ConocoPhillips

Welcome to the first quarter 2019 ConocoPhillips earnings conference call. My name is Christine, 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. Please note that this conference is being recorded. I will now turn the call over to Ellen DeSantis, Senior Vice President, Corporate Relations. You may begin.

Thank you, Christine. Hello, everyone, and welcome to our first quarter earnings call. Joining me today from ConocoPhillips are Ryan Lance, our chairman and CEO, Matt Fox, our EVP and chief operating officer, and John Ouellette, EVP and chief financial officer. Also, we're pleased today to have our three region presidents on the call. They are Bill Bullock. Bill is the president of our Asia Pacific Middle East region. Michael Hatfield is the president of our Alaska, Canada, and Europe region. And Dominic Macklin is the president of our lower 48 region. A couple quick administrative notes before I turn the call over to Ryan. Our cautionary statement is shown on page two of our presentation. Excuse me. We'll make some forward-looking statements during today's call that refer to estimates or plans. Actual results could differ due to the factors described on this slide as well as in our periodic filings with the SEC. We'll also refer to some non-GAAP financial measures today, and that's to help facilitate comparisons across periods and to facilitate comparisons with our peers. Reconciliations of non-GAAP measures to the nearest corresponding GAAP measure can be found in this morning's press release or on our website. And with that, I'm going to turn the call over to Ryan.

Thanks, Ellen, and welcome, everyone, to today's call. My opening comments will be brief. I'll summarize our 1Q results, then address some ConocoPhillips-specific issues we're hearing from the market, which I'll take head-on. First, our one-quarter results shown on slide four. The punchline of this slide is essentially the same as the many quarterly slides before it. were successfully executing our plan. There's a lot of supplemental information in today's disclosures, so I won't cover every dot point on this slide, but I'll tick off some of the highlights across the page. Earnings and cash flow were strong. We generated significant free cash flow and organically funded shareholder distributions of 37% of our CFO in excess of our target. We met or exceeded operational targets. Underlying production grew year-on-year by 5% on an absolute basis and 13% on a per debt adjusted share basis. The business is running safely and efficiently. We received the ICSID ruling ordering Venezuela to pay $8.7 billion for unlawful expropriation of our assets. We recently announced completion or agreements of non-core asset sales, all part of building the best portfolio for winning our through-cycle return strategy. We've summarized our first quarter results at the bottom of these columns. Expand cash flows, maintain discipline, improve returns. That's the mantra. Our cash flow reference point has improved at $65 WTI and current differentials. Our cash flow reference point is now about $13 billion. That's more than $2 billion improvement over the past two years, driven by our Brent-weighted pricing, our ongoing portfolio work, and our focus on margin expansion. While prices have been stronger lately, our guidance items are unchanged. As we said last quarter, we expect capital to be front-end loaded this year. Production is expected to be back-end loaded as the Turner unconventionals ramp, and we come out of our usual 2Q and 3Q turnarounds. As for improving return on capital employed, our ROC ticked up on a rolling four-quarter basis. Underneath all the current noise and energy, we believe the way our industry will bring investors back to our sector is to perform quarter in and quarter out. No excuses. Put up the numbers, improve returns, grow cash flows, and distribute a significant portion to shareholders. That's our job one, period. Now to slide five, our value proposition on a page. Our priorities shown on the left haven't changed since we rolled them out in 2016. and we have no intention of changing them now. On the right side of the slide, I'll address some topical issues, starting with our future capital trajectory. As you know, we're hosting an analyst and investor meeting in November. At a high level, here's what you can expect to see. First of all, we intend to show a decade-long plan that extends the successful new order plan that we rolled out a few years ago. That plan worked. and we're going to show you how it will continue to work for many years. Second, our annual capital expenditures averaging under $7 billion. The plan can achieve steady organic growth on an absolute and a per share basis with the captured opportunities in the portfolio today. Why can we maintain this capital discipline? Because we have numerous options at our discretion for exercising flexibility. For example... how we choose to phase projects where we have control on timing, and whether or not we choose to reduce ownership in projects where we currently hold a high working interest. These are details we expect to lay out in November. But our plan isn't about capital discipline for capital discipline's sake. It's about generating free cash flow, deploying that free cash flow in a prudent, shareholder-friendly manner, and growing returns. In November, you'll see a plan that can generate free cash flow at less than $40 per barrel WTI throughout the plan period. And at a reference price of $50 per barrel, the plan continues to return at least 30% of our cash flow operations to our shareholders. For almost three years, we've been on a mission to bring investors back to this sector, but not just for a quarter or two. We want to bring investors back to energy for many years to come. Our strategy gives investors a clear path to compelling value creation. It's not anchored to a production target, and it does not bet on higher prices. So that frames up what you'll see from us in November. We'll maintain capital discipline. We'll fund the best combination of projects to maximize shareholder value and honor our priorities well into the next decade. Now, in the meantime, 2019 continues to be volatile. an environment in which ConocoPhillips thrives. That's what we're describing with the two lower boxes of this slide. We have significant leverage to higher prices. Our production base is 75% Brent weighted. Our operations are primarily in tax and royalty regimes, and we're unhedged. We don't chase higher prices with pro-cyclical investments, and we'll build cash for inevitable price downturns. And in that part of the cycle, we offer distinctive resilience. We generate free cash flow at less than $40 a barrel WTI. Our balance sheet gives us flexibility to maintain consistent programs, and we have a $16 billion barrel resource base that averages less than $30 a barrel cost of supply. Just a few months ago, I remind you, WTI dipped into the low 40s per barrel, and we didn't miss a beat. If you just look at our performance over the past few quarters, you can see our resilience and our torque in actions. So in case people have forgotten how well we work across prices, that's a reminder. We're actually built for price cycles. Finally, it's not on the slide, but I'm going to take another issue head on, and that's M&A. As you've heard from me many times, we think of M&A in three buckets. First, incremental fence line transactions that add value, such as additional working interest, royalty interest, or coring up our acreage. We're going to do these things under the radar day in, day out. The second bucket consists of high return bolt-on assets or acreage deals, and they could be larger in size. They also make good sense. We're always on the lookout for these kinds of opportunities, and we executed a few last year. But I'm sure the bucket people seem focused on now is the third one, bigger corporate transactions that require premiums. Of course, we pay attention to what's out there. However, we've always said the bar is very high for these large transactions, and that's still the case. We're focused on returns, and we won't do transactions that are not in our shareholders' best interest. So let me summarize my comments. The business is running well. Execution is strong. No one needs to be worried about capital sticker shock in November. You can expect to see a decade-long plan that honors the successful value proposition that we believe is ideally suited for our sector. Our strategy works across a range of prices and through cycles, the strong upside to higher prices, and distinctive resilience to lower prices. We have the short-term covered, and we have the long-term covered. And the bar is high for corporate transactions. That's all I wanted to say today, and we'll be quick and now turn it over to your questions.