ConocoPhillips

Good morning, and welcome to the Q4 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'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, this conference is being recorded. I'll now turn the call over to Ms. Ellen DeSantis. Ellen, you may begin.

Thank you, Zanara. Hello and welcome to our listeners today. First, I'll introduce the members of the ConocoPhillips executive team who are on today's call. We have Ryan Lance, our Chairman and CEO. Bill Bullock, our Executive Vice President and Chief Financial Officer. Matt Fox, our Executive Vice President and Chief Operating Officer. Tim Leach, our Executive Vice President of the Lower 48, Dominic Macklin, our Senior Vice President of Strategy and Technology, and Nick Olds, our Senior Vice President of Global Operations. Ryan will open this call with some prepared remarks, and then the team will be available for your questions. Before I turn the call over to Ryan, excuse me, a few reminders. The results we released this morning reflect 2020 results for ConocoPhillips only. We will not be discussing any Concho-specific results today, but beginning in the first quarter of 2021, results will reflect the combined ConocoPhillips-Concho company. We will make some forward-looking statements this morning based on current expectations. Actual results could differ due to the factors described in today's press release and in our periodic SEC filings. We'll also refer to some non-GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and on our website. Thanks, and now I'll turn the call over to Ryan.

Thank you, Ellen, and thanks to all our listeners for joining today's call. Lately, I've been reflecting on this time a year ago. We had just rolled out a groundbreaking multi-year plan for the company. The plan was anchored to a comprehensive philosophy and approach we had been espousing since 2016 that was aimed at reversing the failings of the NP sector to create a sustained value for shareholders through cycles. What was that business model? It was reinvest about 70% of our cash flows into the lowest cost of supply resource to grow financial returns and free cash flow, return at least 30% of the cash flow to our owners, maintain a very strong balance sheet, and lead in ESG stewardship. Our multi-year plan gave the market a credible example of how this business model would work. Well, almost as soon as the ink had dried on our multi-year plan, along came 2020. And for the entire year, nothing went as expected for any of us. But here's the thing. Despite the most challenging year in the history of our sector, our business model worked. The value proposition prevailed. We exercised available flexibility without forfeiting productive capacity. We high graded our portfolio. We executed our programs and returned over 50% of our cash to our owners. Our balance sheet stayed strong and we continued to up our game on ESG. In other words, our value proposition passed the test of 2020. And this strengthened our conviction that we have the right model for this volatile sector. This conviction is what led us to acquire Kancho in a transaction that will enhance our ability to deliver our proven value proposition. So we've turned the difficult experience of 2020 into an opportunity to emerge as an even stronger, more investable company for our sector. Earlier today, we announced fourth quarter and full year 2020 results for ConocoPhillips. Because the contra transaction closed after year end, the results we reported today represent standalone ConocoPhillips performance for 2020. However, beginning January 1st, our 2021 results will reflect the combined company performance. Now, I don't plan to review the results we announced this morning. I just described some of the important highlights from last year. But this morning's results should give you all confidence that the underlying standalone ConocoPhillips business is running very well, thanks to the many efforts of our workforce. And I can assure you the Concho Permian business is running well, too. And again, thanks to our workforce in Midland. Our mindset as we start 2021 is all about doing the work and delivering the results that make us the best E&P company in the business. And to align all of us, here are our key focus areas for 21. Our top priority is to create the strongest competitor in the business from the combination of ConocoPhillips and Concho. The closing of the Concho transaction cleared the way for us to begin comprehensive integration and optimization efforts across every part of our business. We're just getting started post-closing, but we're already taking actions that will drive greater efficiency and capture best practices to ensure we perform at the highest level organizationally, technically, operationally, financially, and culturally. We have already identified the sources of capital and cost reductions to meet the $500 million target we set when the deal was announced. And I can report that we will significantly outperform those initial expectations as we review our processes, share best practices, and organize for the new realities of the business. But let me put our revised saving expectations into perspective for you. Compared to pro forma, 2019 adjusted operating costs of approximately $7 billion We anticipate being at an annual run rate of approximately 6 billion in 2022, assuming a similar production level of roughly 1.5 million barrels a day equivalent. Now, this billion-dollar reduction, about 400 million of that was driven by actions taken by both companies prior to the deal announcement. with the remaining savings to be realized through cost reductions implemented in conjunction with the transaction. It represents a major value upgrade for the company because it greatly enhances the competitiveness of our free cash flow generating capability, which is how we'll win. We'll be implementing our cost reduction actions throughout 2021, and we'll provide updates on our progress along the way. The next priority is to execute the announced operating capital plan of $5.5 billion. This budget is comprised of sustaining capital of about $5.1 billion and about $400 million that will be directed toward major capital projects, primarily in Alaska, and ongoing appraisal activity. Now, for this level of capital, we expect to produce about 1.5 million barrels of oil per day equivalent, which is roughly flat to 2020 pro forma production adjusted for curtailments and asset sales. In this morning's supplemental material, we provided operating capital plan by segment. We expect to spend about 55% of our capital in the lower 48, with the remainder allocated across our diverse global programs. We set the capital budget at about $5.5 billion for two principal reasons. First, while the macro environment has firmed up recently, we are cautious about the trajectory and the timing of a recovery. Demand recovery is taking longer, spare supply remains, and inventories remain elevated. It makes no sense to grow into this market environment, so we're choosing to stay at a sustaining level for the year. Second, we're committed to growing free cash flow, and we are setting up the company to be a significant free cash flow generator. That means maintaining capital discipline, but also driving program improvements that enhance uplift efficiency. In other words, we're driving for free cash flow growth, not production growth. At $5.5 billion of capital in 2021, and if current prices hold, we expect to generate significant additional free cash flow. In that situation, our dividend alone would not be sufficient to meet our target of returning greater than 30% of our CFO to our shareholders. You should not be surprised to see us reactivate buybacks as a channel, and we always like the idea of improving net debt. A third key 2021 priority is engagement with our various stakeholders. This includes investors, regulators, government officials, partners, communities, and our workforce. We're undergoing a significant level of change, both on the inside as we integrate our companies, but also in the external environment. While we consider engagement part of ordinary business, there's no question this priority has taken on a new level of importance in today's environment, especially given the recent industry-related announcements coming from the new Biden administration. Now, let me take a moment to address our thoughts about the administration's recent pronouncements of a temporary moratorium on leasing and permitting on federal lands. I have to say, we were not entirely surprised by the announcement. In fact, President Biden said during the campaign that he would issue a temporary moratorium on new leasing. As for the permitting moratorium, the administration has publicly indicated this is a temporary pause and that they will continue to issue permits. Obviously, we hope these temporary actions are resolved in a timely fashion, and we are certainly watching the situation closely. Now, from our perspective, some of the recent executive actions targeting U.S. oil and gas production will have negative economic and environmental consequences to the American people. If the moratoriums become permanent, they will eliminate well-paying jobs, mainly in rural America, slower economic recovery, negatively impact energy and national security, and increase our reliance on higher GHG foreign barrels. We certainly want to avoid these outcomes. So we stand ready to work with the Biden team, as we did successfully with the Obama-Biden administration, to find balanced solutions to address the issues. As for the questions of what a permitting moratorium could mean for ConocoPhillips specifically, let me take that head on. While we certainly are going to engage to protect our interests, ConocoPhillips has the flexibility, the diversity, and the depth of low cost of supply and low GHG resource to manage through this issue without materially impacting our plans. And a final 2021 priority will be continuing to up our game on another issue that is very important to our stakeholders, namely ESG. This is an area where we have a long-term demonstrated track record of commitment and performance. but clearly there is heightened interest across all of industry on this topic. We continue to accept our responsibility for continuing ESG improvement and, in fact, embrace the opportunity to be an industry leader. Last year, we became the first U.S.-based upstream company to adopt a Paris-aligned climate risk strategy. We set internal emission reduction targets that are consistent with the goals of that agreement and are taking significant measures to monitor and reduce methane emissions across our operations. In addition, we're actively advocating for a well-designed price on carbon in the U.S. because we believe that's the most economically efficient and effective step that can be taken by the U.S. to set the world on a sustainable path to long-term GHG emission reductions. While we work diligently to reduce emissions, on a parallel path, we have established a low-carbon team within the company. That team is conducting in-depth studies of energy transition alternatives, monitoring trends and evaluating the economics and the viability of these alternatives for ConocoPhillips over time. Our board is engaged with the team and its work, and we're committed to continuing our analysis on this important topic. But at least for now, we believe the highest value we can create for all our stakeholders is by being the best E&P company in the business. The world needs clean, low-cost barrels that are safely delivered by disciplined, free cash flow and returns-focused companies like ConocoPhillips. 2020 was indeed a challenging year, but the lessons and accomplishments we took from it put us in great stead, not only for 2021, but as a 75 billion enterprise value industry leader. We're in a unique position to help transform the perception and the performance of our sector with a clear vision of what we need to do. Deliver value from the contract transaction, execute our 2021 operating plan, engage with our stakeholders, and keep pressing on ESG leadership. We look forward to keeping you informed of that progress as we go throughout the year. Now let me turn that back over to the operator, and we'll take your questions.