ConocoPhillips

Good morning, and welcome to the Q3 2020 ConocoPhillips 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-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, this conference is being recorded. I will now turn the call over to Ms. Ellen DeSantis. Ms. DeSantis, you may begin.

Thanks, Inara. Hello and welcome this morning to our listeners. I'll first introduce the members of the ConocoPhillips executive team who are on today's call. We have Ryan Lance, our chairman and CEO. Matt Fox, our EVP and chief operating officer. Bill Bullock, our executive vice president and chief financial officer. We have Dominic Macklin, our senior vice president of strategy, exploration and technology. and Nick Olds, our Senior Vice President of Global Operations. Ryan will open this morning with some prepared remarks, and then the team will take your questions. Before I turn the call over to Ryan, a few reminders. In conjunction with this morning's press release, we posted a short deck of supplemental material regarding the quarter onto our website. That's available for your access. Next, we will make some forward-looking statements this morning based on current expectations as well as statements about the proposed business combination announced last week between ConocoPhillips and Concho. A description of the risks associated with forward-looking statements and other important information about the proposed transaction can be found in today's press release, all of which are incorporated by reference for purposes of this call. We'll also refer to some non-GAAP financial measures today and reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and also on our website. Thank you, and now I will turn the call over to Ryan.

Thank you, Ellen, and good morning to our listeners. Before we get into our third quarter results, I'll take a few minutes to address last week's announcement of our combination with Concho Resources. We spent a lot of time talking to the market over the past several days, and I'm pleased to say that the feedback has been positive. By the way, earlier this week, we added some annotations to our transaction deck for clarification. Today's call is a great opportunity to reflect on our conversations and reiterate the compelling merits of the transaction for both sets of shareholders. I'll start at the highest level. Our announced transaction with Concho combines two widely recognized leaders in the sector. ConocoPhillips has been a recognized leader in the returns on and returns of capital model for the business. And Concho has been a recognized leader in the Permian pure play class. Yet, while we're both best-in-class companies on a standalone basis, by scaling up our existing returns-focused business model, we are stronger and more investable within the sector characterized by frequent price cycles, industry maturity, capital intensity, and ESG focus. will be a nearly $60 billion enterprise that is uniquely positioned to create sustained value by embracing what we believe are the three essential future mandates for our sector. And these mandates are, first, providing affordable energy to the world, second, committed to ESG excellence, and third, delivering competitive returns. We believe the transaction accelerates our ability to successfully and simultaneously deliver on all three of these mandates. That's how we will win. Now, let me take these mandates one by one in the context of our transaction. In all future energy scenarios, we know the world will need hydrocarbons as part of the energy mix for a long time, even as we see increasing adoption of low-carbon energy sources. However, we also recognize that the energy transition means the winners will be those companies with resources that can be affordably developed in a transition in any transition scenario including a less than two degree scenario that's the reason we've always been committed to having the lowest cost of supply resource base in the industry the company will have a 23 billion barrel resource base for the cost of supply less than 40 a barrel concho gets the benefits of our global diverse and lower capital intensity portfolio attributes conoco phillips gets the benefit of adding some of the best resources in the world And by the way, we've studied rock quality everywhere. Now let's move on to the second mandate, a commitment to ESG excellence. In conjunction with last week's transaction, we announced we're adopting a Paris-aligned climate risk framework. We're the first U.S.-based oil and gas company to do so. Our framework includes specific emissions intensity reduction goals, a commitment to no routine flaring, permanently installed methane monitoring, and advocating for a well-designed carbon price in the U.S. This framework is in service to our ambition to reach a net-zero operational emissions target by 2050. Now, we've been asked at our engagement meetings if this framework included the portfolio effects of the Concho assets. The explicit answer is no. We were preparing to issue our new climate risk framework before the transaction was agreed. However, we see the addition of CONCHA's assets as being consistent with and accretive to these goals. The production emissions of the U.S. unconventionals are among the lowest GHG intensity assets in the world. So the addition of these resources will be a benefit to our projections, plans, and targets. Now, the third mandate, delivering competitive returns, is an imperative for attracting and retaining investors to the sector. Our company has been all about returns, and that won't change. In fact, the combined company will be uniquely positioned to deliver on the proven returns-focused value proposition we know investors want from our sector because of several advantage attributes and demonstrated priorities. For example, as I just described, the transaction creates a massive, resilient, low-cost-to-supply resource base. I discussed this as part of Mandate 1. but also add that low cost of supply is the best assurance by definition for delivering competitive financial returns through price cycles. After the deal closes, we'll publish our combined cost of supply curve. I have no doubt it will be best in class. By the way, we've been asked about how we view risk in the event of a change in leadership in Washington. Our view is that while it might create some headwinds for the industry, our company's global diversification and our mix of private, state, and federal leases in the U.S. assures that we are competitively positioned for that outcome. And we accounted for this potential risk in our evaluation of the overall transaction. Diversification and low capital intensity matters. And as I just mentioned, we preserve those portfolio characteristics. adding conscious unconventional assets into our portfolio will not make a material difference to our base decline rate that means we retain our diversification and low capital intensity advantage for the benefit of both shareholders we'll apply our disciplined consistent approach to future investment programs capital will be allocated first on a basis of cost of supply and then based on secondary criteria such as flexibility capital intensity asset optimization affordability and free cash flow generation and our expanded permian program resulting from the transaction will be integrated within the total company plan to optimize overall outcomes and value the combination creates greater visibility on earnings expansion and free cash flow generation factoring in our announced 500 million targeted cost and capital savings the transaction is accretive on all key consensus financial metrics including earnings free cash flow and free cash flow yield. Finally, our strong balance sheet plus free cash flow generation means we're even better positioned to give investors what they want from this business, returns of capital. The transaction enhances our ability to meet our stated target of returning more than 30% of our CFO to our owners annually. And this target isn't an ambition. It's what we've been doing for the past four years. in fact we returned over 40 of our cfo to owners over that period and it will remain a key part of our future offering the bottom line this transaction creates a best-in-class competitor of scale to thrive in a new energy future that is compelling for shareholders for both companies now a few comments on what to expect next rs4 filing should be filed in the next couple of weeks and we expect the transaction to close in the first quarter of 2021. Integration planning is already underway. Dominic Macklin will lead the effort for ConocoPhillips, and Will Giroux will lead the effort for Concha. Both sides are excited and committed to a very successful integration. As part of the integration planning, we'll begin to evaluate how best to optimize our future investment programs. We would expect to announce pro forma CapEx for next year shortly after closing. But directionally, on a standalone ConocoPhillips basis, we remain cautious on the pace and timing of recovery. So as a place to start, we're currently thinking we entered 2021 CapEx at a level that is roughly similar to this year's capital, meaning little to no production growth on a standalone basis. Of course, we retain the flexibility to adjust as the year progresses. We have the capital flexibility, the balance sheet, and the cash on hand to respond as necessary to changes in the macro while meeting our capital return priority. And that brings me to a few comments on the third quarter results. It's certainly been a ball of the year for the business, as we all know. The company took some significant actions to respond to the downturn, including production curtailments. And over the past couple quarters, we also carried out our major seasonal turnarounds. So a bit of noise in the second quarter and third quarter numbers. But by the end of the third quarter, the containment program was behind us. The seasonal turnarounds were complete, and the underlying business was running very well. As you saw this morning's release, third quarter results were in alignment with expectations. We've reinstated guidance that you should think of, and you should take the fourth quarter as the new baseline for 21 capital and production. Those I just mentioned, that's subject to ongoing monitoring and market conditions. We look forward to keeping you updated on our integration progress and our future plans for the business. And finally, we hope everyone's safe and well. And now I'll turn it over to the operator for Q&A.