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.