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spk01: Good morning and welcome to the ConocoPhillips Third Quarter 2019 Earnings Conference Call. My name is Zanara and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-answer session. During the question-answer session, if you have a question, please press star then 1 on your touch-tone phone. Please note that this conference is being recorded. I will now turn the call over to Ms. Ellen DeSantis. Ellen, you may now begin.
spk14: Thanks, Zanara. Hello, everyone, and welcome to our Third Quarter Earnings Call. Today's prepared remarks will be delivered by Don Wallette, our EVP and CFO, and Matt Fox, EVP and our Chief Operating Officer. Our three region presidents are also in the room with us today. They are Bill Bullock, the president of our Asia Pacific Middle East region, Michael Hatfield, the president of our Alaska, Canada, and European, Europe region, and Dominic Macklin, the president of our Lower 48 region. Page two of today's presentation deck shows our cautionary statement. We will make some forward-looking statements during today's call. Actual results could differ due to the factors described on this slide and also in our periodic SEC filings. We will also refer to some non-GAAP financial measures today. Excuse me. And reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and also on our website. One final comment before I turn the call over to Don. Given that our November analyst and investor meeting is only a few weeks away, we're going to limit questions to one per person and ask that questions address today's earnings release or recent announcements. And with that, I'll turn the call over to Don.
spk03: Thanks, Ellen, and good morning, all. I'll begin with the third quarter highlights on slide four. Starting on the left with our financial performance, we realized adjusted earnings of $0.9 billion, or 82 cents a share. Higher LNG realizations and higher production volumes combined with lower overall costs to mitigate the impacts of reduced market prices. Cash from operations was $2.6 billion, resulting in free cash flow of $1 billion in the quarter and $4 billion year to date. We ended the quarter with $8.4 billion of cash in short-term investments. And our strong financial returns continued, with a return on capital employed at just under 11% on a trailing 12-month basis. Moving to the middle column, operationally in the quarter, we produced 1.32 million barrels of oil equivalent a day, up 7% on an underlying basis compared with the year-ago quarter, and up 12% on a per-share basis. Matt will cover the rest of the operations highlights in a moment. On the strategic side, earlier this month, we announced a 38% increase to our quarterly dividend, which reflects the company's improved underlying financial strength, as well as our commitment to pure leading capital returns to shareholders. In addition, we repurchased $750 million of shares in the quarter and announced our plan to buy back $3 billion of shares in 2020. In both the third quarter and year to date, we've returned over 40% of CFO to our shareholders. We closed the sale of our E&P assets in the UK in September, which generated $2.2 billion in proceeds. And, as recently announced, we entered into definitive agreements for the sale of our Australia West business. If you turn to slide 5, I'll wrap up with a look at our cash flows for the quarter. We began the quarter with cash and short-term investments of $6.9 billion. Moving to the right, cash from operations was $2.6 billion. There were a couple of items impacting cash from operations in the quarter that are noted here. First, in conjunction with the UK sale, we made a one-time top-up contribution to the pension plan, such that it is now fully funded and essentially self-sufficient. That $320 million can be viewed as an acceleration of future pension contributions. And second, as we do each quarter, we note the cash received during the quarter associated with the PAYDA-VESA settlement. To date, we've received over $750 million related to the $2 billion settlement agreement reached in the third quarter of last year. Working capital was a $300 million use of cash, and as mentioned, we recognized $2.2 billion in proceeds from closing of the UK disposition. Capital spending was $1.7 billion, resulting in free cash flow of $1 billion in the quarter. And we distributed $1.1 billion, or 41% of CFO to shareholders during the quarter, through dividends and share buybacks, ending the quarter with a cash balance of $8.4 billion. So as you can see, this past quarter once again continued our trend of consistent, strong, operational and financial performance. It also demonstrates our unwavering commitment to financial returns, capital discipline, free cash flow generation, and returning capital to shareholders. We firmly believe that ours is a sustainable, distinctive, and compelling value proposition, one that is highly competitive not only within the energy sector, but also across the broader market. With that, I'll turn the call over to Matt.
spk02: Thanks, Don. I'll provide a brief overview of our -to-date operational highlights and discuss our outlook for the remainder of the year. Please turn to slide seven. Across the portfolio, we continue to advance the operational milestones we highlighted at the end of last year. Starting in Alaska, we safely completed our third quarter turnarounds of Prudle, the western North Slope, and Koparuk, and closed the Nuna Discovered Resource acquisition. We also continued to progress appraisal of our Willow and Narwal discoveries. Earlier this month, we spud another horizontal well from an existing alpine drill site into the Narwal trend. The well is designed to provide offset injection to the horizontal producer we drilled earlier in the year and help us optimize future development planning. We're also gearing up for the winter exploration, appraisal, and project execution season. Moving to Canada, we completed commissioning of our Montney gas plant this quarter. Due to delays in the third-party pipeline, we now expect that project to be online in early 2020. At Sormont, our alternative dillium project is on track for start-up in the fourth quarter, as planned. In fact, we're actively transitioning to DH Strat Consonate Blending for dillbit sales beginning on November 1st. This capability will not only reduce the amount of dillium we require, but also provide blend flexibility and consistently improve our netbacks. In the lower 48, Big 3 third quarter production by asset was Eagleford at 226,000 barrels equivalent per day, Bokken at 102,000 and Delaware at 51,000 for a total of 379,000. As we indicated last quarter, we expect Big 3 production to remain relatively flat for the remainder of the year, and we're on target to achieve a full-year growth rate of about 21%. Lastly, in the lower 48, we now have three Vintage 5 multi-well pilot pads online in Eagleford, and you'll hear more about that in a few weeks. Moving over to Europe, the UK disposition closed and we successfully transitioned operatorship. In Norway, Paterner-operated turnarounds were safely completed in the third quarter. In Qatar, we've been invited to submit a bid for the Northfield expansion project. In Malaysia, production ramp up at KBB continued through the quarter, and we expect to reach full throughput by year end. In addition, Gimusu Phase 2 came online in August. Finally, in Australia, we announced the divestiture of our Australia West assets for 1.4 billion, which we expect to close in the first quarter of 2020. Meanwhile, we continue to progress Barossa and remain on schedule for FID by early next year. So, we've had another strong quarter of execution as well as significant progress across the portfolio. Now, we'll discuss the outlook for the remainder of the year on slide 8. As we enter the last quarter of 2019, we're continuing our focus on execution while maintaining capital discipline. Our full year operating plan capital guidance remains unchanged at 6.3 billion, excluding about $300 million of opportunistic, low cost of supply resource additions that we discussed last quarter. On the production side, full year guidance also remains unchanged, except for updating for the close of our UK asset divestiture. With that in mind, we now expect the fourth quarter to average between 1.265 and 1.305 million barrels of equivalent per day, with a full year guidance between 1.3 and 1.31 million barrels a day. So, we remain on track to deliver 5% underlying full year production growth, and combined with our buy-buy programme, that results in 10% production growth per share. Finally, we're looking forward to our analyst and investor meeting on November 19th in Houston. We'll show a decade-long, disciplined plan that delivers free cash flow and strong returns. And of course, we'll provide a deep dive into the assets across our diverse portfolio. Our continued strong performance highlights the strength of our portfolio diversity and our ability to generate free cash flow to support distinctive returns to shareholders. Our entire Conical Phillips team is focused on successfully executing the remainder of our 2019 plan, and we look forward to sharing our longer-term plans with you in November. Now we'll open up for questions on the quarter.
spk01: Thank you. Our first question... I'm sorry. Thank you. We will now begin the question-answer session. If you have a question, please press star, then one on your touchtone phone. Once again, if you have a question, please press star, then one on your touchtone phone. And our first question comes from Phil Gresh from JPMorgan. Please go ahead, your line is open.
spk05: Yes. Hi. Good morning. First question here, just as you said on the quarter. As you look ahead here to the fourth quarter guidance, it looks like from your prepared remarks, the production outlook was just meant to be an adjustment for the closing of the UK transaction. Just wanted to confirm that, and if there are any other moving pieces we might want to be thinking about for the quarter.
spk02: Thanks. Yes, Phil, it really is just an adjustment for the UK change. It's a bit less of an increase from the third to the fourth quarter than we usually see, but that's mostly because we've had front-end low-due production in the lower 48 in Qatar, and it's also influenced to some extent by the fact that Montney Startup has slipped into the first quarter because of this delay in the third-party pipeline. But really, primarily just reflecting the change in the UK.
spk05: Okay, got it. And then just one for Don. On the cash flow, you've had a decent working capital headwind -to-date, and I was just wondering if there are any transitory dynamics there that could reverse some of that in the fourth quarter, and then obviously I think we're going to get a step up in the APLNG distributions as well, correct?
spk03: Yeah, Phil, on the APLNG distributions, yeah, we do expect the even quarters to be high and the odd quarters to be low, so we'll continue that trend. We had $60 million distributed in the third quarter. I would expect that number to grow to about $300 million in the fourth quarter, so still pretty consistent with what I guided to last time, which I think was $750 million for the year on APLNG. On working capital, we had a $300 million use in the quarter, and there we saw an increase in accounts receivable due to some sales timings on liftings in Norway and Malaysia both, and a decrease in accounts payable of about the same, about $150 million, and that's just normal payment timing, so there's really not a lot going on there. I wouldn't suggest that we have a trend line that we're following.
spk01: Thank you. Our next question comes from Doug Legate from Bank of America, Maryland. Please go ahead. Your line is open.
spk19: Thank you. Good morning, everybody. I wonder, again, trying to stick to the quarter, I guess, with also one of the things you included in your slide today, Matt, your decision to exit the Rossa in the middle of the quarter, but yet prepared to still consider investment in Qatar. I just wonder if you could walk us through your thinking in terms of LNG market outlook, why exiting one and still being involved in another might make sense for you guys, and maybe if I could get at a part B to that. It looks like international gas prices are a little bit better this time. I'm just wondering if you're seeing any improvement or is that just a lag effect on pricing? I'll leave it there. Thank you.
spk02: Thanks, Doug. We decided to exit the ABUS not because we're concerned about the cost of supply there. We actually think that is a competitive project, but we concluded that we should monetize those assets and redirect the capital to higher returning projects across the rest of our portfolio. So it was a pretty straightforward allocation of capital decision for us to make the decision that we did to ABUS. We are still interested in the Qatar Northfield expansion. We think that that will also be a very competitive cost of supply LNG project. We will continue to progress those discussions with Qatar as we go through the rest of the year and into next year.
spk01: Thank you. Our next question.
spk14: Excuse me, Zahra. We'll complete the answer to Doug's second part questionnaire.
spk03: Doug, you had a question about LNG realizations in the third quarter, so I just wanted to address that. And you're right, it is the lag effect in pricing, the way these long-term contracts work. For example, in the quarter, Brent, as you know, was down about $7 from the previous quarter, but JCC pricing was up $8. So what you're seeing is just the lag effect on LNG realizations.
spk14: Go ahead, Zahra, we'll take our next question.
spk01: Thank you. I apologize about that. Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.
spk10: Good morning, team. The first question I had was around Qatar. And can you remind us again, Matt, just around the mechanics of production? To the extent that you have a heavy first-half weighted production run in Qatar, does that come up against any caps or restrictions on volumes as you get into the fourth quarter?
spk02: We've already talked as we've gone through the year about the front-end loaded nature of the lower 48. In Qatar, there's an annual limit to total production that we can produce there in Qatar. And we had very strong performance through the first three quarters, so that means that we choked back in the fourth quarter to meet our limit. That's something that's been in place from the beginning of Qatar, but it's been a bit more pronounced this year because performance has been so strong in the first three quarters.
spk10: Thanks, Matt. And then growing down into the lower 48, can you just walk us through each of the three regions and what you're seeing from a volume perspective as you go into the fourth quarter and anything notable that you would call out in terms of how the performance is play by play?
spk12: Thanks, Neil. It's dominant here. I think in terms of Q4 outlook on the big three, all pretty flat. I think Eagleford, pretty flat from Q3 into Q4. Bakken had a good strong quarter in Q3. It's probably relatively flat into Q4. We may see some weather impacts in December up there in North Dakota, of course. We will see a little bit of growth in the Delaware, but overall, you know, our guidance is relatively flat Q4 for the big three versus Q3. We will see continued growth in 2020 in the big three, and we look forward to talking about that in November.
spk01: Thank you. Our next question comes from Doug Pearson from Evercore ISI. Please go ahead. Your line is open.
spk17: Hi, everybody. So my question is about the implications of divestitures in the North Sea and Western Australia on your total corporate retirement obligations and specifically how you expect those to change once those asset sales close.
spk03: Yeah, Doug, this is Don. Yeah, I can give you some guidance around the asset retirement obligations. You know, in the UK, I think we've already published that, but that's $1.8 billion of reduction in ARO. And then in, let's say, Australia West, assuming that that completes in the first quarter next year, we would expect that ARO reduction to be about $650 million. So combined between the two major asset sales, we'd see a $2.5 billion reduction. That's about 30% of our balance.
spk17: Oh, wow. Okay. Okay. That's all I had. Thank you.
spk01: Thank you. Our next question comes from Roger Reed from Wells Fargo. Please go ahead. Your line is open.
spk06: Yeah, good morning. Thanks. I was just curious, hearing that the winter program is already pretty set. Just kind of curious about an update there, what we may look for in the coming months.
spk04: Yeah. Hi, Roger. This is Michael. We're gearing up for our winter drilling program now. In fact, this upcoming winter program will be our largest ever. We'll drill wells at Willow, at Narwhal, and Harpoon. And we're looking forward to sharing the details of that program at our meeting in November. There's really nothing further to share at this point.
spk06: All right. I'll leave it there. Thanks.
spk01: Thank you. Our next question comes from Paul Chang from Scotia Howard Wheel. Please go ahead. Your line is open. Hey,
spk07: guys. Good morning. I'm just curious that on Monday, I think you guys are targeting on the condensate window. What's the API you're targeting? Because one of the pushback we heard from people is that up there, that people actually want to have a higher API condensate so that they use lesser of the pipeline space when they brand it with the Richmond. So from that standpoint, I mean, why do you guys think that your condensate, if you get from there, if it is a lower API, you will have a good market?
spk04: Thanks, Paul. This is Michael again. The, you know, our liquids in Montney is about half of our product mix and about two-thirds of our revenue mix. About over half of that is condensate, and it's a fairly light condensate. It's about 40 degrees. It's not linked physically with our Cermont asset. We'll sell the condensate into the market. And in fact, we're in the process of just waiting on a third-party pipeline to start up our gas plant probably early next year. And so we'll start to see production results from this first pad that we'll bring online at that time. So the condensate and other products will all be sold into the market in Canada, which is actually a pretty strong market in terms of condensate.
spk07: Michael, I'm sorry. You say what is the API for your condensate?
spk04: Yeah, it's around, it's in the 40 degree range plus or minus.
spk07: 40? Okay. That seems pretty low. Okay. Thank you.
spk01: Thank you. Our next question comes from Paul from Mizzou Securities USA. Please go ahead. Your line is open.
spk15: Thank you. Hi, all. We had a question about the maintenance capital levels that will be ongoing after the disposals you made, Matt. So we wanted just to know what the impact is on spending on an ongoing basis from the disposals. And if I could follow up on the M&A theme, could you talk a little bit about the 300 million of opportunistic add-ons, I think you call them? What are the parameters for those deals? And do we assume that the parameters that you're using there would be similarly applied to a bigger deal if you made one? Thank you.
spk02: Okay, yeah. Thanks, Paul. The maintenance capital, assume you're referring to the sustaining capital number that we... Yeah,
spk15: exactly. Sustaining is what I should have said.
spk02: Yeah, no, that's fine. They're sort of interchangeable. But that's around $3.8 billion and that continues here. In fact, it continues through the next decade. We'll talk about that some in a few weeks. So there's no significant change there. There's some puts and takes with the acquisitions and growth and the unconventionals. But it stays around $3.8 billion and that keeps our sustaining price, which is what we're really focused on, well below $40 a barrel. On the M&A front, you referred really to the $300 million that was spent this year on acquisition capital. So those were adding positions in Alaska. The Nuna trend is now closed. In the lower 48, adding, for the most part, Royalty acreage within our existing operated positions. Some smaller additions in the motenet continue to continue cording up there. And then the entrance into the Vaca Mertor play in Argentina. There's nothing new in this quarter in that respect. But you asked what the sort of decision criteria are from where we're thinking about those. Basically, we're focused, as we are on all of our capital investments, on the cost of supply. So we have to be able to see the acquisition price plus the development cost of supply in aggregate being competitive with other sources of resource additions. And again, that's something that we'll talk about more about in November, just to be philosophical how we think about all of that in the context of asset or corporate acquisitions.
spk01: Thank you. Our next question comes from Janine Wye from Barclays. Please go ahead. Your line is open.
spk11: Hi. Good afternoon, everyone. Hi. Hello. In terms of Alaska, and I think this question qualifies because it's on recent news, do you see anything changing from an operating perspective now that you have a new partner with BP Exiting? And have you had maybe any early conversations? And could there be some upside there? And I guess what we're getting at also is because we've noticed that you spent almost all of the full year budget in Alaska already.
spk04: Yeah, Janine, this is Michael again. So with the transition from BP to Hill Corp, it's still early stages. So we're still pending the successful close of that transaction. But Hill Corp does have a track record in Alaska of rejuvenating mature fields. They've reduced lifting costs. They've increased development activity and increased production in these other fields. And so we expect to see a reduction in operating costs and a renewed focus on investment. Now, any capital plans for Prudhoe Bay require the approval of Hill Corp, Exxon, and ConocoPhillips. And so while we work very closely today with BP as the operator, we'll continue to work closely with Hill Corp as they come in and Exxon to maximize the value of this legacy asset. So we're excited for this transaction. We see opportunity to unlock more value at Prudhoe Bay.
spk11: Okay, interesting. We'll stay tuned. Thank you very much.
spk01: Thank you. Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open.
spk16: Another Alaska-related question. If we think about the Fair Share Act ballot initiative, can you talk about that and perhaps put it in the context of the longer-term ebb and flow of tax policy up on the North Slope?
spk04: Yeah, thanks, Bob. This is Michael again. It's a situation that we're monitoring very closely. You know, I'd say this initiative is not in the best long-term interest of the Alaskan citizens. We believe the Alaskan citizens will see the benefit that the North Slope exploration renaissance has already brought to the state and to its citizens. If you look at the positive changes that have occurred since SB 21 went into effect in 2013, ConocoPhillips and others have announced several additional discoveries and projects that could add significant incremental production and revenue to the state. And so we believe that continuing those investments is good for employment, it's good for the Alaskan economy, and it's good for the Alaskan citizens. And so that's for both now and over the long term. And so we feel like it's also worth noting that this sort of initiative has come up in the past. And we've successfully informed voters of the negative consequences of jobs, production, and long-term revenue. The impact of those sort of initiatives have on the benefits of the citizens would see. So we do have a long history of engagement with the public. We feel that there's a mutually beneficial relationship with the stakeholders. And in short, so it's very much on our radar and something we're monitoring quite closely. And we do expect, in fact, we're gearing up now to make our case to the citizens about the benefits of continuing under the fiscal regime that we currently have.
spk16: Great. Thanks for that.
spk01: Thank you. Our next question comes from Jeffrey Lambujan from Tudor Pickering Holt. Please go ahead. Your line is open.
spk13: Good morning. My question is just on capital allocation for the remainder of this year. Just thinking about the unchanged budget, we thought there may have been some downside potential in spending just given that the UK closed. So just looking for any color on where that unspent capex might be allocated to instead for the remainder of the year.
spk02: Yeah, and this is not Jeffrey. So so far this year, our run rate has been about 1.6 billion a quarter, and that's going to drop by about $100 million into the fourth quarter, part of it because of the UK disposition, but also just general phasing, primarily associated with completions and refacts and exploration timing. And it's just that those modest sort of plan changes that cause us to go from a run rate of 1.6 to 1.5.
spk07: Thank
spk01: you. Thank you. Our next question comes from Michael Hall from Heikinen Energy. Please go ahead. Your line is open.
spk08: Thank you. Good morning. Appreciate the time. I guess maybe going back up to Canada or to Alaska. Sorry. Can you guys provide an exit rate on what Alaska production looked like after the turnarounds?
spk04: Yeah, we're producing around the 210,000 to 220,000 barrels a day at this point.
spk08: Great. That's helpful. And then on the Canadian gas plant, can you just remind me what the net capacity on that is to those operations and to you?
spk04: Yeah, the capacity is about 100 million cubic feet a day. One of the benefits that we have of the plant that we've designed here is we can design one and build many. So as we're in this appraisal mode and we ramp up to different stair steps of production levels, we'll be able to clone this plant multiple times over.
spk01: Thank you. Our next question comes from Paolo Molchano from Raymond James. Please go ahead. Your line is open. Thanks
spk09: for taking the question. First, just a quick one about gas pricing. You mentioned the lag effect benefiting LNG in the quarter. But in your European gas pricing, it was the lowest number, as far as I can remember on record, lower than in 2016 even. I'm curious why North Sea gas was so depressed in the September quarter.
spk03: Hey Paolo, this is Don. Yeah, all of the markers were down during the third quarter from Brent to WTI and Henry Hub, of course, here in the U.S. And we saw the increase in the price of eco-international gas in Europe. LNG, of course, is quite different. It's priced differently. That's why we saw the increased realizations in the third quarter. But now that's just a supply and demand factor in Europe. There's a weakness in the market, or there was in the third quarter, and it continues in the fourth.
spk09: Okay, understood. My follow-up is a little more thematic, if I may. In your sale of Australia West, did you consider including APLNG as part of the same transaction to simply exit Australia altogether?
spk02: No, this was focused on the cash flow characteristics in ABUS and the nature of that asset at the stage of the life cycle. We didn't consider an exit of Australia in this entire thing.
spk01: Thank you. We have a question from Doug Legate from Bank of America, Merrill Lynch. Please go ahead. Your line is open.
spk18: I know I asked my one question already. I think that's a mistake, but I can ask another one if you like.
spk19: Well, I have you guys. I actually didn't line up for another question. I feel quite embarrassed, but I had another one written down. Just on your cost guidance, I'm expecting this will come up next week, but the costs look like they've been running a bit light this year. I'm just wondering if there's anything that we should read into that. Are you doing a lot better on both operating costs? I guess CDNA is a bit low as well, but pretty much on the cash costs. I'm guessing that's something you'll address in a couple of weeks, but any comments you can share. I'll extend my gratitude to the operator for giving me a second shot.
spk03: Thanks. Doug, thanks for your second question. The operating costs continue to hold the line. In fact, in the third quarter, I think our production and operating costs and SG&A were down about 6% or so from the previous quarter. I wouldn't read a whole lot into that. Some of it was we had a bit higher cost in the second quarter because of the turnaround activity, and we had, I think, a settlement litigation thing that we settled. So we see operating costs remain essentially flat for this year, and so we're not adjusting the full year production and operating cost guidance at this time. We can talk more about how we see that outlook going forward next month, but we continue to be aggressive on trying to keep a very efficient operating structure.
spk01: Thank you. And at this time, we have no further questions. I would like to turn the call back to Ellen.
spk14: Thank you, Zunara. Thank you to our listeners today. We look forward to seeing you in a few weeks. Appreciate your time and interest in ConocoPhillips.
spk01: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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