantstohavethecapabilitytodothatthroughallkindsofdifferentcommoditypricecycles.Wedofeellikethat'stheappropriatecreditspaceforustobein.
Operator :
JohnHerrlin,SociateGenerale.
JohnHerrlin (Analyst-SocieteGenerale):
Thankyou.WiththeCookInletsale,doesthatincludetheKenaiplant?
MattFox(EVP-E&P):
Noitdoesn't.
JohnHerrlin (Analyst-SocieteGenerale):
Okay.Thanks,Matt.Nextone.You'vetalkedalot,obviously,aboutefficienciesandcostsavingsandoptimizations,anddeflation,andallthat.You'reabigCompany,asRyantalkedaboutearlier,youhavetheabilitytechnicallytorunyourfieldsdifferentlythan,say,smallercompanies.Sohowmuchofyouroverallperformanceisrelatedtothattypeofself-helpfrom,say,fieldautomizationsoyoucanminimizeunplanneddowntimeandenhancerecoveries?
MattFox(EVP-E&P):
It'spartofourcostreductionprocess.We'relookingatouroperatingcosts,ourliftingcostsacrosstheCompanyasawhole.Wehavehad--foryearsI'vehadtheverystrongoperationsexcellenceprogramwe'veappliedacrosstheorganization.Frankly,forthepastfewyearswe'vebeenfocusingthatonincreasingproduction.
That'swhatyoudowhenoilpricesare$100abarrel.Butthesame--thetoolsexistwithinthatcapabilitytofocusthatmoreoncostreduction,sowe'rerefocusingouroperationsexcellenceonmakingsurethatwe'regettingtherightbalanceoftherightoperatingefficiencyandtherightcostsinthispriceenvironment.Sohavingthatcapability,that'sourintegratedviewacrossthewholeorganizationisreallygood.
RyanLance (Chairman,CEO):
AndIwouldadd,John,tothat,aswetalkabouttheindependent,someofthecapabilitywehaveasaCompany,ourfunctionalexcellencearoundintegratedoperationcentersandtheopsexcellenceplansthatMatttalkedabout,thereservoirunderstandingandcharacterization,theEUR,thestimulatedrockvolumeworkthatwe'redoing,weneedto--we'regoingtomaintainthatandexpandthatcapabilitybecausewethinkit'sdifferentialinleveragingintheindependentworld.
JohnHerrlin (Analyst-SocieteGenerale):
Thankyou.
EllenDeSanctis (VP-IR,Communications):
Thanks,John.
Operator :
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
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JasonGammel,Jefferies.
JasonGammel(Analyst-MacquarieResearchEquities):
Thanksverymuch.Ihadanotherquestiononlongcycletimeversusshortcycletimeinvestments.You'reclearlyatapointwhereyou'rehittinganinflectionpointandcapitalisdroppingawayandproductionrampiscomingin.ButIsupposelongcycletime,bydefinition,meansifyou'renotinvestingtoday,thenyoudon'thavethosebigstepchangesinproductionin,let'ssaythe2019,2020timeframe.
Myquestionistwofold.Firstofall,doyouexpecttomovetowardsFIDonanymajorcapitalprojectsthisyearandnextyear,giventhecapitalconstrainedenvironment?Andthesecondpartofthequestionis,overthecycle,howmuchCapExabovethe$8billionmaintenanceCapExwouldyouwanttobeputtingintotheselongercycletimeprojectsrelativetoyourshortcycletimeinvestmentopportunities?
MattFox(EVP-E&P):
OntheFIDquestion,wewillbemakingfinalinvestmentdecisionsonafewrelativelysmallprojectsaswegothroughthisyearandintonextyear.We'reinthefortunatepositionthatmostofourmajorprojectsthatareintheportfolionowarenotmegaprojectsandthey'retheprojectswe'veexecutedbefore,likeaddingdrillsitesinAlaskaoraddingplatformsintheNorthSeaorinChina.Sothey'reallrelativelysmallscalethings.Sowedohavethescopewithinthecapitalprogramtocontinuetoinvestinthoselongercyclebutsmallerscaleprojectsandwewilldothat.
Oneofthestrategicquestions,whichIthinkiswhatyou'regettingat,Jason,isforthelong-term,what'stherightbalanceforaCompanylikeusbetweenthemoreflexibleshortcycleinvestmentopportunitiesofwhichwehavealotwithinourdevelopmentprograms,andinparticularinunconventionalbusiness,andthentheselongercycleprojectsofthecharacteristicswejustspokeabout.Andwehaveflexibilitytodecideexactlywhatthatratioshouldbeandthat'soneofthelensesthatwelookatourstrategythrough.
JasonGammel(Analyst-MacquarieResearchEquities):
Okay,thanks,Matt.Appreciatethethoughts.
Operator :
NeilMehta,GoldmanSachs.
NeilMehta(Analyst-GoldmanSachs):
Goodafternoon.
RyanLance (Chairman,CEO):
Hi,Neil.
NeilMehta(Analyst-GoldmanSachs):
Appreciatethatincrementaldisclosureoncashflowneutralityin2017.Definitelybeentopofmindforinvestors.Twomoreindustry-focusedquestions.Iguessthefirstone,Ryan,SpeakerBoehneryesterdaycameoutinfavorofcrudeexports.Ithinkaswespeakhe'satleastdiscussingit.Flipsideiswe'regoingintoanelectionyear.Justwanttogetyourthoughtsonthelatesttemperatureonthisissueasyou'vereallybeenleadingthechargeonbehalfoftheindustry.
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page20of22
RyanLance (Chairman,CEO):
Thanks,Neil.We'regladtosee--we'vebeenworkingwiththeSpeaker'sofficetogetthemtosupporttherepealofthebanandgetitupforavotelaterthisyearandIthinkwemadesomesignificantprogressbothintheHouseandtheSenate.AndofcoursetheSpeaker'scommentsyesterdaywerewell-receivedbytheindustryandeverybody.It'sstillgoingtobealittlebitofatoughuphillclimb.We'regettingbipartisansupportbothintheHouseandSenate.WecouldusealittlebitmoreoftheDemocraticsupportforit.Sowe'reworkingonthat.
ButwhatchancesdoIgiveitofpassingthisyear?Ihaven'tclimbedto50%butit'sencouragingtoseewemaygetavote,atleastanup-downvote,atleastinoneofthechamberstogoforward.Ithinkthequestioneverybodyisaskingisisthereenoughbipartisansupport,particularlyinbothHousesandthentocleartheAdministration?That'swhatwe'respendingmostofourtimeonrightnow.
NeilMehta(Analyst-GoldmanSachs):
Thanks,Ryan.ThesecondquestionisviewsonindustryconsolidationThisislessaConoco-specificpoint,butmoreanindustrypoint.Ifyouexpectanaccelerationinactivitywiththedoubledipinthecommodityandthecapitalmarketstightening,lesssoasyouguyspointedoutforyourselves,butforcompanieslessattractivelypositionedfromacapitalstructurethanyou,yourthoughtsonM&Agoingforwardfortheindustry?
RyanLance (Chairman,CEO):
Ifwesawsomemodestincreasinginthecommoditypricesmaybethatwewouldhaveenvisionedalittlebitmoreearlierintheyear,IwouldhavetoldyouthatIthinkthestocksareprettyfullyvaluedandexpectingpricestocomebacktothat$70,mid$70,$80level.Certainlywiththisrecorrectionoverthelastfewmonths,it'sputtingalotofthespotlightonsomeofthecompanies,asyousay,thatmaynothavethefinancialcapacitythatConocoPhillipsdoes.
Iftheselowerpricespersistforalongerperiodoftime,that'scertainlyanareathatprobablywouldstarttorampup.Istilldon'tpersonallybelievethefloodgatesareopeningonthat,butIthinkit'ssomethingthatindustrywillbewatchingprettycloselyifthesekindsofpricespersistforalongerperiodoftime.
NeilMehta(Analyst-GoldmanSachs):
Thankyou.
Operator :
JamesSullivan,O lympicGlobalAdvisors.
JamesSullivan (Analyst-O lympicGlobalAdvisors):
Hey,guys.Thanksforfittingmein.Justwantedtobeverycrystalclearononepoint.Obviouslyyouguyshadhighlighteda$14billionto$16billionoperatingcosttogobacktothatissue,reductionofa$1billion,ofwhichIthinkyouhadsaidroughly70%wassupposedtobestructuralsavings.
AmIrightinthinkingthatthatwasreallybeforeyouguyshadenvisionedastrategicreviewofthekindthathasbeentalkedaboutacoupletimesregardingstreamliningsomeofyour--let'scallthemmajor-likeexecutioncapacitieswhichwould--isitrighttothinkofthoseasincremental--potentialincrementalstructurecostsavingsoutsideofthatoriginalfirst$1billion?
RyanLance (Chairman,CEO):
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page21of22
No,James,whenwelaidoutthe$1billion,wehadavisionthatweweregoingtogothroughthisprocessandmakesomestructuralchangestotheCompany,soIwouldsaythatsome,notall,butmanyofthosestructuralchangesarebuiltintothe$1billiontrajectorythatwe'reonis--asJeffdescribed,Ithinkwe'reaheadofplanandourexpectationisthatwe'llgeneratemoresavingsbeyondthe$1billion.
Andthentheexplorationdecisionwemadenottocontinuepursuingsomeofthedeepwater,thatisincrementaltothe$1billiondecision.Andwe'reworkingthroughwhattheimplicationsofthat--giventhatwehavesomeportfolioanddiscoveredportfoliothatwe'regoingtocontinuetoinvestinormonetizeinotherways.
JamesSullivan (Analyst-O lympicGlobalAdvisors):
Okay,thatmakessense.Sodownshiftinginthatwaywouldbetheincrementalpiece.Okay.Justaseparatething,followinguponthequarterlydiscussionregardinglongcycle,shortcycle,andcorrectmeifthere'sbeenachangeinthis.ButlookingatAKLNG,asIunderstoodit,therewasthepotentialforthattoprecedeintopre-FEEDin2016oratleastgraduatetothenextstepinthedevelopmentprocess,whichwouldprobablyrequireamaterialcapitalcontributionfromstakeholders.
Itmaybethatthat'sgettingpushedtotherightbutcouldyoudescribeyourthinkingonthatproject,yourparticipationinitandthenhowitfitsintoyourportfoliogiventhatobviouslywe'retryingtoskewtowardshortercycleprojectsatthemoment?
RyanLance (Chairman,CEO):
Ithinkwearemakingsomeprogressonthatwiththepartnersinalliancewiththestate.There'sstillalotofworktogodotogetanalignedviewaroundthefiscalsandthestate'sparticipationandwhatthat'sgoingtolooklike.There'salotofworktodoevenbeforewetakethatnextstepthatyoudescribedinthepre-FEED.Ithinkthecompaniesarelookingatkindoftheendofthisyearinto2016tomakethatdecision,butalotofthatisdependentonhowweseethealignmentworkingwiththestateofAlaskaandtheirparticipationintheproject.It'savery,verylongproject.Noresourceriskforus.
KindofgoesbacktoMatt'scomment,howmuchofthislongercycletimeisveryflatproductionwithverylowresourcerisksdoyouwantintheportfolio?Andwe'regoingthroughthosethoughtsinanalysisrightnow.Itdoesn'tmeanthatthere'szeroofthatintheportfolio.Ithinkahealthyportfoliohassomeofthat.We'vegotsomeLNGproperties.We'vegotourCutterproperty.We'vegotAPLNGcomingonline.Wehavealargeresourcepotentialintheoilsands.We'retryingtofigureouthowtobreakthoseprojectsintoshortercycletimeprojects.
Stilltherearelong-datedresourcebarrelsthatareattractiveandshouldbeapartoftheportfolio.That'sgoingtobethechallengeforusaswethinkaboutAKLNGgoingforward.
JamesSullivan (Analyst-O lympicGlobalAdvisors):
Great.That'sallIhad.Thanks,guys.
EllenDeSanctis (VP-IR,Communications):
Thanks,James.
Operator :
Thankyou.IwillnowturnthecallbackovertoEllenDeSanctis,VPInvestorRelationsandCommunicationsConocoPhillips.
EllenDeSanctis (VP-IR,Communications):
CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy
EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138
©2014TheStreet,Inc.Al l R ightsReserved Page22of22
Thanks,Christine,andthankstoallourparticipants.Obviouslyfeelfreetocallusbackforanyfollowupquestions.Wereallyappreciateyourtimeandinterest.Thankyou.
Operator :
Thankyou.Andthankyou,ladiesandgentlemen.Thisconcludestoday'sconference.
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