ConocoPhillips

Welcome to the fourth quarter 2018 ConocoPhillips Earnings Conference Call. My name is Paulette 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 a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Ellen DeSantis, Vice President, Investor Relations and Communications. You may begin.

Thanks, Paulette, and thanks to our listeners for joining us today. Our speakers will be Ryan Lance, our Chairman and CEO, Don Wollett, our Executive Vice President and CFO, and Matt Fox, our Executive Vice President and Chief Operating Officer. Ryan will deliver some brief remarks and then today we're going to go straight to Q&A to make time for your questions. Our cautionary statement is shown on page two of today's presentation materials. We will make some forward-looking statements during today's call that refer to future estimates and plans. Actual results could differ due to the factors described on this page and in our periodic SEC filings. And then finally, we'll refer to some non-GAAP financial measures today. and that's to facilitate comparisons across periods and with our peers. We've provided reconciliations of non-GAAP measures to the nearest corresponding GAAP measure in our press release this morning and also on our website. And now I'll turn the call over to Ryan.

Thanks, Ellen, and welcome, everyone, to today's call. In a moment, I'll recap our 2018 highlights, but before I do... I'll first want to put those results and, in fact, our results since 2017 in context. We're on a path to manage this company for the business we're in, one that's mature, capital-intensive, and cyclical. We've embraced this view of the business with a value proposition that we believe should be the new order for E&P companies. Now, what do we mean by the new order? We mean a value proposition that competes on returns and doesn't chase cycles up or down. The market has clearly spoken that it expects behaviors in this business to change, and we've led the E&P industry in an approach that can, and we believe will, attract investors back to the sector. Our value proposition, now more than two years old, is fundamentally structured to offer this. Over this period, we've driven our sustaining price lower and made our balance sheet stronger. We've simultaneously grown our resource base while lowering its overall cost of supply. We've achieved competitive per share growth, not chasing absolute growth. And we've returned a distinctive payout of cash flows to shareholders, kept our costs in check, and generated among the most competitive financial returns in the business. We're encouraged that our value proposition is clearly discriminating with the market. For us, the value proposition is a mindset and a commitment that began in late 2016 and worked in 2017, and work began in 2018. So with that, let me summarize our 2018 results on slide four. Starting with the strategy column on the left, we held firm on our priorities. During this year, rent prices touched $80, but also $50 a barrel. But our priorities didn't change. And this consistent approach allowed us to generate a return on capital employed of 12.6%. That's nearly a 20% improvement over our ROCE when Brent was 109 for Merrill just a few years ago. We increased our dividends. We accelerated our debt reduction to achieve our $15 billion target 18 months ahead of plan. And we've reached for just $3 billion in shares. We've executed just over $6 billion of buyback since our program began in late 2016, with about $9 billion remaining on our existing authorization. Including our dividends and buybacks, we returned about 35% of our CFO to our owners. All this was funded organically from free cash flow. We had $5.3 billion of adjusted earnings, $12.3 billion of cash from operations, and $5.5 billion of free cash flow. We ended the year with $6.4 billion in cash and short-term investments on the balance sheet. And we view cash as an effective means to ensure that we can... can execute our consistent programs, both on buybacks and capbacks, through the cycles. Our financial position is very strong, and we exited 2018 A-rated by all three major credit rating agencies. And we achieved a settlement agreement in our ICC proceedings with Petravesa to fully recover an arbitration award of about $2 billion, of which we recognized over $400 million in 2018. Operationally, I'm proud of the way our organization performed. We safely executed our capital program and achieved underlying production growth of 18% on a per capita adjusted share basis. We got help from strong performance on our lower 48 business and from project startups across our regions. Finally, we made great progress on our continuing efforts to add to our low cost of supply resource base and optimize our asset portfolio. We completed high-value asset acquisitions and achieved significant exploration success in Alaska. We progressed our Montney appraisal program in Canada and began exploring on our new Louisiana Austin Chalk Play. Our portfolio high grading continued in 2018. We generated about $1.1 billion of disposition proceeds, and we grew preliminary year-end reserves to $5.3 billion barrels of all equivalents. The total reserve replacement rate was 147%, and our organic reserve replacement rate was 109%. Our year-end resource base now contains roughly 16 billion barrels of all equivalents with an average cost of supply of less than $30 a barrel. This is the fuel for our continued success in our approach to the business. So in summary, 2018 was another exceptional year for ConocoPhillips. But again, 2018 is behind us. What matters now is what's next. And that's a great segue into 2019. So in December, we laid out an operating plan that we believe can and will sustain our success. It's a plan that's resilient to lower prices, while offering investors virtually uncapped upside to higher prices. This is an intentional and sometimes overlooked aspect of how we've positioned ConocoPhillips. We've planned both ends of the field, offense and defense. Our 2019 operating plan is summarized on the next slide. You'll see in the upper right that we're sticking with the core elements of our value proposition. Discipline, a focus on free cash flow generation, investing to grow cash flows, and distinctive returns to shareholders. We've already announced a 2019 capital budget of $6.1 billion, planned production growth of 5% to 10% on a per debt adjusted share basis, and planned buybacks of $3 billion for a third year in a row. This is consistent with our dollar cost average approach to repurchases. Our 2019 capital plans include activity and some potentially impactful operating milestones, several of which are shown on this page. I'll make a quick tour of these items, starting with Alaska. In 2019, we'll advance construction at GMT-2 and conduct another season of exploration and appraisal drilling. In December, even before our ice road campaign began, we drilled two exploration wells from existing paths. Our bonding 14-well path program is in full swing in Canada, and in the lower 48-bit tree, we expect to grow production by about 19%. We're focusing our activities in the early part of the year on testing potential resource-enhancing programs, such as multi-well pilots of our Vintage 5 completion techniques, EOR pilots, and refracts. Given these activities, we expect volumes in the Big Three to be relatively flat in the first half and ramped in the second half of the year. In the Louisiana Austin Chalk, we've already started our four-well exploration program and expect to have results later this year. And we expect to advance discussions and decisions on a few major projects in Asia, including Bohai Base 4 in China and the Northfield expansion in Qatar and Barossa in Australia. The items on this page represent opportunities to add low cost to supply resource, strengthen our portfolio, and create optionality for the future. Importantly, as we see results on these opportunities, we'll retain flexibility on how and when we invest in most of these projects. You should expect us to prioritize and phase these investments in a way that's aligned with our value proposition. As the year plays out, we'll update you on our results across each of these fronts. and we anticipate providing a comprehensive multi-year update to the market in November. We're excited to have another year underway. We believe our 2019 operating plan reflects what you've come to expect from us. It's consistent with our priorities, focused on growing long-term value, and underpinned by our commitment to strong execution. This is our formula for delivering superior returns to shareholders through the cycles and for many years. It's a formula we believe works, And we're sticking to it. So with that, let me turn the call over to your question.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone. And our first question comes from Paul Chang from Barclays. Please go ahead.

Hey, guys. Good morning. Good morning, Paul. Ryan, just curious that it seems like that you still have running room in Eagle Fund and probably a little bit lesser in Barclays, I presume. Based on what you see today on the business, I don't know whether you can actually say that, oh, this is what I planned. Is the plateau one way going to be on those two basins? And once you get there, and how fast you can get there, and once you get there, what kind of rig program you need to sustain and how long that you can sustain at that peak production. And the second question is a really short one, whether you receive any payment from APLNG.

Yeah, let me, I think Matt could probably add a little bit of color. Paul and Don can cover the APLNG question. But, you know, I would just say at a high level, you know, we continue to find new technologies and new approaches. We talked a little bit about testing our Vintage 5 completions in Eagleford. What we see is continuing lowering cost of supply and opportunities to continue to grow that opportunity. And, in fact, Bakken had an outstanding year in 2018. We had reached some plateau, and it suggested that to the marketplace, and we outperformed in 2018, and we see some similar opportunities there as we go forward. Matt can maybe provide a little bit extra color for you there.

Yeah, Paul, we're running six rigs in Eagleford just now. We actually dropped a rig at the beginning of the year in Eagleford to optimize the ratio of our rigs to completion crews. We're running three in the Balkan and two in the Permian. At those sort of rig levels, we would be at continuing to grow in the Eagleford. If we ran those rigs continuously, we'd ultimately reach a plateau and we'd be able to hold that plateau for well over a decade, maybe two decades. In the Balkan, as Ryan said, we thought we were a plateau, but we've had some Improved results from our drilling and completions there and we have more partner operated activity and so we're now at a higher rate than we anticipated and that can probably be sustained close to that rate for a decade or more. And then of course in the Permian we're very early in the life cycle there so that's got several years of growth ahead of it before it reaches a plateau.

Matt, do you have a number in mind in Eagle for that where the plateau may be for you guys? And also that if you guys don't mind, give me the production number for the big three in the quarter.

Yeah. No, we don't have a number that we're ready to share on the plateau rate because it is a function of the number of rigs that we run over the long term. So it will vary. What we're trying to do, of course, in all of these plays is optimise the rig count so that we optimise the infrastructure costs. So it's all about maximising NPV. As we learn more about our new completion designs, for example, in Eagleford, that might change how we view that. So it's premature to go there. In terms of the rates for the big three and the fourth quarter, Yeah, I can give you those. We don't have them off the top of my head here just now, but we can get those to you.

Okay, thank you.

I'll come back to you in a moment. Paul, you want to answer that?

Yeah, Paul, with respect to APL&G payments, I'm sure you're referring to distribution, so In 2018, we had a total of $480 million of distributions from APLNG, and you'll recall we had 200 in the first half. I believe that I had probably guided that the second half would look similar to the first half, and we ended up with a larger dividend distribution payment in the fourth quarter of $280 million, and that's really a reflection of A number of things, but probably mostly the high realizations. You know, the LNG pricing is on a three-month lag, so fourth quarter LNG pricing or realizations really reflect third quarter oil prices. So you saw really good revenues of APLNG, and, of course, they've made good progress on reducing costs both on the operating side and on refinancing opportunities on the project financing debt. You know, while I'm here, I know that you'll be curious about expectations for 2019 looking forward. And I would say that, you know, you've got to pick a price point because it's going to be very much influenced by actual realizations during the year, of course. But at around, say, $65 a Brent, then I'd probably expect distributions to be in the $500 to $500 million, $550 million range.

And, Paul, I have the fourth quarter average rates for the big three. It was 200 in the Eagleford, 101 in the Balkan, and 34 in the Permian.

And our next question comes from Doug Terrison from Evercore ISI. Please go ahead.

Hi, everybody, and congratulations on your results. Thanks, Doug. Thanks, Doug. I have a financial and a strategic question today. First, return on capital appears to be rising even after normalizing for changes in oil and gas prices, especially in the U.S. business. And on this point, I wanted to see if you guys could provide some color on the drivers of this dynamic, meaning is it gains in capital efficiency, is it technology, is it cost, or is it something else driving these improvements? So just some color on this improvement in this area. Sure.

Oh, well, Doug, this is Don. I would say it's all of the above. If you look at the transformation that we've undergone the last two to three years, certainly more capital efficient, more disciplined, a greater focus on returns. That's the priority now, of course. And so, you know, you can go back to a lot of the portfolio changes that we've done to lower our cost of supply and our sustaining price. I think all of these things, you know, reducing the debt and our operating costs, I think we're from like $10 billion to $6 billion, taking capital down from $17 billion, I believe, in 2014 down to, you know, the current level around six. It's just efficiency on all fronts.

Okay, and then also strategically, Ryan, you reiterated your pledge to your new order value proposition, which has obviously served shareholders in that. COP has been the best stock in S&P Energy since you implemented the plan two years ago. Simultaneously, companies with high success in this industry often mission drift, and that often results in strategic activity. So while most E&P acquisitions were done at about half of acquirer capital cost over the past couple of years and were therefore deferred, viewed pretty negatively in the market, valuations have fallen further, and I wanted to see how you guys are thinking about strategic activity these days, and if there are areas of interest, why and what are they?

Yeah, Doug, we do get quite a lot of questions. I appreciate you getting this chance to sort of articulate our views a little bit about the M&A side. you know, really for us it's about strategic portfolio choices. And we've been pretty deliberate in that space over the last couple of years. And since the spin of the company, you know, it's mostly been on the disposition side with $30 billion. And I would also remind everybody half of that went to the shareholders and half went to reduce the debt on the balance sheet. But we have been involved in some more strategic and smaller scale acquisitions like adding acreage opportunities in the Montney and the Austin Chalk, where we think we have a clear competitive advantage, like the asset deals we did last year up in Alaska. So when we think about that, we consider asset quality, diversity, resource depth, and operating costs. So we think about, do we add and add in those four categories around the portfolio? But I'll point out the portfolio is in pretty good shape, 16 billion barrels of low-cost supply resource base that's Brent-weighted, It's diverse, it's deep, it's material, so we're not feeling any pressure to do anything. It just has to be value-adding and substitutive in the portfolio. That's kind of where we stand as a company. Now, broadly within the sector, you know, consolidation should result in more disciplined capital allocations, slower growth, and ultimately, you know, strengthening oil prices and help investors back into our sectors. When you consider, I think, that on a sector basis, you have to consider things like the value that you pointed out, synergies, the timing, the market reaction to it. And what we find is tough on a valuation perspective. You know, if you're going to implement a disciplined capital allocation program like we have in place, you know, you need to slow down the growth rate for any acquisition target that you look at. But that growth rate is built into their valuation, and then you usually have to pay it. a premium on top of it. That makes it extremely difficult. Synergies, tough to realize with some of the pure plays and the private equity companies that are out there. They just, unless you have adjacent acreage and infrastructure, there's just typically not many synergies. Timing is tough. There's a low point in the cycle. Boardrooms are reluctant to sell, and obviously tough to issue shares to go in and go do something. And then you touched on it as well. What's the market reaction? It's not been good. So people have been punished because they seem to be overpaying. So we pay attention to it. We look at it. We watch it. We see all the opportunities. Got to be competitive in the portfolio. We understand what we like and what might fit, but it takes a real special deal to where we feel like it's a good use of a shareholder capital.

Thanks for the comprehensive answer, Ryan.

Our next question comes from Phil Gresh from J.P. Morgan. Please go ahead.

Hi. Good morning. First question, I guess, would be for Don. You know, you're at your $15 billion gross debt target, but you have over $6 billion of cash, so your net debt is now below $9 billion. Wondering how you're thinking about that today in terms of you know, willingness to take the gross debt down more or obviously it provides you a lot of flexibility, you know, in a downside price case. But, you know, in an upside price case, you'd be building even more cash. So how are you thinking about what you want to do with that?

Yeah, I think, Phil, we're still at the same place we were as far as capital structure of the company and as far as gross debt. So we're really not contemplating anything to further reduce the balance sheet debt. I think this is more of a cash utilization type question and the reasons why we would maintain, you know, levels of cash, high levels of cash in a positive price environment. And, you know, that's going to speak to a number of things, but obviously being able to withstand cash volatile price cycles and being able to run steady programs and keep our strategy on pace on all fronts as far as buybacks as far as the base capital program and so forth gives us the opportunity to take advantage of strategic opportunities investments that come around that are kind of one time deals and maybe the potential cutter expansion is part of that so it can help kind of refund some of those potential opportunities going forward.

Yeah, I'd say still too, you know, it's not burning a hole in our pocket. And remind everybody less than a month ago, people were panicking with $40 grid prices. So, you know, we're not doing that. We're staying with our program, as Don said, with it allows the consistency through the cycles on both the buybacks and the capital invested and follow our priorities. Yeah, that makes a lot of sense.

And I guess the follow-up is to your last comment there, Don. I feel like one of the most frequently asked questions I've been getting about ConocoPhillips is the level of capital spending that might be moving forward. You could include Cutter in there. You could include Barossa or Willow. So how do you guys think about levels of capital spending that might be needed moving forward? I realize you're not going to have an analyst there for a little while, but any color you might be able to give, I think, would be helpful.

Yeah, Phil, let me take that one on. I know we've gotten a fair number of questions about them. I appreciate you asking about it. Yeah, we're probably not going to provide the clarity that you may want in terms of absolute numbers going forward. We'll update the market as some of this resolves. But I think we've been pretty transparent about the opportunities. You mentioned the new field – Northfield expansion in Qatar. So we tried to show those beyond, you know, our base programs. I just reviewed in my prepared remarks some of the higher impact activities we have underway in 2019. Now, we expect to resolve, you know, a lot of the uncertainties and most, if not all of those projects as we go through the course of the year. And then we'll take stock of what and when and how we might invest in those opportunities. But I tell you, I think from our past activity and reputation, we've been intentional about retaining flexibility in many of the projects. And we really have a discussion to phase the capital investments over time. I think we've also had a pretty successful track record of dispensing assets that don't compete in the portfolio to high-grade it. And that, you know, provides another means of flexibility as well. So our goal really is... is to create the highest returns to our shareholders while preserving our value proposition that we're committed to, including a focus on pre-cash flow. So that means we'll be setting and be thoughtful about setting our future plans according to those kinds of premises. And then, again, we'll lay that out in a lot more detail for you later in November, but we're not going to lose our way about ourselves.

Okay. Thanks, Ryan.

Our next question comes from Doug Leggett from Bank of America. Merrill Lynch, please go ahead.

Thanks. Good morning, everybody. Ryan, you guys have set the bar pretty high for the industry in terms of capital discipline. So I think questions around the longer-term CapEx are obviously relevant, but I think in the confines of how you've allocated capital, I am curious, however, if you see a kind of upside limit there on the level of reinvestment as a percentage of cash flow, to kind of put it simplistically. But, you know, I realize you might talk about this a bit more in November, but when you look at the list of opportunities, if you did get Qatar or Barossa or Bohai sanctioned this year, would your aim be to hold the capex within a range, or do you see some upside risk to the longer-term capex?

Well, again, as I tried to say, we'll see where the commodity price for the market is at. I think first and foremost, you know, we're committed to giving a high percentage of our cash flow back to the shareholders. So we start by, as you've all sort of noticed, that, you know, 30% is kind of our floor, and we're committed to giving 30% of the cash back to the shareholders. So we'll run the company, and we'll allocate capital, to the programs with the remaining amount of cash that we have in the business. But we're going to look at it annually and make sure that, you know, we still continue to deliver free cash flow from the business. And as we think about the opportunities that you mentioned, the Northfield expansion, Morosa, and some of the other things, we'll manage that. We've got control over pace. We've got control over timing. We've got control over what our interest level is. And we've got other ways to control the capital program, and we'll do that. And we'll take that into account as we do. We've got a rich set of opportunities coming our way. We've got capacity and we've got cash on the balance sheet. But we also know any given year we're committed to our value proposition and we're going to stay the course.

Perhaps just a quick follow-up to that, Ryan. There's been some speculation in the press that you were pursuing a North Sea sale and that sale may not be going forward now. I wonder if you could offer any color on on just that specific issue, but also the general portfolio management in terms of non-core assets as they stand today. Because I'm guessing that would also factor into, you know, the flywheel for your ability to return cash. And I'll leave it there. Thanks.

Yeah, you bet, Doug. I think Matt's been kind of managing the UK process for us. I'll let him kind of provide a little bit of color on that for you.

Yeah, Doug, we had our process to market the UK assets continues but we're no longer under an exclusive arrangement to do that so we've broadened the process to include several parties and there really is very strong interest in the properties. I don't want to comment any further on that unless there's a material change to report down the line but we're actively marketing those assets. Now in terms of other assets that we might market we've expressed a and consistently executed on the fact that we will look at the lower end of the portfolio and dispose of assets as the timing is right. You know, we did $1.1 billion this year. So you should expect to see us continue to work on the assets. Now I would say that the major portfolio restructuring is essentially behind us. But that's not to say that there aren't other changes that we would make to the portfolio. And just to be clear, I think you maybe said the North Sea assets, the assets that were marketing of the UK assets. So I think that's the best way to describe what the state of play is on the disposition front.

And our next question comes from John Herland from Societe Generale. Please go ahead.

Yeah, hi. I've got a question on reserve replacement in the U.S. You had asset sales this year. You've changed the way you allocate capital. Reserves declined. What should we think about in terms of your reserve replacement in the U.S. on kind of a going-forward basis, just low nominal growth?

Yeah, so if we start maybe by explaining what happened to our overall reserve base, there's a slide in the appendix. that we posted, I think it's slide nine, that describes the overall sources of reserve replacements. So we started the year with 5.38 billion and ended with 5.263 billion. That's a lot of decimal places. We produced 483 million barrels. We added 474 through extensions and discoveries and another 52 through revisions and improved recovery. So that's where we get to the 109% organic reserve replacement ratio that Ryan mentioned. And then if you look at the acquisitions and dispositions, the net effect of that was 182 million barrels. We added close to 300 in Alaska through the acquisitions, and that was offset by 38 million reduction in the clear disposition and 68 million from lower 48. So we put all of that together, the net effect is we get 147 million 147% total reserve for placement.

No, I thought that was referring to the lower 48, Matt.

Yeah, the lower 48, I think the best way to think about that is to think about it in the context of the resource space. Because the lower 48, obviously, the booking schedule there is based on FTC rules, is limited to what you're anticipating in your five-year drilling schedule. So when we look at the Eagleford, for example, We've booked about 500 million barrels of the 2.5 billion barrels that's in our resource base. And if you look at the other plates, we're about 50% booked in the Bakken, 20% in Eagleford, less than 15% booked in the Permian, and less than 1% booked in the Montney. So there's a long period ahead of us of continuing to add SEC reserves as we work through this resource base. So what we tend to focus on, frankly, rather than the reserves is that resource base. And if you look at that for this year, we went from 15 billion barrels last year with a cost of supply of less than 50 to 16 billion barrels this year with a cost of supply of less than 40. So because we produce about half a billion barrels, that's a resource replacement ratio of 300%. And that's what we really focus on. And I think both from a reserves and a resource perspective, we're in really good shape. And specifically to your question, we're in really good shape in the lower 48 because of the way those reserves will be booked over time.

Great. Thanks, Matt. My next one is regarding some of the larger projects that could be approved for FID. And I guess this is more towards Ryan. Are you at all worried about E&C capacity in terms of delivery? I mean, obviously... The industry doesn't have the frenzied activity that it did in past cycles, but are you at all concerned about the industry being able to deliver it as you commit to these kinds of projects?

Not necessarily, John. I think when you look at the location, you look at Barossa, we're out for competitive bid on FPSOs, and the market is pretty light right now in Asia Pacific, so the opportunity is out there. Not too worried about that. The subsea equipment associated with that is highly competitive and not real stressed out in the system today. You know, Qatar going through a large expansion in Qatar at Ras Al Fahan, you know, that will probably have its challenges. But I think they've managed it well in the past and would expect them to manage it well going forward. So while it's always a risk, I think we've got the team in place. We've got the capability. a large company like we are and the functional excellence around managing big projects. We haven't lost that as a company, so we'll bring all that excellence to bear on all these major projects going forward.

And our next question comes from Roger Reed from Wells Fargo. Please go ahead.

Yeah, thank you. Good morning. Good morning. I guess maybe come back around. One of the – and, Don, you talked about it a little bit, the decline in OPEX that the company's been able to achieve, kind of broader productivity and efficiencies. Wrapping what you can do going forward on that front, and maybe if you would, or if you can, disclose the underlying decline rate, just kind of want to understand maybe some of the, you know, more – I guess I'd describe it as increasing challenges on being able to deliver continued improvement just from internal things as opposed to maybe some of these future projects that everybody's been more focused on on the call.

Maybe I'll take that one, Roger. This is Matt. If you look at our OPEX, we're still completely committed to the discipline in their OPEX. If you look at what's happening from last year to this year, for example, Last year our operating cost was $5.8 billion. But if you put that on a pro forma basis, reflecting the acquisitions and dispositions, most notably the Caparic and Clare transactions, our OPEX would have been at $6 billion on a pro forma basis. This year we're moving to $6.1 billion. But when you look at the underlying production growth, our OPEX for barrels has gone from $12.6 billion It is 12.6, rather, and that's 20 cents less than last year. So the absolute number is a bit higher than 2018, but the unit cost is lower. And that's pretty impressive when you consider that the acquisition in Alaska are relatively high-cost barrels. Of course, they're very high-value barrels because it's all oil and it sells at rent. And so the fact that we added those higher-cost barrels and still see a reduction in operating cost per barrel, I mean, it's a sign that we have a We're certainly not, haven't lost the discipline on the cost front. And we can see that that focus is going to remain in the company over the next several years. And we're going to continue to make sure that we're driving our unit costs down over time.

Yeah, thanks for that. That's actually very helpful. And anything on the underlying decline rate, I can't remember if you'll talk about that or not. I just wanted to ask.

The underlying decline rate on aggregate is about 10%.

Unmitigated?

Yeah, unmitigated. That takes all the wells that were online at the end of last year and what would they be producing at the end of the next year. So of course, because we have the production in LNG and oil sands, which is essentially zero decline, and a very large conventional base that has a modest decline, When we put together that with our unconventionals, which of course decline more quickly, the aggregate effect is about 10% of decline.

Okay, great. Thank you.

Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead.

Good morning, and thanks again for letting us ask the question here. The first one for you is just on Venezuela. obviously a very fluid situation out there, and just your thoughts on the ability to collect the capital that's owed to the company and just some thoughts on the ground of how that plays out from here.

Yeah, Neil, this is Don. I'll address that question. With respect to... The recent events in Venezuela, you know, a couple of things, I guess. One on the Venezuela side and one with respect to the U.S. sanctions, the new U.S. sanctions. I mean, as far as pay-to-base, you know, today they have fully complied with the settlement agreement that we entered into late last summer, you know, as far as making cash payments and providing the inventories that... where we obtained Title II, we're in very regular contact with the officials at PDVSA, and they continue to assure us that their intention is to continue to comply with the obligations under the settlement agreement. And I think that their actions over the past seven or eight months have indicated that ConocoPhillips is clearly high on their priority list. creditors. So we expect that they will continue to comply. Of course, we don't know, you know, nobody knows how things are going to change in Venezuela and what that may entail. You know, their next, they're now on a quarterly payment schedule for the recovery of the ICC settlement and the next A quarterly installment is due next month. And we expect to receive it, and it appears that they're making plans to satisfy that obligation. The other part of it is on the U.S. side related to U.S. government's recent actions. And, you know, we're operating under a license from OFAC, the Office of Foreign Assets Control, that we obtained before we entered into the settlement agreement. We have been in contact with OFAC officials as recently as earlier this week, and they have assured us that our license is valid, that we are strictly complying with that license, and they've given us very good guidance on how to go forward. They don't anticipate any issues related to our settlement agreement, and so we don't see any any complications on that front.

Thanks, Don. And the follow-up question is just on Qatar LNG. The timing of that sounds like it's going to be mid-2019. We expect to get a decision about the project partners. How do you see ConocoPhillips positioned for a potential project win there? Any thoughts on the latest in terms of returns? And I guess one of the market concerns around Qatar LNG has been has been around financing the capital spend. It strikes us that you guys have a substantial amount of free cash flow coming up over the next couple of years that shall lay market concerns even after the dividend and the buyback. But I can comment about how you think about financing that capital outlay if the project materializes would be great.

I'll take that one. The timeline is, just as you laid out, we expect decisions to be made by the middle of this year. The underlying process to achieve that is sort of underway. We think we're very well positioned competitively to participate in the project. And in terms of financing it, yeah, we have cash available to finance it. You know, very high free cash flow, recognizing that even this year we generate free cash flow at any price above $40 a barrel, WPI. So we're not concerned about our ability to finance it, so we're fully engaged in the process with Qatar Petroleum, and we'll see how it plays out as we go through the year.

And our next question comes from Blake Fernandez from Simmons Energy. Please go ahead.

Thanks. Good morning, folks. Matt, on that last point, could you just remind me when, if you did go forward with Qatar, when we could expect first production, roughly?

I think the timeline would be first production between 2024 and 2025 is when the expectations are. Engineering design is already underway. It's not been slowed down for the waiting for the final participants to be agreed, so it would be the sometime late 24 or early 25 is when we'd expect that to come to market.

That's great. Thank you. The second question, I suspect you guys aren't as exposed to this, but the feedback we're getting from our EMP team that's covering some of the smaller companies in the space and maybe some of the privates, we're looking at CapEx budgets being ratcheted back and You know, rig count potentially coming down and all of a sudden now we're hearing commentary regarding potential cost deflation in the lower 48. I know it's early days into 19, but I just didn't know if you're beginning to witness anything or if you think there's potentially some downward pressure on spending based on kind of peers cutting activity levels.

Yeah, I think last year we saw about $100 million of escalation in the lower 48. But we are seeing some deflationary pressures. For example, the frack fleet activity in the low 40 is down about 10% just in the last couple of months. So our view is that the frack fleet is at about 65% utilization just now. And if you put that together with the big reductions in sand prices because of new mine sites opening, we're actually seeing quite a healthy reduction in our completion costs from 18 to 19%. And we've built that into our budget. Those are contracts that we renewed towards the end of the year. So, yeah, we are seeing some cost reductions on completions. On the high-spec rig, on the rig side of it, we're at a higher utilization. We're at about 92% on rigs. And we have options on our rigs, you know, through the end of 2019. So I think that, yeah, there could be some... deflation going to show up in 2019, and we already saw some of that showing up towards the end of 2018.

That's great. I appreciate the call, Matt. Thank you.

Our next question comes from Scott Hanold from RBC Capital Markets. Please go ahead.

Thanks. I had a couple quick ones. First, you all have somewhere around $7 billion of cash right now, and obviously positioned well to generate more free cash flow. But considering the opportunities that you have in front of you that was discussed quite a bit today, and obviously your buyback program that's in force right now as well, is there an optimal amount of cash you guys would like to have as a cushion? And so where I'm going with this is if a number of these large projects do come to fruition you know, is there a chance you guys could look at saying, you know, adding debt to the portfolio to help fund those projects, or is that where you come back and say that's where you look at monetization opportunities and other things?

Well, Scott, yeah, I think we've been pretty clear that we're not looking to either raise or lower debt from its current level, and I don't know that there's an optimal No, there's not an optimal point of cash balance that we're aiming for on the balance sheet. There's probably a pretty wide range given the volatile business that we're in and the host of opportunities that we hope to have that are investable in the future. So, no, there's really not an optimal level of cash.

Yeah, I think I would add then, Scott, that, you know, again, follow our priorities. We feel comfortable with the capital that we're investing right now. We'll grow the company, grow margins, grow cash flows for the company at the kind of level that we're funding today, given where the portfolio stands. We're going to fully fund our $3 billion of share repurchases. And, you know, above that, to the extent we have additional cash there, we're okay putting it on the balance sheet for now because we see opportunities that might present themselves in a down market and also We ask ourselves, you know, we ask ourselves what the future holds for us, what our commodity price is going to do, and that gives us a level of comfort when we have that cash on the balance sheet to know that we can fund the opportunity sets that we have and we can stand the downturns if we see them.

Okay. I appreciate it. Understood. And as a follow-up, touching base on, you know, sort of the big three unconventionals in the lower 48, in Is there an appetite to look at some point to put those, you know, more on, you know, hey, we've hit the plateau and they're going to be more in maintenance mode? Are we near that point for those, say, the Eagleford and Bakken? Or, you know, are you still kind of building up to that? And then as you look at the Permian Basin, you know, with your position in the Delaware, you know, what do you see as sort of the optimal kind of pace that you guys can develop that at?

So I would say, Scott, in the Bakken, we're essentially at plateau. I mean, clearly things will bounce around, but it's not our ambition to grow Bakken further. We can sustain a level around where we are just now for a long time, but we don't use running two or three rigs and we're comfortable with that in the Bakken. The Eagleford, we're still growing. This year we're running six rigs and we'll continue to see growth from that. And we are, as Brian said, testing some new technology in the completion designs there, what we call Vintage 5. Once we understand how those new completion design works, we might revisit, you know, what the right pace and what the right plateau rate is and so on. But there's a few more years of growth for sure left in Eagleford before we get to plateau. And then the Permian is a long way from plateau. We're running two rigs just now. You remember last year we took a rig out of the Permian as the differentials blew out. I suspect sometime over the next year or two we'll put the third rig back to work again there. And that will continue to grow for several years before it reaches plateau. But you're asking a good fundamental question here for the industry as a whole. How does the industry think about where the optimum plateau is? And the optimum plateau is certainly not just a year or two. You know you're overbuilding infrastructure if you go there and the optimum plateau isn't 30 years because your time value of money is hurting you. We think about this very carefully as we consider the pace of rig activity and the pace of infrastructure build and the pace of technology change. So I think we have a good handle on how we should be managing these assets to optimise the value from a plateau perspective and rig count perspective.

And our next question comes from Jeffrey Lamboujon from Tudor Pickering Holt. Please go ahead.

Good morning. Thanks for taking my questions. My first one's on the upside for the lower 48. I was just hoping you could talk a bit more about the Vintage 5 testing that you've mentioned a few times now that's going on in the Eagleford in terms of both variables that you may be tweaking and then also just timeline for when we may see some data around it all. And then in the Permian specifically, I was hoping you could talk a bit about capital allocation and within NASA for you all just towards getting a sense of operational objectives there in the near term?

Yeah. I mean, the Vintage 5, basically what they're designed to intensify the stimulated rock volume to improve recovery factor. That's the essence behind the Vintage 5 design. We haven't really disclosed that design, but that's the underlying that we're trying to improve is the recovery factor by improving the intensity and regularity of the stimulated rock volume. So we completed a single well pilot last year and we got really encouraging results there. So what we're doing now is we're going to do three multi-well pilots at different locations and at different spacings within Eagleford in 2019 and then two more we have planned for 2020. So we'll get initial results from that late this year and then more results into 2020. We're also advancing a multi-wheel pilot Vintage 5 test in the Delaware too. That'll be later this year, so results there won't come until 2020. So it's a very interesting technology angle to be pursuing here and we're looking forward to seeing those results. In terms of the Permian capital allocation specifically, Really, it's driven, of course, by the rig count and the two this year and sometime over the next year or two growing to three rigs.

Great. And then my second one is on acquisitions, and maybe this is a bit nuanced and maybe even possibly around the year, but I saw in the disclosure with earnings today $0.6 billion for acquisitions for the year last year, which compares to $0.5 for Q3 earnings. I know the bolt-ons in Alaska and Montney have been listed pretty consistently throughout the year. So just wondering if there's any color you can give there on the nature of that incremental $100 million or so that might be implied just for Q4's activity.

Yeah, so the acquisition in the western North Slope is $400. The Montney acquisition was $120. The balance of that is really some additional smaller acquisitions to core up. in places like the Louisiana Austin Chalk. So I can't point to one big one that makes up the difference there. It's several smaller-scale acquisitions around the portfolio that takes us to the 600.

I appreciate it.

Thanks, Paulette. We're getting close to the top of the hour, so we'll take our last question, please.

Thank you. And our last question comes from Michael Hall from Heikkinen Energy Advisors. Please go ahead.

Thanks, appreciate the time. You kind of alluded to one in the last question, but I was curious in the context of kind of the vintage five completions in the Eagleford. I mean, if you look at your prior disclosures, you've had pretty big step changes all along the way as you've moved up, you know, the vintage cycle, I guess. You still see that sort of you know, potential rate of change, I guess, as you move from Vintage 4 to Vintage 5, or is this something that's more on the margin, and then where would you say you're at in terms of vintaging in the other place, like the Williston and Permian?

Yeah, so Vintage 5 really isn't focused on trying to improve IP. It's really focused on trying to improve recovery factor. So the big increases in initial production that we've disclosed from vintage one through vintage four is really not what we're targeting here. It's a sort of more fundamental improvement than the EU are, you know, across any given grain drop volume. So that's what vintage five is about. That's why it's going to take several months after these wells are brought online to really understand how the type curve is evolving. and how interference with other wells is behaving. So it will have a different characteristic of improvement than Vintage 1 through Vintage 4. So far, across the rest of our plays, the Bakken, Permian, and Motney, we're really implementing completion techniques similar to Vintage 4 just now. We're testing Vintage 5 in Eagleford, and I said we'll test it in the Permian also. And we'll then, we're pretty good at transferring these learnings across the organization quickly. So we don't have to pilot test everything everywhere before we can put it to work in other plays.

Great. That's super helpful. And I guess last on my end would just be, just curious if you'd be willing to possibly provide exit rate thoughts for the big three in aggregate or individually for 2019.

Well, I mean, I gave the exit rates earlier for the big three individually for really the fourth quarter average rates, which is really, in my view, the best way to think about the exit rate because of the movement here. What we said we were going to do in 2019 is we're going to produce 350,000 on average through 2019. So that's about 20% growth from 2018. And that's going to come through over the first quarter or so. And I think Ryan mentioned this in his prepared remarks. The first half is going to be relatively flat. We had really quite exceptional outperformance in 2018 as we went through the year. In particular, towards the end of the year, we had, you know how these programs work. You have You're drilling multi-well pads so you get lumpiness within each of the individual plays. Towards the end of 2018 we had multi-well pads coming on essentially simultaneously across the big three. So we saw a big jump there and so now we'll be moving towards more of a momentum and we'll be experimenting with these vintage pad completions which take a little bit longer to pump. So that's why we expect them to be flat through the first half of the year, and then we'll jump up in the second half of the year as we increase the number of completions.

Thanks. I think that's going to wrap it up for the day, everybody. We really appreciate your interest. By all means, call us back if you have any other follow-ups, and thanks again for joining us. Paulette, that will wrap it up for us.

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