ConocoPhillips

Good morning, and welcome to the Q1 2020 earnings call for ConocoPhillips. 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'll conduct a question-and-answer session. During the question-and-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'll now turn the call over to Ms. Ellen DeSantis. Ellen, you may begin.

Thanks, Zanara, and good morning to our listeners. Thank you for joining us today to discuss this morning's press release, which contained our first quarter earnings results, our dividend declaration announcement, and an update on our curtailment actions. Our speakers today will be Ryan Lance, our Chairman and CEO, our Chief Operating Officer, Matt Fox, and our Chief Financial Officer, John Ouellette. Ryan will make some very short opening comments, but we'll reserve most of the time on today's call for the question and answer session. We don't have any slides this morning, but we will post a replay of this call shortly. As you know, given market volatility, we have temporarily suspended guidance. However, we may make some forward-looking statements in today's call. Please refer to our SEC filings for a description of the risks and uncertainties that could impact future performance. And now I'll turn the call over to Ryan.

Thank you, Ellen, and welcome to today's call. Well, here we are at the start of first quarter earnings for the E&P sector, and it's a brave new world for all of us. Ordinarily, we would use this call to discuss our recent quarter results in detail and provide guidance for future periods. But the first quarter already feels like a long time ago, and as you know, Due to significant uncertainty and volatility in the markets, we will temporarily suspend guidance. So here we are. Well, while we won't provide guidance, we continue to believe it's important for ConocoPhillips to provide insights. How are we thinking about this environment? What actions are we taking or considering taking to respond? And that's how we'll intend to use this conference call time today. I'll make some very brief remarks, then turn the call over to our listeners for a question and answer session. There are three themes I want to emphasize in these remarks. First, our underlying business is running very well. You saw our first quarter results in this morning's press release. It was quite a strong quarter operationally, despite the COVID-19 pandemic. I'm certainly very proud of our organization. While some activities are changing day to day, I assure you that our workforce is all in on safely delivering the business, including our upcoming seasonal turnarounds and our ongoing capital activity. The second theme I want to emphasize in these prepared remarks won't surprise anybody. It's this. The next few months are going to be very bumpy for the industry and for us. A couple of weeks ago, we announced plans to begin voluntary curtailments in May. This morning, we announced that we expect to curtail about 265,000 barrels per day gross in May from our lower 48 in Sermont combined. We also announced that we'll expect to curtail about 460,000 barrels of oil per day gross in June from our lower 48, Sermont, and Alaska combined. On a net basis, this represents about a third of our first quarter production. This should be seen as a clear signal that we're willing to use flexibility and balance sheet strength to protect value for our shareholders. And that brings me to the third theme of these remarks. In our previous two market update conference calls, we've emphasized that our actions in this environment are driven not only by our view of the markets, but by the fact that we entered this downturn in a relatively advantaged position compared to most of industry. You saw in today's press release that we ended the quarter with total liquidity of nearly $14 billion, including the $6 billion available under our revolver. Our portfolio was diversified and relatively low-declined. These are the factors that allow us to make rational decisions based on a reasoned views, and we can continue to assess and monitor the markets that act. We continue to manage the business in a way that preserves our strong relative position, allows us to take additional actions if needed, and protects our ability to resume programs in the future. So in summary, here's what I want you to take from my comments. The underlying business is running well. We have a strong first quarter operationally, all things considered, and our workforce remains focused on safely delivering our plans. We expect a period of significant volatility over the short term. We know what we need to do. And we are relatively advantaged coming into this downturn, and we'll protect that relative advantage as this environment plays out. So with that, I'm going to turn the call over to the operator, and we'll begin our Q&A.

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're 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. Our first question comes from Doug Pearson from Evercore ISI. Please go ahead. Your line is open.

Hi, everybody. Good afternoon. Good morning, Doug.

Sorry.

Yeah. So, Ron, your production curtailment seemed to have been more market responsive than peers, which may have to do with your higher proportion of operator production, your working interests, or other factors. So, but my question is, are these the primary drivers of your curtailment decisions? Are there other control or economic factors that play into it? And then also, What are the risks to recoverability for your portfolio after output starts to be restored if you think that they're meaningful?

Yeah, thanks, Doug. I can probably take the first one, and Matt maybe could provide a little bit of color on the second part of that. You know, honestly, Doug, we'd be curtailing as much as we could right now, and I think we just – I don't think it's right to be accepting these kinds of net back prices for the product that we're producing. We've got a very strong balance sheet, as I said in my remarks. We're taking, you know, modeling sort of the short and the longer-term scenarios to guide our decisions, and these curtailment decisions are guided by the way we see the market playing out over the short term. We certainly have more control over things that we operate. we expect things to be coming from governments and infrastructure curtailments, but these are the things we can proactively go to do based on our recent view of the market and based on our capacity that we've got on the balance sheet to do these kinds of things. You know, in our view, we see this as a sign of strength, and we're deploying that and, I think, acting in a reasoned fashion. So I'd let Matt maybe... Talk a little bit about what recovery would look like on the back end of these curtailments with improved markets.

Doug, I think there's two aspects to that answer. One is how quickly can we bring production back, and are we taking any risks associated with the curtailment, or reservoir damage or otherwise? And basically, we can bring the production back across lower Florida, Canada, Alaska within a few weeks. It doesn't take months to bring it back, so the majority of it can be brought back very quickly. But to get to full production in a matter of weeks, we're making sure that we're not doing anything that's going to take any risk either from a reservoir or wells or facilities perspective. That's why we're going down to a minimum rate so that we can still provide enough heat and temperature to the steam chambers to keep them intact. Lower Fort Reate, we've got a very specific set of protocols as to how we shut down and prepare those wells for restart. In Alaska, we're not shutting in completely. We're going down to a rate that's the minimum sort of operating level that we can consistently operate at for a period of time. Across all of these, there's no risk of reservoir damage. So we can come back in a couple of weeks, and there's no risk of any permanent damage.

Okay. Thanks, Matt. And then also, Ryan, there's been a lot of commentary surrounding pro-rationing of supply that would be mandated by regulators over the past several weeks. So just wanted to see where you stand on that topic and how you think it's going to play out.

Yeah, we haven't been supportive of that, Doug, from a regulatory perspective because we think the market is going to ration that very quickly and either through both voluntary type cuts that we're taking or infrastructure and storage related cuts that become involuntary, I guess, to some degree for, you know, maybe us and other operators as well. So the market is reacting. The market's working well. And it's going to drive supply down to kind of match inventory levels and what the demand, what the refineries can take on the other end. So we haven't been supportive of efforts that like the Railroad Commission recently has been analyzing and thinking about.

Thank you. Our next question comes from Roger Reed from Wells Fargo. Please go ahead. Your line is open.

Yeah, thank you. Good morning. I guess we've heard different things from different companies about the shut-in, elective shut-ins and reservoir issues, and I heard your answers to the first question. But I was just curious, can you give us any examples of what brings you confidence about maintaining reservoir security? integrity as you go through the shutdowns that you are doing or will be doing in May, will be doing in June, and then, you know, if they continue beyond that, what gives you that confidence?

Roger, that's a fair question. It's really because to some extent we go through this on a regular basis in our fields anyway just for a shorter duration. You know, for example, in Alaska, You know, every other year we do a full turnaround at Alpine, and we go through shutdowns or turnarounds at our different processing facilities in Kuparuk. So we know how to take the wells down and keep them in good condition and bring them back on again. The same is true in Sermont. I mean, occasionally we've had to put Sermont fully shut down because of wildfires, where we've had to go down very quickly. So we know how to handle that as well. And in the lower 48, the most recent example, during Hurricane Harvey at Eagleport, we had to go down. So we've got plenty of operating experience that gives us confidence that we know how to handle this. We've got the advantage just now that we can plan it and we can get it. So there's no reason to be particularly concerned about that. We also understand what our decline rates are. We also understand what our flush production is that comes back after shut-ins. So that gives us everything that we need to make a sensible economic analysis as well. So trust me, Roger, this is all pretty well thought through.

Oh, I didn't doubt it wasn't thought through. I was just mostly trying to understand, you know, where the experience comes from because there are some different attitudes out there. Switching gears a little bit, Don – Obviously, significant liquidity in the company. I was just curious, is there anything else you're looking at balance sheet-wise? And I'm not just thinking about, you know, revolvers or new debt or anything like that, but also kind of how you're thinking about the working capital side of the business that we should be thinking of levers you could pull here in coming quarters. Yes.

Not really, Roger. Our working capital is pretty finely managed, always has been, so we don't have a lot of optionality there. We don't carry surplus inventories or anything like that. Just thinking about other items coming down the road that would affect liquidity, I can't think of anything in a negative way other than the low cash from operations that we expect over the next few months as oil prices continue to be low, we do expect the proceeds from the Australia West transaction. We still believe that that's going to close in the second quarter. So, you know, that'll be coming in from a positive direction. But other than that, I can't think of any big ticket items out there.

Thank you. Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.

Good morning, team, and thanks for the extended Q&A session here today. The first question I had is around the sanctity of the dividend, and this is for anybody who wants to take it. We've seen one of your large competitors reduce their dividend today. Conoco, in some ways, took this medicine a couple years ago, but curious on your view about safety around the dividend and strategy around that distribution.

Yeah, thanks, Neil. Yeah, I think you kind of have answered the question. We, you know, we declared our dividend today, as you saw in our press release, that, you know, kind of remains a priority. And really, we, you know, we're committed to a return of cash to the shareholders of greater than 30%. We've outlined that since we set our value proposition a number of years ago. And the dividends, the fixed part of that that we expect to be able to execute through the cycles, we exercise the flexible part of that return to shareholders with the suspension of our buyback program here a month or so ago. So we're pretty confident. As you described, I mean, we took our pain a couple years ago. back in this last downturn, and we wanted to set the company up because we knew the volatility was with us to stay. Maybe this is a three or four sigma event. It's even beyond maybe what we were thinking about a couple years ago and what we outlined in November. But through Don's comments on the balance sheet, the strength that we have as a company, I think we're well positioned to get through this downturn in pretty good shape.

Thanks, Ryan. A follow-up question is around consolidation. I know you spoke to this a little bit on the capital spending call, but I wanted to get any updated thoughts around it. One could argue this is towards the bottom of the cycle and there's potential to be opportunistic, but curious on your views as you've been patient in the past and had some strong views on bid and ask.

Yeah, no, I think you're right, Neil. Our views haven't changed. We're patient. We're persistent. We monitor the market. Certainly believe there's going to be significant stress across the sector, as you've described. And, you know, we've been willing to transact. We've talked about that, but it has to be accretive, and it can't break our long-term financial framework that we've described to the market many times. So, you know, the strong balance sheet and – And we won't put liquidity at risk. So, you know, I think broadly speaking, it makes it obvious that this E&P industry needs structural change. You know, the growth model is broken. There's too much G&A running around this business. And I think it was addressed, it was an interesting article by Liam Denning in Bloomberg here yesterday. So read that. I think it's, you know, reasonably accurate. There's too many names for investors. It's getting less relevant in market cap terms. So we do believe the assets could be run more rationally for improved returns over growth. But imagine the depth of this downturn. There's some pretty tough discussions going on between boards and management right now. So it will probably take time for some of this to realize, but I think it needs to happen.

Thank you. Our next question comes from Janine Y from Barclays. Please go ahead. Your line is open. Hi.

Good afternoon, everyone. My first question is on the June production curtailment. The anticipated June curtailments, they're a bit more than what you're expecting in May. And so can you talk about how you settled on the June versus the May level? Because I guess when we look at the forward curve plus the implied CMA role adjustments, June and July WTI pricing looks stronger than May. So is your decision based on something you're seeing in the physical market versus the paper market, or are you just being a little bit more conservative here, or is it just related to something else?

Yeah, I'll take that to mean this is Matt. To me, essentially, we curtailed as much as we could while still honoring contracts that we had entered into with buyers. So we had in the previous months, March and April, entered into contract to sell crude and we were going to honor those contracts. So what we curtailed is areas where we didn't have contracts in place or where the buyer was happy not to take. In June, we had more flexibility in that respect because we had much fewer barrels placed already. So that's the primary reason why the curtailment is higher in June. There's also still this issue of a bit of a dislocation between the marker price and the net back prices that were actually being offered, you know, not just us, everyone else. So I think that phenomenon was stark in May, and it's still here in June. So there's an element of both of your potential responses. I think both are somewhat true.

Okay, great. Thank you. That's very helpful. And then maybe my second question for Ryan, it's on the 10-year plan. So I'm wondering, do you see the current or medium-term environment simply pushing out the 10-year plan, meaning that you would resume pretty much the exact plan maybe a year or two delayed? Or have the conditions changed so much that you could see more value to shareholders if you make more meaningful adjustments to the underlying plan?

Yeah, thanks, Gene. And I'd add to the last question, too, Alaska is an additional 100,000 barrels a day that we are doing in June that we aren't doing in May. But to your second question about the 10-year plan, you know, it was as much a philosophy and principles that we think that E&P companies need to be taking to, you know, focus on returns, and really bring value investors back into this business. We don't see the basic tenets of that plan changing. Strong balance sheet, you know, diverse low-cost supply portfolio, returning more than 30% of our cash back to the shareholder, looking at through cycle returns. I would say that You know, I remind people we've got a 15 billion barrel resource base of less than $30 cost of supply. And in that cost supply, it embeds 10% after-tax rate of return. So, you know, we've got something that's quite resilient and sets up. And we've been long preaching about, you know, volatility and you've got to be prepared for these lower prices. So they're the right ones for an E&P business. The tactics of the 10-year plan were based on how we're going to optimize our investment choices that we had. So clearly, you know, the early years of that plan has changed with the downturn. But the shape and the speed of the recovery will dictate how quickly we return and get back executing that previous scope and pace of work that we had outlined last November. So when this event passes, you know, we expect to have the same philosophy and approach The programs might be staged and phased a little bit differently, but, you know, we intend and fully expect to emerge with an even more competitive plan when we get done.

Thank you. Our next question comes from Doug Legate from Bank of America. Please go ahead. Your line is open.

Hi. Good morning, everyone. I hope everyone's doing okay out there. Ryan, I wonder if I could bring you back to... Yeah, well, I'm enjoying going to work in my shorts, but we'll save that for another conversation. The breakeven that you have with the adjustments you've made, I'm just wondering if you could give us a refresh with the reduced production capacity with the shut-ins. Where do you think your breakeven is right now, just to give us a kind of roadmap for how your cash flow capacity is coming out the other side of that? That's my first question.

Yeah, Doug, this is Don.

I think on a recent call, we mentioned on a go-forward basis, if you're looking at our spending for the remaining three quarters of the year, we said that our break-even to cover CapEx was under $30 WTI.

Does that include the dividend and the reduced additional curtailments, Don?

It does not include the dividend. So to get to the dividend, you'd be in the mid-30s WTI? And as far as curtailments, it doesn't because we're not projecting them beyond June. We don't know what they're going to be. But I can tell you the CFO impacts of the curtailments that we've announced is quite small because of the prices that we expect.

Of course. Okay, I appreciate that. My second question, I don't know if either... which one of you wants to take this, but it goes back to the issue of sustaining, you know, supporting or sustaining your production capacity. So when you think about the shut-ins that you're taking, and obviously you can recover those volumes as you discussed, but when you're not drilling against the backdrop of a declining unconventional business, what happens to the underlying production capacity? Because I have to believe that You're running up that down escalator. You're basically going to come out the other end of this with lower absolute production capacity on the big three and the lower 48. Can you walk us through the dynamics there? And I'll leave it there. Thanks.

Hey, Doug. This is Matt. I'll take that one. So based on the capital and operating cost reductions that we announced a couple of weeks ago, and if we don't pay any attention to production curtailments, Our average production for 2020, our average productive capacity would be about the same as 2019. So capacity-wise, about flat. The actual production will be whatever it ends up being, you know, including the curtailments. In terms of the shape of the profile through the year, which is what I think you're getting at, I mean, obviously the capital was front-end mode. And we're assuming in our capital program that we don't complete any wells in the big three over the last eight months of the year. So that means there's certainly some declining capacity as we go through the year. But we're not given specific guidance on that because there are so many moving parts just now, including the curtailments. We're concerned about getting misleading guidance. But the overall direction is, yeah, there will be some declining capacity. Now, bear in mind that we're actually going to be building some ducts here. Probably somewhere in the region of 130 or so ducks. Any loss in productive capacity we can recover very quickly. So this is a sort of transient thing that we can manage through. But we're not getting any specifics on that because we're concerned about giving misleading guidance.

Thank you. Our next question comes from Phil Gresh from JP Morgan. Please go ahead. Your line is open.

Hi, yes. Good morning. Thanks for taking the question. The first question is somewhat related to a couple of the prior ones. You talked about this WTI breakeven in the low 30s for the full year and then the high 20s for the rest of the year. Back at your analyst day, is originally going to be about $40 and then over time work its way down to $30 as you ramped, you know, some of your production objectives over the next few years. How do you think about this moving beyond 2020? Do you think it makes more sense to maintain a break even where you're run rating now? or does it make sense to, you know, wrap spending back up a bit as you see increased visibility?

Yeah, Phil, this is Matt. The, and that becomes a question of, in the long run, how we see this epidemic and implications for demand, implications for long-term demand and therefore prices, but generally speaking, Although we could run at a very low sustaining capital price and a very low sustaining price in general, because the cost of supply of our investment opportunities average below $30, we don't feel it's in our shareholders' best interest not to exploit those development opportunities. I think it's unlikely that the choice we would make would be to try and run at such a low rate even because it would be deferring a lot to very low cost of supply investment opportunities. Having said that, you know, we'll just have to see how this plays out. We'll have to see if we sense there was a very long term implication on the mid-cycle price. But I think it's too early to make a decision on that right now.

Yeah, I would say Bill, that, you know, if you recall back in November, we talked about our asset optimization model and, you know, we've looked at and obviously if we come back to a different mid-cycle or a different sort of long-term price, we'd redo that, but we have a pretty strong idea of what that optimum kind of exploitation rate across our lower 40 unconventionals is and have applied that to our broader portfolio as well. So, but obviously we look at that, but But it is a higher level than what you might call the sustaining capital level because there is a sweet spot of investment that we would make that would generate what we believe is the better returns in the business. And we're going through this downturn today and we've retained all of our capability. So we have not eliminated any of that organizational capacity. Because, again, we're informed by our short and medium-term view of the market what we think the recovery might look like and have chosen to retain that capability so we can come back strongly if we, you know, if and when we choose to.

Sure. Okay. I appreciate that it's early to be asking those types of questions. The other, I guess, piece of this is there's a very lumpy part of the development plan over time, which was Willow in Alaska. And I'm just curious how you're now thinking about and how the timing, I guess just based on your base case macro view from here, I know there are a lot of potential outcomes, but what would be your base case on how you think about well and living forward and the timing around it?

Phil, this is Matt again. We're working through and we're in the concept selection stage just now. We have a timeline that would get us to the end of this year with the opportunity to select the concept and by that I mean how big a facility do we build, how many drill centers do we have and so on. So we're continuing to work towards that decision. towards the end of the year for Willow. We'll make a decision at that time, and then that will dictate the pace beyond. So we have not made a decision to defer Willow, but that decision is ahead of us, so we're continuing to work through that.

And we expect permits, you know, here this summer supporting the development at Willow, both at the federal and state levels.

Thank you. Our next question comes from Scott Hanold from RBC Capital Markets. Please go ahead. Your line is open.

Yeah, thanks. If we could stay on Alaska a little bit. Obviously, you completed some of your winter program with some appraisals and tests out there. Can you give us a sense of what you learned from that and how that helps you form your decision to the next year or so?

Yes, Scott, we did some exploration at Hartoon and appraisal at Willow. At Willow, we drilled two wells out of a plan four. And at Hartoon, we drilled one out of a plan three. The reason that we drilled about half the program is we were concerned about having these exploration camps way out west on the North Slope if we had a COVID outbreak. Now, thankfully, we didn't have a COVID outbreak, but out of an abundance of caution for our people and our contractors, we decided to shut down the exploration program early. So, we drilled two of four wells at Willow, and those wells had the results that we were expecting. And we're still on track for a concept select decision, we'll just have to decide if we If we want those additional wells before we make that decision, then we're still evaluating the data just now. On the Harpoon well, which is the exploration complex to the south, original plan was to drill three wells there. We only drilled one. And that well appears to have clicked the edge of a top set based on this log response. We won't know that for sure until we get a chance to drill a second well. So we're still evaluating those results. But I think the bottom line is that the jury is going to remain out on Harpoon until we get back out there to complete the exploration program.

Okay, I appreciate it. Good color, good color. And this one might be for Don. You know, the LNG outlook and, you know, can you provide any kind of color on expectations for, you know, distributions, you know, maybe over the next quarter or year if, you If you have information you think would be good enough at this time.

Sure, Scott. Actually, LNG realizations have held up pretty well so far. I think our LNG netbacks were only down about 4% from the fourth quarter. But that's because of the lagged nature. So that's going to roll over, and we're going to start seeing the impacts as we go through the rest of the year. But we do have an advantage in that most of our LNG, I'm talking about all of our projects globally, the vast majority of our LNG is under long-term contracts and so they're holding up relatively well compared to the very weak current spot market. In fact, I think 90% of our total LNG sales are term and less than 10% spot. So back to your question as far as distributions, you know, we reported, I think, about $100 million distribution in the first quarter from APONG. We're still expecting somewhere between 500 to maybe 550 for the year.

Thank you. Our next question comes from Alastair Sim from Citi. Please go ahead. Your line is open.

Thank you. I had a related question for Don on the cash flow. I'm just wondering if you could give some sort of guidance on how you're thinking around cash tax in this environment. I think if I remember back in 2016, you had substantial tax loss carried forwards, particularly in the U.S. I was wondering to what extent these still exist.

Yeah, we're still, Alistair, in a non-cash taxpaying position in the U.S. And I think, you know, coming into this year when markets were still stable or relatively stable, we were thinking that we could come out of that position maybe as early as 21, but probably more likely 22. So now this is going to obviously set that time frame back because we're going to have some large losses this year. And so, you know, I don't have an estimate of when we might come out of it now, but it's going to certainly be beyond what we thought before.

So does that mean the U.S. is in a minimal zero taxpaying position in 2Q, in effect?

Yeah, we're in a zero-tax-paying position in the U.S. and expect to remain there for quite some time. Okay.

Thank you very much.

Thank you. Our next question comes from Paul Chang from Scotiabank. Please go ahead. Your line is open.

Hey, guys. Good morning or good afternoon. It depends on where you are. Ryan, I think your overall business model, you are not changing. You have a good business model of a balanced growth and cash return to investor. But with this event, is there in any shape or form that have changed some of the parameters, whether it's the leverage ratio that was considered as an acceptable or comfortable range, or that was the percent of the reinvestment Any of those parameters within your framework because of this event have been changed? If not, why not?

Well, I think time is going to tell, Paul. I think, you know, we got to go through this, find out where demand returns to, if there is any permanent demand loss as a result of this pandemic changes in consumer behaviors that might drive a different you know, different longer term view of the price. So I don't think we're kind of like a lot of people watching that very closely to try to understand where supply and demand rebalances out at the end of this downturn. So it's probably a bit early, but, you know, we'll continue to, again, rely on the fundamentals of the business that I talked about earlier, you know, the strong balance sheet, you know, executing on a low cost of supply resource base, And we're committed to the value proposition that we laid out back in November. We've really been reinforced back in November in what we've been operating under for quite some time, or at least the last few years. So I think your question around capital intensity and how you return money back to the shareholders, we just have to see what our long-term view of prices ends up being in the and where supply and demand rebalances itself as we come out of this downturn?

Ryan, that's fair. I mean, the only problem is that we probably won't know what is the real long-term impact or if there's any maybe for four or five years. I mean, I think by the end of this year or next year, I'm not sure we can really tell that we know what is the long-term impact. So, yes, that means that you guys probably not going to do anything differently until maybe four to five years down the road for you that you have some kind of confidence level that you really know what is the long-term impact. Is that the way how we should look at it?

How long have you known us, Paul, to take five years to react to market environments that we're in? You know, we've run our scenarios. We know what we're doing. We know what the philosophy is around the business. And we'll match our efforts around capital and return back to shareholders and where we put the balance sheet and how much cash we need to have on the balance sheet based on the environment that we find ourselves in. We have confidence because the low cost to supply resource space that we have existing in the company competes in a very low commodity price environment. So We know, we know what wins. And that's what we're going to be focused on. And we're going to be flexible and do what we have to do to make sure we're putting the money into the portfolio in the right places and reacting to the kind of environment that we find. We certainly won't wait five years.

Thank you. Our next question comes from Josh Silverstein from Wolf Research. Please go ahead. Your line is open.

Yep. Thanks, everybody. Just on the Alaska volumes, we've typically thought about ANS and Brent just kind of interchangeably there. You know, that relationship has broken down over the past month. Can you just remind us how you sell those volumes and like how that might be different from how you're selling the lower 48 volumes?

Josh, I'll take that one. You know, most of our ANS sales go into the West Coast, which is, you know, why you're seeing, you know, the traditional relationship between ANS and Brent break down because of the very low refinery utilization rates in Pad 5. So, you know, we would expect that relationship would return, you know, once demand picks up in California and the rest of the West Coast. You know, some of our cargoes, we do, if the opportunity is open for us, we do send them to Asia as well. But generally, our A&S sales, wherever they go, they're going to correlate usually very closely with Brent, you know, except under unusual circumstances as we're facing today.

Great, thanks. And then right now there's a lot of defense being played right now, whether it's by Conoco or everybody else in the market. Just wondering where Conoco can play offense in this environment to lower the forward break-even price. I guess the M&A question was asked before, but is there anything from a service cost standpoint or anything else that Conoco can pull lever on to get that break-even price lower?

Yeah, Josh, I mean, obviously, we're working with our supply chain partners on the opportunity to see some deflation in this environment. We have a strong relationship with suppliers, and there may be some value there. We also see value. We've had a very strong focus on innovation in the company over the last many years. So there are opportunities to accelerate the adoption of new technology. and find ways to continue to drive the cost of supply down. We've made incredible strides on that over the last few years, and we're not done yet. I mean, we know that part of our job is to continue to drive cost of supply down, because what wins in the end in the commodity business is low cost of supply. And that mantra is fully understood by everybody that works here, and we're focused on moving every cent we can on the cost of supply over time.

In our workforce, Josh sees the volatility in the market, so they see what happens in these volatile markets and why, as Matt said, we have to continue to lower the break even and drive the cost of supply down.

Thank you. Our next question comes from Michael Hall from Hyken and Engie. Please go ahead. Your line is open.

Thanks. Good morning. I guess I was just curious as you think about bringing back the curtailed volumes, do you expect to see any sort of material or notable incremental operating costs and or capital costs associated with bringing those back for things like workovers or ESP refurbishment or any other associated costs that are associated with restarting those volumes?

This is Matt, Michael. And not particularly. We have slowed down our well-work and work-over activity as part of our operating cost reductions. So when prices recover and we want to reduce those barrels, then we will wrap that back up again. But for the most part, the production deferrals don't result in any incremental reductions. significant incremental work over activity, for example, to bring them back on again. I think that's what you were getting at.

Yep. That's helpful. And I guess also as you think about the second quarter, I mean, are there anticipated turnarounds that we ought to keep in mind as well that would go beyond any of these curtailments outside of the lower 48 Canada and Alaska? I'm just thinking the rest of the global portfolio. Is there something that was already baked in that we just ought to be keeping in mind as we head into the second quarter?

Yeah, we have sort of standard standards. turnarounds going on across the portfolio this year. Last year was a very heavy year for turnarounds. It's less heavy this year, but we're keeping to that schedule. There are no hugely notable ones that are unusual as we go through the year, but they will be occurring predominantly in the second and third quarter. We did take a turnaround in Qatar in the first quarter, but the majority of them will happen in the second and third quarter.

Thank you. Our next question comes from Paul Sankey from Mizuho. Please go ahead. Your line is open. Hi.

Good morning, everyone. There's a lot of disconnect between paper markets for oil and physical markets, and obviously within that physical dynamic, there's tremendous differences across the board in regional crude prices. Could you just talk a bit about how that's been affecting you? And I'm also wondering about some of your crude quality. You know, there's been a lot of talk that very high API crude has been a problem. And then while we're going there, could you also, there's a ball case for natural gas here as people shut down production. Could you talk about your exposure to the natural gas theme, please? Thanks.

Yeah, Paul, I'll take that one. This is Don. Yeah, it's been two different worlds really the last month or so. Speaking to your comments about what's happening in the physical markets versus what's going on in the financial markets, we've certainly seen that in the U.S. in particular. And that's really driven our decisions around curtailment that, you know, the net back prices are lower than what you might assume reading the screens. So I would say we haven't had any – we haven't faced any problems in placing the volumes that we wanted to place. So, you know, we call these voluntary curtailments, and they are. They are elections that we're making just because we don't like the price that's being offered. But we haven't faced a situation where we've had difficulties finding a market for our crude. not here in the U.S. and not anywhere in the world, not yet. That may be coming. On the natural gas side, we are seeing some at least somewhat bullish views on the natural gas side. We just don't have the same exposure that we used to have. Our exposure is mainly on the On the LNG side and on the European gas side, we have very little domestic production anymore.

Understood. Can you talk a little bit as a follow-up about your infrastructure positioning and how markets are around the positions you have in North America? And I'll leave it there. Thanks a lot.

Yeah, Paul, I guess you're talking more about some of our marketing activities and, well, maybe both equity and marketing. But, you know, we do have long-haul positions on both the oil side and the gas side, probably more on the natural gas side because we've been such active marketers of natural gas in North America. You know, so we've been... marketing our own equity gas out of the Permian Basin, generally moving it west towards California, some to Mexico, Arizona, and up the west coast as well. But we also move a lot of third party volumes as well.

Thank you. Our next question comes from Bob Brackett from Bernstein Research. Please go ahead. Your line is open.

Thank you. I read the release. You mentioned the Komuntu East field is not moving forward into development. Can you kind of talk to that and talk about, as an example, how has your capital allocation philosophy changed, at least in terms of sanctioning projects this year, if it has at all?

Hey, Bob, this is Matt. The Komuntu East project, That was simply a sort of financial recognition of the fact that the timing of when we would develop the KME is essentially a satellite to Kaaba Bank and KBB. And because KBB has been slowed down by this pipeline issue, third-party pipeline issue between Saba and Sarawak, the license for KME is going to expire before we can bring it to an economic development. So we were just recognizing that in our treatment of the asset. So that was what caused that recognition in this quarter. In terms of the second part of your question, I wouldn't say that there has been any significant change in our view of how we should be allocating capital. We should be allocating to lowest cost of supply, and we should be phasing it so that we're doing that in the optimum way. So no significant change. At least not yet, Bob, in our thinking on that.

Okay. Thanks for that. A quick follow-up on Anchor, or sorry, on Harpoon. You mentioned that you clipped the top sets, which tells us something about missing reservoir, but you didn't mention fluids. Did you encounter hydrocarbons in that?

Yeah, we did encounter hydrocarbons. We're still interpreting the results there, but it's... It looks from a lithological perspective, similar to other lithological signatures we've seen on the edge of these top sets. But, you know, we had two other wells to drill. We would have got a lot more information had we been able to finish the program, but for safety reasons, we chose not to.

Thank you. Our next question comes from Devin McDermott from Morgan Stanley. Please go ahead. Your line is open.

Hey, thanks for taking the question. There are a few asked already on capital spending and the balance sheet, but I wanted to just follow up in a bit more detail on that. And you provided back at the Investor Day a helpful analysis of stress testing, the balance sheet and cash flow profile through a low commodity price period. And clearly, what we're seeing right now is a bit unprecedented and different than that stress test, but the balance sheet is still a very strong competitive advantage for you. I was wondering if you could just give an update on How are you thinking about the required cash balance and willingness to take on kind of additional leverage here or lean on the balance sheet to the extent we see a sustained period of low prices over the next few quarters to years? And at what point further CapEx cuts become a consideration?

Devin, this is Don. I'll take that. You know, as far as cash balances, back at the analyst day, I think we said that we had an operating balance requirement of about a billion dollars and we felt like we wanted to keep a reserve balance on top of that of two to three billion. I think generally we feel the same way about it. You know, technically it's probably, those numbers have probably come down a little bit. Operating cash is not quite a billion dollars because, mainly because of some of the assets that we've sold. We just don't need that much. And the reserve capital or the reserve cash, that's a number that we recalculate every month based on our outlook for the next six to 12 months. And that number's probably come down a little bit because of our lower spending on CapEx, OpEx, the suspension of our buyback program. But it might be a billion dollars lower than what we were thinking in November. But that's about it. So those numbers are still pretty good. We think we'll, you know, as we look out, say, to the end of the year, we think that we'll be able to maintain cash balances above those levels of operating and reserve cash. So that would imply that we don't expect to have to access the debt capital markets.

Thank you. Our next question comes from Pavel Melchanov from Raymond James. Please go ahead. Your line is open.

Thanks for taking the question. You may have mentioned a few minutes ago, are you going to be having any involuntary shut-ins in Norway or Indonesia, both of which were part of the OPEC Plus agreement?

Yeah, I'll take that, Pavel. We just saw today, as you did, that Norway announced that they would be participating in the OPEC cuts. They announced a 250,000 barrel a day curtailment for June and about 135, 134, I think it was, in the second half of 2020. So we are likely to be allocated some of that in Norway. But we're working, they have a reasonably complicated way of working that out. so it's likely to have some impact on our Norway business. Our estimate at the moment is it will be, in terms of the impact on average rate for the year, it will be in the low single digits barrels a day for the year for us, but we are still working through that. They also made some interesting changes to the tax regime over there. The most interesting one being accelerating the depreciation schedule to one year for capital. So that was a pretty smart strategic response from the norwegian government as you would expect in terms of indonesia we um i think you mentioned indonesia we we we sell gas in indonesia um to uh to the domestic market most of our fixed prices that take a fake commitments so uh so we're not going to be affected by any any indonesian action to um to support the opec plus group Now, we may be affected in Malaysia, and the Malaysian government has announced that they are going to participate to some extent, but we don't know the details yet of how that will play out.

Senora, this is Ellen. We're getting close to the top of the hour, so I'm going to ask that we take just one more question. Apologies to our participants, but we'll wrap it up here with one more.

Thank you. Our last question comes from Phillips Johnson from Capital One. Please go ahead. Your line is open.

Hey, guys. Thanks. Your oil mix in the lower 48 has been pretty consistent over the last several quarters in the 57% to 60% range. As you mentioned, you aren't planning on any well completions in this environment. So my question is if we look, you know, 9 to 12 months out, Would you expect your oil mix to move significantly lower from that range just as, you know, GORs and existing wells naturally move higher without any new volumes to offset that mix shift?

Yeah, so there may be some modest increase in the gas ratio over as we go through the year, but it shouldn't be that significant. We'll have declining production in the bulk and the ego curves are permanent. And with that, there'll be some increases in GUR, but it shouldn't be that, you know, significant.

Thank you. I'm not showing any further questions at this time. I would like to turn the call back over to Ms. Ellen DeSantis.

Thanks, and our, excuse me, thanks to our listeners. If we left anyone in the queue, excuse me, we'll come back to you. Thanks for your participation and stay safe.

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