ConocoPhillips (NYSE:COP) Q1 2024 Earnings Call Transcript

ConocoPhillips (NYSE:COP) Q1 2024 Earnings Call Transcript May 2, 2024

ConocoPhillips misses on earnings expectations. Reported EPS is $2.03 EPS, expectations were $2.04. ConocoPhillips isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the First Quarter 2024 ConocoPhillips Earnings Conference Call. My name is Liz, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. [Operator Instructions] I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.

Phil Gresh: Thank you, Liz, and welcome, everyone, to our first quarter 2024 earnings conference call. On the call today, we have several members in 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; Andy O’Brien, Senior Vice President of Strategy, Commercial Sustainability and Technology; Nick Olds, Executive Vice President of Lower 48; and Kirk Johnson, Senior Vice President of Global Operations. Ryan and Bill will kick it off 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.

Second, during this call, we will make 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. And third, of course, when we move to Q&A, we will be taking one question per caller. So with that, I will turn it over to Ryan.

Ryan Lance: Thanks, Phil, and thank you to everyone for joining our first quarter 2024 earnings conference call. It was another solid quarter of focused execution across the portfolio on our strategic plan. Starting with our international projects. We continue to ramp up production at Surmont Pad 267 in Canada, Bohai Bay 4B in China and three subsea tiebacks in Norway. And we expect to start up the fourth subsea tieback in Norway in the next month. In Canada at Montney, production reached a new record level following the start-up of the second central processing facility, leading to over 20% growth versus the fourth quarter. Shifting to our other projects. We are wrapping up a successful first major winter construction season at Willow this week and module fabrication is going according to plan.

As we build out our LNG portfolio, our Qatar and Port Arthur projects are also progressing well. Moving to the Lower 48. Our primary focus remains on capital efficient growth as we continue to improve efficiency in drilling and completions. For 2024, we still expect to deliver low single-digit production growth at flat activity levels with lower capital spending versus 2023. Shifting to return of capital, we remain on track to distribute at least $9 billion to shareholders this year. And we announced a VROC of $0.20 per share for the second quarter, consistent with our guidance of a 60-40 split between buybacks and cash distributions for the year. To wrap-up, it was a solid start to the year. We are on track with the full year guidance that we laid out back in February, which anticipates a well-balanced growth across our global portfolio.

And as we discussed in our Analyst and Investor Meeting last year, we continue to invest in our deep, durable and diverse asset base, which will drive significant cash flows and shareholder distributions over the course of our 10-year plan. Now, let me turn the call over to Bill to cover our first quarter performance and 2024 guidance in more detail.

Bill Bullock: Thanks, Ryan. In the first quarter, we generated $2.03 per share in adjusted earnings. We produced 1,902,000 barrels of oil equivalent per day, representing 2% underlying growth year-over-year. Lower 48 production averaged 1,046,000 barrels of oil equivalent per day with 736,000 in the Permian, 197,000 in the Eagle Ford and 96,000 in the Bakken. Now this included a 25,000 barrel per day headwind from weather, which impacted Lower 48 production by about 2% and was slightly higher than the 20,000 barrel per day guidance provided on the fourth quarter call. As a result, Lower 48 underlying growth was roughly 1% year-over-year. Now for the rest of the company, Alaska International production averaged 856,000 barrels of oil equivalent per day, representing roughly 4% underlying growth year-over-year, excluding the Surmont acquisition effects, and this really highlights the benefit of our diversified global portfolio.

Moving to cash flows. First quarter CFO was $5.1 billion, which included APLNG distributions of $521 million. Capital expenditures were $2.9 billion. Debt retirement payments were $500 million and this was partially offset by proceeds of $200 million from disposition of non-core assets. And we returned $2.2 billion to shareholders in the quarter, including $1.3 billion in buybacks and $900 million in ordinary dividends and VROC payments. We ended the quarter with cash and short-term investments of $6.3 billion and $1.1 billion in longer-term liquid investments. Turning to guidance. We’ve maintained our full year production outlook of 1.91 million to 1.95 million barrels of oil equivalent per day, which translates to 2% to 4% underlying growth.

And for the second quarter, we expect production to be in the range of 1.91 million to 1.95 million barrels a day equivalent also which represents a similar 2% to 4% year-over-year underlying growth. Our full year turnaround forecast is 30,000 barrels per day. This includes 25,000 barrels per day of turnarounds in the second quarter primarily in Alaska, Norway and Qatar and 90,000 barrels per day for the third quarter. And as we mentioned on the last earnings call, the heavy third quarter maintenance was driven by our once every five-year turnaround at Surmont. For CapEx our full year guidance remains $11 billion to $11.5 billion with a greater weight to the first half of the year. Now this is due to the $400 million of equity contributions at Port Arthur LNG that are almost entirely in the first half of the year as we discussed on the last call.

For APLNG we expect $300 million of distributions in the second quarter with no change to full year guidance of $1.3 billion. And finally for the second quarter, we’re forecasting a $600 million working capital outflow related to tax payments and timing in the US and Norway. All other full year guidance items are unchanged. So we continue to deliver on our strategic initiatives. We remain focused on executing our plan for 2024 and we’re committed to staying highly competitive on our shareholder distributions. That concludes our prepared remarks. I’ll now turn it back over to the operator to start the Q&A.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Devin McDermott from Morgan Stanley. Your line is now open.

Devin McDermott: Hi. Good morning. Thanks for taking my question. I wanted to ask about Alaska. You noted that you just completed the first and are completing the first winter construction season for the Willow project. I was wondering if you could give us a little bit more detail on what was completed this past winter, how it was plan? And as we look ahead what are some of the next key milestones we should be focused on for the project?

Kirk Johnson: Hi, Devin, this is Kirk. Good morning. Yes. So we had a really strong start to project execution here on Willow this year. We were actively closing out here this week actually our first major winter construction season on the North Slope where we were able to successfully mobilize over 1,200 workers and were able to successfully build out seven miles of gravel road, 30 miles of gravel pads, 30 acres of gravel pads for future facilities. And we’ve successfully constructed all of the pipelines that we planned for this winter season. Certainly in addition module fabrication has continued to progress really well here this winter and this spring. And we’re expecting to be ready to transport the first of those modules to the North Slope here on schedule here midyear which is the Willow operations center.

We still expect to be in the range of $1.5 billion here for 2024 and the progress that we’re making here this year gives us confidence to keep our estimate on total capital to first production as being remaining unchanged. So we’re still in that $7 billion to $7.5 billion range. And again, that’s underpinned not just by the progress that we’re making here on construction here this year, both on the North Slope and our offsite module fabrication. But we continue to make some really strong progress on our contractual scope. We’ve landed three quarters of our total project scope here to date, and we have an expectation that we could be upwards of 90% of our total scope contractor here by year-end. And so as we look forward here for the remainder of the year, obviously, we’re going to continue off-site module fabrication for production facilities, and then we’ll continue to ramp up both procurement and certainly prepare for the follow-on winter construction season.

So again, great progress here on the Willow project this year and putting us in a really strong position. We do these projects a lot in Alaska, and it’s great to see the teams making the progress they are here yet again this year.

Operator: One moment for our next question. Our next question comes from the line of Neil Mehta with Goldman Sachs. Your line is now open.

Neil Mehta: Good morning team. I wanted to spend some time talking about return of capital, and it is notable in the release you talked about at least $9 billion. So just your framework for thinking about what the right level of return of capital, it is early in the year. Oil prices have been volatile, gas prices have been weak, but certainly, you have a terrific balance sheet and have the capacity to raise that number. So I’d love your perspective on that.

Ryan Lance: Yes. Thanks, Neil. No, I think we want to divestiture. Look, we believe we’re in good shape with the nine day that we described early in the year. I think you look at a reasonable percentage of our cash flow through the first quarter of this year, similar to what we’ve done in years past. We recognize that the price that we’re experiencing today is well above our mid-cycle. So our investors should expect well above 30% of our cash flow going back to them. We’re monitoring kind of the volatility, as you mentioned, Neil, and again, it’s not just sort of in WTI or Brent markers, it’s in all the markers, NGL, LNG and natural gas as well. So it’s a function where we just want to see some durability to some of the prices to see where they end the year and you can expect to get a fair percentage of our cash flow return back to our shareholders like we’ve done over the last number of years.

Operator: One moment for our next question. Our next question comes from the line of Lloyd Byrne with Jefferies. Your line is now open.

Lloyd Byrne : Hey, guys. Ryan, good morning.

Ryan Lance: Good morning.

Lloyd Byrne : Can you just comment strategically on the Permian gas and just kind of how you see that playing out? You guys have been really proactive in integrating some of that gas and looking forward, but any target levels you have? And maybe just how you’re thinking about some of those differentials.

Ryan Lance: Yes. Thanks, Lloyd. I can — Bill’s got some information there that he can share. I think you’re right. We’ve been thinking about this for the last number of years trying to build out an LNG strategy and to complement what we’re doing on the commercial side, the gas that we move around the Lower 48 to expose ourselves to some of the arms that are open even today. So I can let Bill add a little bit more color to that.

Bill Bullock: Yes, sure. Good morning, Lloyd. So as we talked about in the past, we have — we shipped to multiple markets. We’ve got transport capacity to the Gulf. We’ve got transport capacity on West Coast. We’re very supportive of offtake capacity from the Permian Basin. In fact, we do have some firm capacity on the upcoming Matterhorn pipeline, but a sizable portion of our volume also is exposed to prices and in-basin pricing. We don’t disclose what percentage moves to each location for commercial reasons. But a really good way to think about the company’s realizations is as a percentage of capture of first of month Henry Hub pricing that’s what we show. First quarter, we were about 70% realization. That was a little bit higher than fourth quarter, so in a good position.

And obviously, the Permian Basin has got some transitory issues right now with gas pricing, you’re start seeing pricing go negative in towards the end of the first quarter and as we go into the second quarter. So I think everyone is expecting to see a lot of volatility this year. We certainly expect realization in the second quarter to be particularly low, but these are transitory that as we come out the back of the year with takeaway capacity, we expect that to return to more normal levels. And as you know, we’ve got a very sophisticated gas marketing organization. We are moving several multiples of our equity production. So our flow assurance is very good for the company and we’ve got access to competitive market pricing. And that flow insurance really is important because we don’t routinely flare and we want to be able to continue to produce mix, we’ve got strong return profiles in the Permian, primarily driven by oil.

Operator: Our next question comes from the line of Scott Hanold with RBC Capital Markets.

Scott Hanold: Thanks. I’d like to take a look at the Lower 48 activity. Obviously 1Q is down a little bit just because of the weather, but can you give us some color on how you see that progressing through the year? Should we see a nice bounce back in 2Q and then that steady kind of slow single-digit kind of rise through the course of the rest of this year?

Nick Olds: Yes. This is Nick Scott. Maybe I’ll take you through kind of the Permian update in Lower 48 what we see – as you noted, there we had the headwinds of weather downtime as Bill referenced in his prepared remarks. As we look at that we would have – you exclude weather we have about 3% year-over-year of growth there. In addition, remember we took the operational frac gap at Eagle Ford in the second half of 2023. So we had some impact in Q1 there because of wells coming online kind of the second half of the Q1 time period. Overall, for Permian, we’re very focused on just driving efficient operations out there. We’ve got flat activity with rigs and frac crews. We may bump up quarter-to-quarter. I’d also mention that on the first half of our development plan out in the Permian is really focused on the Delaware and then we’ll pivot to on the second half more oil weighted towards the Midland Basin, where we’ve got some of our larger pad projects and some 3-mile laterals coming online.

Again, Scott the teams are just again laser focused on capital efficiency both on drilling and completions. We see good results from the combination of for example simul-frac and remote fracs. So we continue to see those efficiency improvements on the operating side for fracs. And then on the drilling side I think we’ve mentioned several times we’ve got a real-time drilling intelligence group out there monitoring the rigs 24/7. So that’s really seeing promise as well. So on the efficiency front we’re seeing that roll through. If you look back as far as taking in account the weather that Bill had mentioned on 25000 barrels equivalent per day and also accounting for the impact of the Eagle Ford frac app, you can look at 1Q kind of being the low point for the year around production we’ll see progressively higher production kind of Q2, Q3, Q4.

And again, we’ve got some larger pad projects coming on in second half of the year in the Midland Basin. So increasingly favorable trajectory on production. All in, as we talked about before the plan that we laid out was low-single digits of growth in that 2% to 4% range.

Operator: Our next question comes from the line of Betty Jiang with Barclays. Your line is now open.

Betty Jiang: Hi, thank you for taking my question. Nick you set that up for me really well because I want to follow-up on the Permian and then the efficiency gains that you guys are seeing. We are hearing from other operators significant efficiencies from e-fracs and longer laterals. I would just love to get more color what you guys are seeing and how that’s tracking versus the corporate plan and importantly, how that’s getting translated into the capital efficiency that you’re seeing in the basin relative to plan? Thanks.

Nick Olds: Yes. Well, good. Let’s start on some of the longer laterals. I talked a little about previously on the operating efficiency on the frac spreads and drilling. Again, our teams are very focused on long lateral development, as we go forward. As a reminder for the group on the phone, if you look at our Permian inventory, 80% of the laterals are 1.5 miles or greater and we got 60% 2 miles or greater. If you look specifically at 2024, again 80% of the wells or 1.5 miles or greater and about 20% are 3-mile laterals. And we’ve got – as I mentioned before, we got some of those longer laterals coming online in the second half of this year. We see up to that 30% to 40% improvement on cost of supply when you move from a 1-mile lateral to a 3-mile lateral.

So we’re seeing those efficiency improvements out there. Maybe just staying on the drilling side, specifically in the Midland Basin, we’ve had some recent success there, where we’ve had internal record wells. We look from spud to rig release so very favorable performance over the last three months and we continue to see that on the drilling side. And the bottom line is, it does translate as we focus in on more feet per day, more stages per day more pumping hours per day. And we’ve seen that 10% to 15% improvement of pumping hours from 2022 to 2033. That all translates to improved capital efficiency and therefore lowering your cost supply. So it’s very encouraging across all fronts.

Operator: [Operator Instructions] Our next question comes from the line of Roger Read with Wells Fargo. Your line is now open.

Roger Read: Thanks. Good morning. Maybe Ryan, just get your updated thoughts on the global LNG market. You’ve obviously got a pretty good footprint, you’re expanding it here, just how you’re thinking about it over the next let’s say two to three years as some of these newer projects come online?

Ryan Lance: Yes. Thanks Roger. I’ll take a shot and maybe let Andy chime in a little bit as well. But as I said earlier, I think we certainly step back to a few years ago and wanted to continue to grow our LNG exposure in that position. We know the markets. We have our own technology. We know the business quite well and we do have a strategic intent to continue to try to grow that. And it’s really participating in all facets of it the production side here in North America in Qatar, in Australia being in the liquefaction side here in North America and elsewhere being — having ships and being in the regas potential as well. So trying to grow that integrated business as well even at sort of the lower Henry Hub prices you see today the arb is still open to make money and make a decent rate of return as you move some of that LNG to Europe and to Asia. And it’s a long-term business that we’re interested in. So I can let Andy chime in on a few more specifics as well.

Andy O’Brien: Yes. Thanks Ryan and thanks Roger for the question. I think this is a bit of our business that I don’t think is completely understood. So it might be helpful if I just put sort of some of the details around it. As Ryan said, if you go back all the way to 2022, we increased our ownership on the resource side with taking more equity in APLNG. And then we’ve also participated in the two Qatari expansion projects. And I think where you were specifically going with your question on really more from the commercial perspective. So on the Gulf Coast, we’ve secured five MTPA of offtake from Port Arthur and we also have a 30% equity interest there. We’ve also secured offtake on the West Coast of Mexico with 2.2 MTPA of Saguaro LNG and that one is pending FID and 0.2 MTPA of offtake for five years starting in 2025 from ECA Phase 1.

So, all in, our offtake in North America is about 7.4 MTPA pending the FID at Saguaro. Then switching to the regas side of things, we now have 4.5 MTPA secured in Europe. This includes 2.8 MTPA of capacity at the German LNG. Now up to two of that will support our LNG SPAs with Qatar and we also have 1.7 MTPA of regas capacity at the gate terminal in the Netherlands. So over the near term, our focus is on continuing to ladder in the regas opportunities. And over the longer term, maybe think about 10 to 15 MTPA has a good range of offtake capacity to think about. This will allow us to achieve the full benefits of scale across our organization. I do want to be clear this is an offtake ambition. We don’t feel that we have to take on additional liquefaction capital.

So for competitive reasons, we don’t get into the specifics of where we’re actually developing offtake and regas right now. But needless to say that’s something that’s front of mind for us. So I know that was a lot of detail, but hopefully that helps everyone sort of just frame up sort of the moving parts we have going on, on the LNG business.

Operator: [Operator Instructions] Our next question comes from the line of Nitin Kumar with Mizuho. Your line is now open.

Nitin Kumar: Hi, good afternoon and thanks for taking my question. Ryan there’s been some news report saying that linking you to a potential bid on the Citgo refining assets there was also some articles and notes saying that you’re considering the sale of part of your equity interest in LNG. I’m not going to ask you to comment on specific transactions. But as you look at the portfolio today and the evolving macroeconomic outlook are there opportunities for portfolio optimization? And maybe you can comment on a few of them.