ConocoPhillips (NYSE:COP) Q2 2023 Earnings Call Transcript

ConocoPhillips (NYSE:COP) Q2 2023 Earnings Call Transcript August 3, 2023

ConocoPhillips misses on earnings expectations. Reported EPS is $1.84 EPS, expectations were $1.94.

Operator: Welcome to the Second Quarter 2023 ConocoPhillips Earnings Conference Call. My name is Liz, and I will be your operator for today. [Operator Instructions]. I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.

Philip Gresh: Thank you, Liz, and welcome to everyone to our second quarter 2023 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO; and Tim Leach, Adviser to the CEO; Bill Bullock, Executive Vice President and Chief Financial Officer; Dominic Macklon, Executive Vice President of Strategy, Sustainability and Technology; Nick Olds, Executive Vice President of Lower 48; Andy O’Brien, Senior Vice President of Global Operations; Kirk Johnson, Senior Vice President, Lower 48 assets and Operations; and Will Giraud, Senior Vice President, Corporate Planning, Planning and Development. Ryan and Bill will kick off the call with opening remarks, after which the team will be available for your questions.

A few quick reminders. First, along with today’s release, we published supplemental financial materials and a slide presentation, which you can find on the Investor Relations website. Second, during this call, we will be making forward-looking statements based on current expectations. Actual results may differ due to factors noted in today’s release and in our periodic SEC filings. We will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today’s release and on our website. So with that, I will turn the call over to Ryan.

Ryan Lance: Thank you, Phil, and thank you to everyone joining our second quarter 2023 earnings conference call. It was certainly another busy quarter for ConocoPhillips. In April, we hosted our Analyst and Investor Meeting in New York City where we laid out our 10-year strategic and financial plan, and we committed to you that we would keep working to make the plan even better, and we’ve done that again this quarter. We executed an agreement to purchase the remaining 50% of Surmont, which we expect to close in the fourth quarter. Surmont is a long life, low decline and low capital intensity assets that we know very well. In the current $80 per barrel WTI price environment, we expect incremental free cash flow from the additional 50% interest to approach $1 billion in 2024.

We expect first production in early 2024 from Pad 267, our first new path since 2016, and we see debottlenecking potential at the facility to further improve our cash flows. We also continue to progress our global LNG strategy. In the quarter, we finalized the acquisition of our interest in the Qatar North field South joint venture. And in North America, we executed agreements for 2.2 million tonnes per annum of offtake at the Saguaro LNG project on the West Coast of Mexico. And in Germany, we can confirm we have secured a total of 2.8 million tonnes per annum of regasification capacity at German LNG. And while it’s only been a few months since FID at Port Arthur, we are further progressing our offtake placement opportunities in both Europe and Asia.

Now shifting to the quarter. While commodity prices were volatile, ConocoPhillips continued to deliver strong underlying performance. Once again, we had record global and Lower 48 production and we raised our full year production guidance for the second straight quarter. This was achieved through continued capital efficiency improvements as the midpoint of our full year capital guidance remains unchanged. We continue to deliver on our returns-focused value proposition. We have distributed $5.8 billion through dividends and buybacks year-to-date, putting us well on track to achieve our planned $11 billion return of capital for 2023. And we did this while funding the shorter and longer-term organic growth opportunities that we see across the entire portfolio.

So in conclusion, our deep and our durable and diversified asset base continues to get better and better. And we are well positioned to generate competitive returns and cash flow for decades to come. Now let me turn the call over to Bill to cover our second quarter performance in more detail.

William Bullock: Thanks, Ryan. Diving into second quarter performance, we generated $1.84 per share in adjusted earnings. We recognize that this result was below consensus, which we primarily attribute to transitory price capture headwinds in Lower 48 natural gas and Alaska crude. Now based on strip pricing for the second half, we expect price capture to normalize and be consistent with our previous full year guidance of $22 billion in CFO at $80 WTI and our published full year sensitivities. Moving to production. We set another record in the second quarter, producing 1,805,000 barrels of oil equivalent per day, representing 6% underlying year-over-year growth with solid execution across the entire portfolio. Planned turnarounds were successfully completed in Norway and Qatar.

And Lower 48 production was also a record, averaging 1,063,000 barrels of oil equivalent per day, including 709,000 from the Permian, 235,000 from the Eagle Ford and 104,000 from the Bakken. Lower 48 underlying production grew 8% year-on-year, with new wells online and strong well performance relative to our expectations across our asset base. Moving to cash flows. Second quarter CFO was $4.7 billion at an average WTI price of $74 per barrel. This includes APLNG distributions of $405 million. And in the second quarter, we also received $200 million in proceeds, primarily related to a prior year disposition. Second quarter capital expenditures were $2.9 billion, which included $624 million for long-cycle projects. Now through the first half, we have now funded $700 million for Port Arthur LNG of the planned $1.1 billion for the year, which we expect to lead to a step down in overall capital in the second half.

We also expect to see a step down in Lower 48 capital in the second half of the year. And as a result, we have narrowed our full year capital guidance range to $10.8 billion to $11.2 billion, with no change to the midpoint. Regarding returns of capital, we returned $2.7 billion to shareholders in the second quarter. This was via $1.3 billion in share buybacks and $1.4 billion in ordinary dividends and VROC payments. And we announced a fourth quarter VROC of $0.60 per share, which has us on track to deliver our $11 billion target for total return of capital in 2023. Turning to guidance. We forecast third quarter production to be in the range of $1.78 billion to 1.82 million barrels of oil equivalent per day, which includes 20,000 barrels a day of planned seasonal turnaround, primarily in Alaska and Europe.

We have also increased the midpoint of our full year production guidance. Our new full year range is 1.8 million to 1.1 million barrels of oil equivalent per day up 15,000 barrels per day from the prior midpoint of $1.78 billion to $1.8 million previously. For APLNG, we expect distributions of $400 million in the third quarter and $1.9 billion for the full year. Consistent with our higher production guidance for the year, we have raised our full year adjusted operating cost and our DD&A guidance by $100 million each to $8.3 billion and $8.2 billion, respectively. We have also lowered our corporate cost guidance by $100 million to $800 million due to higher interest income. And finally, as a reminder, all guidance excludes any impact from announced but not closed acquisitions such as Surmont and APLNG.

So to wrap up, we had another solid operational quarter. We’re confident in our outlook, leading to our increase in full year production guidance. We continue to progress our strategic initiatives across the portfolio, and we expect to return $11 billion to shareholders this year. Now that concludes our prepared remarks. I’ll turn it back over to the operator to start the Q&A.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Neil Mehta with Goldman Sachs.

Neil Mehta: Want to build on Slide 7 here on price realizations. As you mentioned, a little weaker in Lower 48 gas and Alaska. You had mentioned some of the stuff is transitory, and it’s moving in your direction in Q3. Can you provide a little more color there?

William Bullock: Yes, absolutely, Neil. So obviously, second quarter was a bit challenging on our capture rates. And as you noted, it’s particularly Lower 48 gas and Alaska crude. And I’ll give you some details on each, but the punchline here is that we’re already seeing Lower 48 gas differentials and elastic crude pricing returning to more normal levels in the third quarter. And as I mentioned, based on strip and differentials for the rest of the year, we remain comfortable with our framework reference of $22 billion in CFO at $80 WTI and $3 Henry Hub that we provided at the beginning of the year, along with our published full year price sensitivities. But let me start with Lower 48 gas. Our slides show that our second quarter capture rate was 68% of Henry Hub.

That’s down from 85% in the first quarter, which compares to our expectation of roughly 80% capture for the full year that we laid out a couple of quarters ago. And as you probably recall, I said that we expected Lower 48 capture to be volatile quarter-to-quarter this year, and we are certainly seeing that. Now the 68% rate in the second quarter was mostly driven by what we’re seeing in still wide Permian differentials relative to Henry Hub for the first half of the year as well as the absence of some strength in SoCal and Bakken that we saw in the first quarter, which really explains the quarter-to-quarter change. Now looking at third quarter, Permian differentials have narrowed back to more normal ranges. That’s with some pipeline takeaway improvements and additional debottleling ahead, and SoCal’s looking a bit better as well.

But Clearly, the story here is Permian disk. That’s what matters the most. Now on Alaska crude, this one’s a bit more unique to ConocoPhillips. Capture rates slipped to 97% in the second quarter from 101% in the first quarter, and that’s largely timing related. With some of our second quarter cargoes, they were priced when A&S was trading at a discount to Brent. But as you can see on the screen right now, A&S is back to premium to Brent more towards historic levels. So I’d say when we look at this and pull it out all together, we remain encouraged by our recent capture rates, and we’re confident in our full year estimates and activities, and we’re pretty constructive on the second half of the year, Neil.

Neil Mehta: Really appreciate that. The follow-up is a small bump here in production guide. It’s been 2 quarters in a row where Lower 48 crude oil has come in strong above 560,000 barrels. So just curious on the driver of the bump was it in the Lower 48? Or is it throughout the portfolio and just your thoughts on production momentum over the course of the year?

Dominic Macklon: Yes. Thanks, Neil. It’s Dominic here. Yes. We’re pretty pleased with production performance. I think it’s really across the board. We’re seeing everything perform well. But certainly, it is a Lower 48 that is standing out a little bit more, and even — and Nick will talk to that in a minute. So you’re right, yes, that’s the second quarter that we’ve increased in a row. Our production guidance were up 25,000 BOEs equivalent since the beginning of the year, and what’s interesting about 80% of that increase is actually oil. And so our full year underlying growth is expected to be 3% to 4% this year, and that would be 7% to 8% in the Lower 48. Now there is a lot of focus on product mix right now in the sector. So let me just say that we expect our product mix to be consistent over the year also.