ConocoPhillips

Welcome to the first quarter 2021 ConocoPhillips earnings conference call. My name is Hilda and I will be your operator for today. 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 and then 1 using your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Ellen DeSantis. Ellen, you may begin.

Thank you, Hilda. Hello and welcome this morning to our listeners. I'll first introduce the members of our 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. Tim Leach, our executive vice president to the lower 48. Dominic Macklin, our SEP of strategy and technology and Nichols, our SEP of global operations. Today, several of our executives will make prepared remarks and then the team will take your questions. Before I turn the call over to Ryan, a few quick reminders. In conjunction with this morning's press release, we posted a short deck of supplemental material that includes first quarter highlights, earnings and cash flow summaries, operational highlights, and updated sensitivities. We also announced this morning that ConocoPhillips will host a virtual market update on June 30th. So save that date. We will be providing details on that meeting shortly. In today's call, we will make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in today's press release and in our periodic SEC filings. And finally, we'll also refer to some non-GAAP financial measures today. Reconciliation to the nearest corresponding GAAP measure can be found in this morning's press release and on our website. And with that, I'll turn the call over to Ryan.

Thank you, Ellen, and welcome to all our call participants. It's a very busy but exciting time at ConocoPhillips. With the Concho transaction now closed, our entire workforce is on a mission to emerge from last year's extreme sector volatility and the transaction integration activities as the strongest competitor in our business. We're viewing 2021 as a catalyst moment, like we did in 2016, to improve every aspect of our business and again, step out from the pack by taking our disciplined, shareholder-friendly value proposition to the next level. We're taking actions across every aspect of the company to improve our underlying drivers, and our first quarter results represent an early indication of our progress. Some of the actions we're taking are transformational, such as capturing synergies. Others are chipping away at core drivers to improve efficiency and returns, such as the debt reduction plans we announced this morning. Here's what everyone in our organization is focused on. First, we believe a safe company is a successful one. With the Concho transaction, we've combined two industry-recognized safety leaders, which has aided our overall integration. And again, I want to recognize our workforce for their exceptional handling of the many challenges presented by the winter storm URI last quarter. We're continuously driving to lower the cost of supply of our diverse resource base. We have a deep inventory of the very best rocks, which is a clear source of sustained competitive advantage. And we're always working to further high-grade the portfolio through asset sales. But our low-cost inventory alone isn't enough. We're focused on applying our rigorous capital allocation process to optimize investments based on the metrics investors demand, free cash flow and returns. We're driving improvements in free cash flow and returns by driving down our sustaining capital through well-cost and supply chain efficiencies, as well as margin improvement, driving down our cost structure through synergies and balance sheet improvements, driving down our sustaining price through the combination of lower sustaining capital and lower cost structure. And finally, we don't cap the benefit from higher prices, which means upside in free cash flow above our sustaining price. We're only a short time into the country integration, but we're already seeing the previously announced synergies materialize, and we expect to yield additional benefits as our integration progresses. We remain committed to returning a significant portion of capital to our shareholders, with a five-year track record of exceeding our target of greater than 30 percent of CFO. In fact, our return to shareholders since implementing our returns-focused strategy in 2016 has been 43 percent of cumulative CFO. So our capital return approach represents a floor on the level of capital returns, not a ceiling. We don't tie our returns to free cash flow like others are doing. So in other words, investors directly benefit from CFO expansion, including from higher prices when they occur. And as you saw in today's release, we're taking actions to further increase our returns of capital in 2021. In addition to our ordinary dividend and our previously announced one and a half billion of buybacks, we intend to begin reducing our Sonovus ownership stake using proceeds to purchase incremental ConocoPhillips stock. We're taking action to further strengthen our balance sheet. This morning, we also announced that we're planning to reduce gross debt by five billion over the next five years. This will reduce our annual interest expense cost and help lower our sustaining price. And finally, we're focused on leading in ESG, especially in emissions reductions. All of this is underpinned by our talented, motivated workforce. They're the driving force in our progress. You can tell from my comments that we're encouraged by the improvements we're seeing across the company. That's why we announced in today's press release our intention to accelerate our 2021 market update from November to a virtual event on June 30th. Now, here's what you can expect at that update. We'll reiterate our discipline philosophy for the business and how we expect to enhance our through cycle performance for a volatile price world, but also for a more stable price world should that transpire. We'll reaffirm the allocation priorities that have been foundational to our company for years. Compared to our plan two years ago, we believe every part of the business has improved. And our goal is to put ConocoPhillips in an even better position to deliver multiple years of free cash flow and returns to shareholders post-conchop. We'll provide an update on our outlook for 2021 and beyond, including our synergy capture progress and our business driver improvements. We'll also provide updates on our asset base and our ESG efforts and plans. As I said earlier, it's a busy time for the company, but we're going to take advantage of our momentum to reengage the market sooner rather than later on our compelling future. Now, let me turn the call over to Bill who will address high level quarterly results as well as our announced debt reduction and Sonova's COP share plans. Thanks, Ryan.

Well, we're certainly off to a good start in 2021. In today's Post-it Materials, there's a summary of highlights from the first quarter, and I'll cover just a few of those items. As we foreshadowed on our March 31st market update, the financial results reflected some one-time contra-related items. Adjusted for these known items, underlying financial performance was very strong. Adjusted earnings were 69 cents per share versus 45 per cents per share in the first quarter last year. Production came into the high end of the range, and all producing segments generated positive earnings in the quarter. As shown in the cash waterfall in the supplemental materials posted on our website, first quarter cash from operations was $2.1 billion and free cash flow was $0.9 billion. These figures include the cash flow impacts related to previous -and-outs contra-related items, which reduced both CFO and free cash flow by about $1 billion. But even with the roughly $1 billion in one-time transaction-related impacts, our CFO of $2.1 billion very nearly covered capital, dividends, and buybacks. We returned 46% of CFO to shareholders in the quarter in the form of our ordinary dividend and share repurchases, and we ended the quarter with $7.3 billion of cash and short-term investments. As a reminder, we issued updated first quarter and full-year 2021 guidance for key business drivers on March 31. And today, we provided updated cash and earnings sensitivities. I call your attention to these because our cash flow torque to the upside has improved significantly as a result of the contra transaction. And in a more constructive price world, we're going to differentially capture the benefit of higher prices because we're unhedged. We're liquid-weighted, and we have exposure to diverse markets globally. Turning to today's announcements, we view our balance sheet as a strategic asset, just like we do our portfolio of low cost of supply resource. And our balance sheet is very strong, with top-tier leverage due to our low net debt. Of course, our cash balances are a component of our net debt, and given that our borrowing costs exceed the returns on our cash, we plan to put some of that incremental cash to work along with future free cash flow to reduce gross debt by $5 billion over the next five years. This will reduce our ongoing interest expense, lower our ongoing free cash flow breakeven price, improve returns, and create greater flexibility on our overall debt structure, all while maintaining our strong leverage position. As part of our program, we may refinance some of our high coupon debt to take advantage of historically low interest rates and facilitate the total quantum of our debt reduction over time. Next, I'll address the Sinovus share monetization plan we announced. As a reminder, we own approximately 10% of Sinovus, which is valued at about $1.6 billion today. The shares were received as part of the consideration for our sale of Canadian assets to Sinovus in 2017, and we've always stated that we did not intend to be a long-term strategic owner of Sinovus shares. Over the years, we've looked at several strategies for reducing our position. We believe the market has responded to the positive steps Sinovus has taken, including its recent commitments to balance sheet strength and operational efficiencies. We intend to begin selling our Sinovus shares in the open market in the second quarter, while simultaneously tending the proceeds and the connoisseur Phillips shares. We will be thoughtful and measured with our sales program, as you would expect, with an intention to fully dispose of our Sinovus position by the end of 2022. We believe this plan to swap Sinovus shares for Conoco Phillips shares aligns well with both our commitment to return capital to shareholders and to monetize our Sinovus position. Taken together, our planned debt reduction and our planned swap of Sinovus shares for Sinovus shares will allow us to balance sheet and our ongoing ability to consistently deliver differential returns of capital to our shareholders, all while lowering our sustaining price. Now, I'll turn the call over to Tim for an update on the Lower 48 business. Tim Larkin Thanks, Bill.

We're just a few months into the Conoco Phillips concho integration process, and like Ryan and our other leaders, I'm more excited now than ever to tell you about our vision for the company and the great progress we've already made. I'll do a quick recap of the Lower 48 from the first quarter, which was nothing short of historic, not only because of the fast-paced integration activity, but because of Winter Storm Uri. Overall, the storm impacted Lower 48 production by about 50,000 barrels a day for the quarter. However, facility damage from the storm was negligible, and we quickly resumed production in March. It was a heck of a test for our expanded Lower 48 region. They passed with flying colors. Total Lower 48 production for the quarter was 715,000 BOEs per day, which includes 405,000 in the Permian, 187,000 in the Eagleford, and 86,000 in the Bakken. We exited the first quarter with 15 drilling rigs, 11 in the Permian and 4 in the Eagleford. And we had 7 frac spreads, 5 in the Permian and 2 in the Eagleford. It doesn't get a lot of attention, but I also wanted to mention that during the quarter, we executed several innovative pilots across the Lower 48, including more than 40 twin frac wells, electrification of our frac spreads, and additional V5 completions. The point is, while we're executing the base business, we're also combining the experience of both companies by conducting numerous tests that should yield future efficiency gains. My entire Lower 48 organization is excited about the role we can play in making Conoco Phillips a company that can supply the cheapest, cleanest barrels to the market, successfully navigate the price cycles, achieve the highest level of execution efficiency, and continue to lead the industry on the innovation front. From a size and scale perspective, our Lower 48 is clearly differentiated in the industry. With the acquisition of Concho, the Lower 48 grew to be about half of Conoco Phillips' production and among the largest domestic producers. We have a high quality set of assets with a low cost of supply resource base made up of core positions in the three premier title basins in the world. Our Lower 48 team is focused on capturing the advantages of both Concho and Conoco Phillips to make our operations more efficient and drive down sustaining capital with the primary goal of maximizing our cash generating capacity. We're creating a massive free cash flow machine from our combined business that will contribute toward the company's ability to deliver on its priorities through cycles. All of us recognize the largest opportunity for value creation is going to come from bringing the best out of both companies and elevating the combined Conoco Phillips to a level unachievable by either company on their own. I'm happy to say that the new organization has embraced this challenge and we're seeing even more opportunity than we initially expected. I couldn't be more pleased with the quality of people we have working on this, starting with the Lower 48 leadership team, which consists of both Heritage Conoco Phillips and Concho leaders. We made it a priority to work closely together and leverage the knowledge base of both very experienced operations. In fact, we continue to see substantial improvements in our well cost. We have our eyes on additional ways to get more for less. Beyond working together to generate the best plan of development and drive in our operations, our team is working hard to identify commercial opportunities to improve margins as well as supply chain opportunities to leverage our global scale and drive down cost. I want to leave you with a strong sense of optimism about what the Lower 48 can deliver. We are fully dedicated to extracting the full value of this deal and I'm looking forward to providing more detail at our midyear market update. And now I'll turn the call over to Nick to provide status of our operations and the rest of the world.

Thanks, Tim. While there's clearly a lot going on in our Lower 48 business, we believe Conoco Phillips has a significant advantage over our independent peers because we also have diverse global businesses that generate significant free cash flow. Today, our Alaska and international businesses comprise about 50% of our companies operated 1.5 million barrels per day production. I'll take this opportunity to recap some of the achievements from the first quarter and bring you up to speed on activities we have underway around the globe. So starting in Alaska, I'm pleased to report that Greater Mooses Tooth II project has made significant progress over the past several months and facility and construction costs are about 10% below budget as we finish our third and final construction season. The project is expected to be online by the end of this year at approximately 10,000 barrels a day with peak production of 35,000 barrels a day that will leverage our existing alpine infrastructure. We're also back to develop drilling on the slope. After suspending virtually all activity in 2020, we're restarting four rigs across our operated assets in Alaska. In the western North Slope, we restart drilling at CD5 and commissioning activities on the new extended reach drilling rig. The ERD rig will play a significant role in augmenting Alaska's base business, allowing us to drill wells in excess of 35,000 feet, accessing low cost supply resources while minimizing surface disturbance. So our base Alaska business is performing very well and we built a strong momentum coming out of 2020. And of course, it's been an eventful quarter for Willow. Let me give you a quick update on where that project stands. We continue to progress the front end engineering and design work while at the same time taking actions to address the legal challenges that have been recently raised. The 600 million barrel oil discovery remains very competitive in our portfolio, but we won't take final investment decision or make significant long lead investments until the litigation risks have been resolved. Now moving to Canada, at Montney, we continue to optimize our development plans to incorporate the liquids rich acreage we acquired from Kelp mid last year. We're leveraging our lower 48 unconventional resource expertise and have reduced drilling costs by 25% over the first four paths. This part of our business doesn't get a lot of external attention yet, but it's worth noting that's currently produced in approximately 30,000 barrels a day, of which 50% is liquids. We continue to be excited about our future in this premier 300,000 acre unconventional position. At CERNMOT, we continue to take actions to reduce costs, improve net backs and reduce emissions, and we're seeing encouraging improvements on all three of these fronts. So in summary, Canada remains an important part of our business with quite a lot of upside and learning curve opportunities. Now moving to our Europe, Middle East and North Africa segment in Norway, we've made good progress on several projects which benefit from the fiscal incentives implemented by the Norwegian government last year. We're nearing completion of tour two and are on track to make final investment decisions on both Tomolitan Alpha and Cobra East Gecko later this year, and work continues to assess our recent discoveries at Varka and Slogugla. In Qatar, our QG3 asset continues to deliver very strong performance and generate free cash flow, and we continue to advance our evaluation of the Northfield expansion opportunity. We're still very interested in participating in this project if it fits our financial framework, so we'll keep you posted as this plays out. Moving on into our Asia Pacific region, APLNG is running extremely well. Production continues to be strong, which when combined with ongoing focus on reducing capital, operating and financing costs, has brought the cash break even down to $25 per barrel rent. APLNG distributed almost $100 million to the company in the first quarter of 2021, and is expected to distribute about $200 million in the second quarter. Finally, in Malaysia, we have several low cost to supply high margin bolt-on projects at various stages of development. The Malachai Phase II project achieved first oil in this year, and SMP Phase II and Gunungsa Phase III are on track for first oil in late 2021 and 2022 respectively. So that's a brief update of our global operations. In summary, we have a lot of exciting work underway that will continue to enhance free cash flow generation. Now I'll turn it back to Ryan for some short closing comments.

All right, thanks Dean. To wrap up, let me go back to how I started today's call. We're giving 2021 and Bay Catalyst both an opportunity to further hone every part of the business and continue leading the sector.

The

aspect of

the company to improve on and we're looking forward to sharing more on that and what that means for our shareholders when we get together with you again on June 30th. So now that let's open it up to Q&A.

Thank you. We will now begin the question and answer session. If you have a question, please press star and then one using your touchstone phone. If you wish to be removed from the question queue, please press the pound sign or the hash key. If you are 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 and then one using your touchstone phone. We have a question from Neil Mehta from Goldman Sachs.

Good morning team and I think Matt's last day if I'm not mistaken was May 1st. So if he's listening from the mountain somewhere, wish him well in his retirement and congratulations to everyone on their promotions.

Thanks, Neil. Rest assured he's probably listening

and greeting us. Well good. Well here's the first question is around Sunovit. So you could have approached this Ryan in a couple of different ways, certainly a block sale and you elected to do it this through the end of 2022. So talk about why you thought this was the optimal way to release the shares into the market and just a housekeeping question here. So you got this annualized billion and a half dollar buyback program but as you're selling Sunovit shares, this will be incremental to the baseline billion and a half dollars, right? So this is this would be a supplemental to the billion and a half that you've already announced. So two questions there.

Yeah, thanks, Neil. Yeah, let me handle the last one first maybe turn it over to Bill for a little bit of color on why. You're exactly correct. So we have the dividend that we're paying. We announced earlier that we were buying a billion and a half of our shares back and this Sunovit swap for Conoco Phillips shares is incremental or on top of the billion and a half that we're currently doing in terms of buying our shares back in. We've looked at this lots of different ways over the course of the last number of years as we've been an owner of Sunovit shares and let me ask Bill to kind of give you a little bit of color on why now and why under this sort of plan.

Sure, good morning, Neil. So as I mentioned, you know, we've always said that we didn't intend to be a long-term holder of the Sunovit shares and as Ryan mentioned, we've looked at several methods. We did look at block sales and we considered that. We think the exchange of Sunovit shares for COP shares over time and the open market makes the most sense to us avoids the discounts associated with open with block type transactions and we think that, you know, we've looked at the Sunovit announcement so that the exchange ratio for Sunovit and COP's really come back to a more historic level. So we see this as an opportunity to one, trade into the COP shares which we like the upside on, two, monetize an asset on the balance sheet which we don't think gets a lot of value and three, give that value back to shareholders.

Yeah, that's very clear and thanks for the color, Bill. Here the second is if you guys can provide some big picture thoughts on the macro recovery. It certainly seems like, you know, that the supply side is responding well and prices are firmer but demand is still uncertain. So, you know, Ryan, how are you thinking about the Brent price outlook from here and the sustainability of the recovery? Any thoughts on the natural gas side, global natural gas side as well as that's firmed up nicely as well?

Yeah, thanks, Neil. You know, we continue to kind of execute the plan that we laid out at the beginning of the year and it's largely due to our view of the macro as you kind of described. Demand still is off to pre-pandemic levels at, you know, picking number 96, 97 million barrels a day of demand. Spare capacity still exists on the supply side largely with the ROPEC group or ROPEC plus. So we still view kind of, you know, five, six million barrels a day of spare supply out in the world. So we still have a balancing that we need to do before we kind of see where the price falls out at that point in time and what the call is on say U.S. tight oil going forward. So we think it's prudent to kind of stay the course right now and not change. We also don't want to whipsaw our programs and driving the efficiencies that Tim and Nick talked about across the global portfolio with a lot of emphasis on what we're doing here in the U.S. in the lower 48. So, you know, until the market gets rebalanced, you know, we're doing all that, watching it before we make any differences as well. So we're positioning ConocoPhillips for any kind of market that we think enters the fray. So if it is going to be volatile or if it's going to be sort of a sustained, more stable kind of price, we're positioned to react to either one of those kinds of markets. It's a bit uncertain with the pandemic and the demand, how quickly that's going to recover. Now, at the office, we believe it's going to recover. We think we probably hit, you know, a million or so barrels a day of demand later this year and on an annual average, we expect 2022 to be at that kind of a demand level. So at that point in time, we would hope the market is balanced on a supply and demand perspective, but it's going to take really the remainder of this year to see that. But our value proposition is pretty firm and delivering money back to the shareholder like we described and hopefully you will see from today's announcements that we're enhancing that. And again, the 30% is our floor. And you look over the last five years, we've delivered 43% of our cash back to our shareholders. So discipline matters and returns matter, and that's what we're all about.

Thank you. The next question comes from Denine Way from Barclays.

Hi, good morning, good afternoon, everyone. Thanks for taking our questions. Good morning. Good morning. Thanks. The first question is really on capex. And Q1 capex was $1.2 billion versus the full year guide of about $5.5 billion. So that implies a little over $1.4 billion a quarter on average for the rest of the year. And so we know that it's hard to do rateable capex outside of Excel, and we can appreciate that. Plus there's noise in the Q1 number based on console and weather and other stuff. But how do you see activity progressing or ramping throughout the rest of the year, if at all? And we understand that production is an outcome for Conoco, but we're just trying to get a better sense of the new steady state now that console is in the mix.

Well, yeah, Janine, yeah, the first quarter was a little bit artificially low given exactly what you described is the weather impacts in the lower 48 that kind of shut things down for a period of time. And then people forget, too, that we had kind of a we had to react to a winter drilling season in Alaska that produced the capital a little bit. So it's not it's not a rateable. You can't just take the first quarter times four. But we are driving the teams to great efficiency and trying to get as much done with the purchase capital dollar that we can. We'll provide more of an update in the June update that we've talked about. And I would say thirdly is, you know, we designed this to run stable. We designed our programs at the beginning of the year and asked our teams to go execute that scope and really not interested in trying to drive that on a quarterly basis and whipsaw the teams, you know, around doing those programs. We just want them to efficiently and effectively execute the programs that we set out at the beginning of the year. But we'll provide more more of an update as we see the year progressing in June.

OK, great. Thank you. We'll wait for that update. And our second question is just on the debt reduction target. We've got balance sheet enhancement, dividends, buyback, capex, all moving pieces on capital allocation. So maybe can you talk a little bit more about how you pick the five billion dollar target over five years? And we noticed that just exceeds the amount that's coming through in that time. So maybe something on cadence as well. And I guess we're just really trying to back into how much cash return is available now that we have a defined growth debt target out there that we need to allocate for cash. Thank you.

Yeah, thanks. I can let Will talk specifically about the debt. I would just say, you know, back to my opening remarks a bit, Jeanine, is that we're looking at every piece of the business. We're looking at the portfolio. We're looking at the balance sheet. We're looking at the cash sitting on the balance sheet and all those pieces of it. And we haven't forgotten about the shareholder. Hopefully you saw that today with our announcement on the trade with the the Sonova shares in the Conoco Phillips. And again, that's incremental to the billion and a half that we're doing already. Let me ask Bill, he can give you a little bit more color on why five billion, why five years. Yeah, sure. Thanks, Ryan. Good morning,

Jeanine. So first, I just would start with, you know, both Heritage Conoco and Heritage Contra had really strong balance sheets. So does this combined company. And in fact, you know, as we look at this, our net debt to CFO consensus is under one times materially less than our peer group. But with the Contra transaction, our growth debts increased from 15 billion to 20 billion dollars. And we have some legacy high keep on debt that's out there on our balance sheet. So we think this is unique opportunity to reduce our ongoing interest and lower our ongoing free cash flow breakeven. We think that improves returns. It creates greater flexibility in our debt structure. And all this supports our ability to maintain greater than 30 percent of returns for our shareholders. When you think about why five billion dollars, well, that's certainly over what the natural maturities of our bond ladders would be right now. We've got about three billion dollars of bonds retiring over the next five years. So some of that will be early retirements. And you can see us do that with public tenders, open market repurchases, or perhaps a combination with refinancing. All that's going to be taking a process that favors flexibility and optionality. And in the case of our five billion dollars over five years, that is our base case. We think that gives us the ability to moderate the reduction and take advantage of supported market conditions. But you may see us accelerate that a bit if efficiencies in the market allow us to do that earlier. So that's a bit of a context on why we're looking at reducing our debt structure, how we got to five billion, and a bit on the pacing.

Thank you. Our next question comes from Phil Grash from JP Morgan.

Hi, good afternoon. I suppose as a bit of a follow-up to Jeanne's question, there's a lot of excess cash that would be available if you're paying down the five billion of gross debt between free cash flow and the cash in the balance sheet and Sunova shares. Perhaps some of this you want to save for the analyst day, but any additional high-level commentary you could share around capital allocation?

Well, yeah, we'll see what the market gives us, Phil, over time. I would say too that we described to you back in November 2019 how we think about the cash on the balance sheet. There's the operating cash, there's some reserve cash to deal with the volatility in the market, and then we like to hold some strategic cash as well. And we still think the market's going to be quite volatile, so we'll see what the market gives us when we want to be prepared for any kind of market that we find ourselves in. And then, and thirdly, you should think about some of that cash. We'll make sure this shareholder is fully satisfied based on our past experience and what we've done as a company. And then thirdly, I would say we are thinking about some of the future calls, whether that's the, if we're successful, the North seal expansion, what we might do at Willow. We had some exploration discoveries in Norway. We hope to be successful in Malaysia. So some of that cash that you might see on the balance sheet will go to some of those projects as well, such that we can continue to reap all the benefits from the annual free cash flow that we're getting and distribute that back out to the company to our shareholders.

Got it. Okay. My follow-up would just be, Ryan, you made a comment about certain minimum cash levels. How do you think about what that should be today? And then if I could glue in one question around Alaska, do you still target trying to sell down Alaska as a portion of Alaska, as you discussed at the 2019 analyst day, would that be another source of potential cash still?

Well, I think more broadly, direct answer to your question, Phil, is yes, we're still looking at potentially marketing some of the Alaska position, but more broadly, I think with the Conchoac position, we're combing through the portfolio to make sure that we're continually high grading and take the opportunity of the kind of commodity price environment we find ourselves in. So we'll have more to say on that in June as well. From the various cash positions, I think it kind of came in the first. We think about a billion dollars of operating cash and a couple billion dollars of two to three billion of reserve cash, which is what happens in the market. We can respond. We can keep our programs running consistently and not with our programs. We want to have the cash there to do that. And then we have strategic cash on top of that, which are for other uses that I described in your first question.

Thank you. Our next question comes from Roger Reed from Wells Fargo. Hello. Good morning.

Morning, Roger.

I guess it's getting beaten pretty hard here, but I'm going to try one other thing on the debt structure here. I mean, looking back to where you were in 16, the changes you made free the Conchoacquisition, it would appear you're aiming for a lower level of debt. You mentioned lowering break even as a component of that. It would seem you could get there by refinancing the debt and bringing the overall interest expense down. So I'm just curious as you think about it as a part of your capital allocation, right? Return to shareholders, granted, reducing debt can be seen that way. But I'm just curious how it all kind of fit together as the goal of reducing by $5 billion.

Sure, Roger. This is Bill. I'll take that. Yeah, certainly. So as part of our $5 billion debt reduction over five years, I mentioned we've got about $3 billion. That's just naturally maturing towers. We are absolutely looking at refinancing a portion of our debt, our purchasing debt in. We like our path to $5 billion, but you know, with the high cupum out there, it's possible to refinance. And I think that'll depend on a couple of factors, including the cost of debt retired and reissued and how we decide to approach our debt reduction targets. But certainly refinancing is a component of the overall debt restructuring and portfolio. And it works in combination with considering public tenders or open market repurchases. But you're absolutely right. We could make some steady progress on that just by refinancing some of our high keep on debt.

Thank you. Our next question comes from Ryan Todd from Simmons Energy.

Great. Thanks. Maybe at a higher level, what do you see in capital efficiency and non-true portfolios? We've kind of emerged from the pandemic a little bit and with the addition of concert of the portfolio, do you have an estimate for what you think that maintenance CapEx is and the right way to think about long-term capital spend? You used to talk about kind of $6 to $7 billion a year, the rough range. Has there been any adjustment to what you see as a normalized level of longer-term capital spend?

Yeah, we'll be talking about that, Ryan, in June and kind of provide an update relative to what you saw back in 2019. It'd be premature for me to talk about that. I would just tell you we're constantly trying to drive down our sustaining capital and lower the break-evens in the company. And I think, you know, Tim and what we're doing in the lower 48, Nick's doing around the rest of the globe, we're seeing a lot of progress. And that goes with the synergy capture that we can talk about if you like. But all those things are manifesting themselves in lower CapEx, lower sustaining and lower break-even.

Thank you. Our next question comes from Josh Silverstein from Wolf Research.

Hey, thanks, guys. Just on Alaska, I know last year was a COVID-shortened drilling program. Can you talk about all the exploration activity that's taking place this year and then just again with the timing around Willow, with the litigation of what needs to happen there to progress that forward?

Yeah, Josh, this is Nick. Why don't I start with Willow. Yeah, I apologize, Josh. Let me start with Willow. First, the big focus this year is related to the front-end in engineering design, as I mentioned, as well as detailed engineering. That's all related to reducing understanding of capital, the schedule and ultimate development considerations prior to taking FID later this year. That's the target. As a reminder for the group, you know, they've got two lawsuits that are currently in federal court filed by two environmental groups challenging the BLM and the Army Corps record of decision for the Willow projects. As you recall, as well, we also had all the permits for the 2021 Willow construction received in early January. However, due to the granting of the injunction by the Ninth Circuit Court of Appeals, that 2021 activity, which was a very small, modest scope of gravel work, has been deferred into 2022. And as all projects, we have scheduled flow or scheduled contingency, Josh, so that won't impact the overall timeline. In addition to the feed that I just mentioned, the primary focus now relates to the merits of those active lawsuits, and we anticipate a decision by the district court in the third quarter. I also want to just mention we have significant support. As an example, we've got the state of Alaska and the North Slope borough have both intervened in the court case supporting the BLM record of decision. We also have several North Slope village councils and tribal organizations who have sent strong letters of support to Congress and the Secretary of the Interior. The last thing I'll just reiterate as part of my opening remarks, we will not take FID or make any significant long-lead investments until such time key litigation risks have been addressed. And finally, will is a great investment opportunity, we have the flexibility to adjust the pace of the project if needed.

Thank you. Our next question comes from Steven Richardson from Evercore ISI.

Thank you. Ryan, I was wondering if you could expand a little bit on this idea of 2021 as a June 30th and that update, and I'm not asking you to kind of preview it, but I think it would seem to us that one of the big differences today at ConocoPhillips relative to the last time you did one of these updates was just the predictability of your portfolio is probably better than it's ever been. So I was wondering if maybe you could reflect a little bit on that predictability, acknowledging oil price is still the big externality, but the predictability of the business you see internally and how that's informing kind of your longer-term targeting and kind of willingness to think out more than a couple of quarters or even a couple of years.

Yeah, Steven, you're right. As we said in the opening remarks, the lower 48 is half the company in terms of production today and the shorter cycle nature of that business is pretty predictable. But I'd say we've gotten to a place where we understand running the base business across the whole world is good too. And so we understand the portfolio really well obviously and know what the prospects look like over the long haul. You talked about the catalyst moment. It's really focused in what we want to convey today. It's every aspect of the business. So we talked about the sheet. We talked about returns back to the shareholder. We talked about the efficiencies that we're gaining in the system post the contra acquisition. So we're working really on every part trying to lower the breakeven of the company and still be the best company in this business that can operate in a very volatile environment. And you can still count on the returns back to the shareholder. And you can count on us hyper-focused and disciplined on returns not only on capital but of capital, both. So I think that's what you'll hear in June. A lot more on that. Work on the portfolio. Work on what we're doing across the whole company on every lever. We know what investors want. It's free cash flow and returns. And that's what we're hyper-focused on.

Thank you. Our next question comes from Dog Liggett from Bank of America, Maryland.

Hello,

Doug.

Doug, are you there?

Can you hear me now, Ryan?

Yeah, now we've got you, Doug.

Thanks. Yeah, so it seems I've got a dodgy headset. I apologize for that. So Ryan, I'm afraid I'm going to beat up a little bit on the free cash story here. But also, I'd like to frame it a little bit because Matt's not here to defend himself. But if you think about value as essentially your unlevered free cash flow, the decision is ultimately between the balance sheet and equity to transfer value between those two. Then a buyback implicitly has some view on value of your company. So I'm kind of curious how low you would be prepared to take the debt before you step up the buybacks again because clearly you could do a lot more if you wanted to of $1.5 billion and where the variable dividend potential fits into that story.

Yeah, sorry you were breaking up there a little bit, Doug, but I understand your question, right? How do we make all those balances? I think we're walking and chewing gum at the same time here a little bit. So we're working on all aspects of the portfolio. I think our focus is on trying to lower the breakeven and lower the sustaining capital to work on the operating side of the business, lower the breakeven, which is reducing our interest expense by taking some of this high coupon debt and bringing it forward, giving us options to make that callable and reduce that in addition to what's coming out over time. So I think we're trying to do all things and I think the basic commitment that we've made to the shareholders is we're going to return 30 percent of our cash or greater back to you over time. So we will do that. Now the vehicle, and I think part of your question was what's the right vehicle to do that in, you know, that's I guess in the eye of the beholder a little bit. There's not unanimity around what the right way to do that is. We like the shares given the reduction that it makes in the absolute dividend, the push-air metrics that it creates in the balance in the accepted way that it's done. But with that said, you know, we've studied variable dividends and CPDs or whatever you want to call them going forward. We spent a lot of time thinking about it. Mathematically, it really doesn't matter. At the end of the day, the commitment is to return more than 30 percent. If there's a hybrid in our future, there could be. We'll keep looking at it, and we're not committed to one path to deliver returns back to the shareholders. But today we think our shares are a great value. So and we think this conversion from CVE to ConocoPhillips shares is an elegant solution to get more back to the shareholder. So we're pretty committed to that.

Thank you. Our next question comes from Bob Brackett from Bernstein Research.

Thanks for that. Most of my intelligent questions have been asked, but I'd like to at least chime in and congratulate Matt as well on his retirement and maybe ask a question around the June 30th virtual meeting. Should we expect something like the 2019 meeting, 100 plus slides, a 10-year plan, or should we expect more of a modest update?

A modest update,

Bob. It felt there was a lot of questions and putting a bit of burden on you all, but glad for that clarification.

Appreciate the question, Bob. We get the clarity out there.

Go ahead, Hilda. Thank you. The next question comes from Paul Cheng from Scotiabank.

Hey, guys. Good morning. Why, our team, just curious that when you think that you will at a stage you believe you are fully integrated, the control asset, and that ready to take on if there's other M&A opportunity arise that you will be at a position to say, okay, the organization is capable and ready to take on new assets. Also, that on that basis that when you're talking to your peers with the commodity prices much stronger and the share performance much better today compared to a year ago, how did conversation on the consolidation trend that in the industry have changed? Do you think that the consolidation trend is essentially over by now or that that still have opportunity? The second question is that when I look at the full year production guidance of 1.5 million bill per day, your first half is roughly 1.5 based on the midpoint of the second quarter. But when we think that second quarter probably has some maintenance down time, perhaps that are a little bit higher than the second half. So is there any reason why the full year or that second half production will not be higher than the 1.5 million per day in time that estimate that you give? Thank you.

Yeah, thanks Paul. I think it was understand your question first one was around consolidation and M&A. I think you referred to the integration activities going on with Concho and we're pretty hyper focused on that right now and trying to deliver all those efficiencies in the synergy and you know the story's pretty good there. We updated the synergies to 750 million kind of earlier this year and you know we still see more opportunity and most of that's focused in the you know best practices and capital avoidance in commercial and in supply chain. So we're really focused on that and we'll get an update in June. So we are really focused on making sure we get the Concho assets integrated in. Tim is doing a great job with his team in the lower 48 and on the efficiency side. I think it manifests itself in the performance of the company in the first quarter and in the production performance despite having the impacts from winter storm URI. So maybe I'll have Nick can comment a little bit. We do for the rest of the year in profile we do have some turnarounds coming so I can let Nick refer to that. I think which is the second part of your question around what does that profile look like in the last half or last three quarters of the year. Okay yeah thanks Ron.

Paul yeah just quickly that the turnaround impacts are very consistent with the prior years or heavy turnaround season is in 2Q but even more so in 3Q. So if you look at 2Q you got about 15,000 barrels a day in 2Q. That's mainly Norway maintenance work and then if you look at 3Q it's about 25,000 barrels a day so see higher downtime and that's mainly in our western north slope alpine assets as well as greater Prudhoe Bay. Again this maintenance across there so 15,000 and 25,000 2Q 3Q respectively. And that

has been included in our guidance. And I probably didn't fully answer your question Paul sorry but I don't think M&A is done in our business. I still think there's consolidation that will occur and needs to occur. There's too many players and it's more difficult at these kinds of prices clearly but don't be surprised if you see more of it in our industry because I think it still needs to still needs to take place.

Thank you. Our next question comes from John Freeman from Jamin Reign.

Good afternoon. Just a follow-up on Stephen's question earlier where following the Concho merger lower 48 makes up half the company's production and again realizing that your primary focus is just on low cost supply but just sort of how you think of kind of the long term balance you're kind of striving for with this short cycle versus long cycle production. Obviously you're benefiting tremendously with the uptick in the short cycle production. So I'm wondering just as your price has had a big move up just maybe longer term how you think about the balance and does it does the answer change at all based on the commodity environment?

No not really. I think we're hyper focused on cost of supply. We're pretty agnostic to gas oil short long which is why we're you know interested in the Northfield expansion in Qatar and continue to have interest in that and continuing to add to and improve our lower 48 operations. So I'd say we we we are really we don't really have a ideal blend in mind that we're trying to drive to over time. We're pretty agnostic and just focused on the best rocks. They deliver the best returns. That's the competitive advantage in this business.

Thank you. Our next question comes from Leo Mariani from Keyback.

Hey guys. A couple quick questions here for you. Certainly just noticed that your your first quarter of 21 Permian production was very strong. I did the math right. Looks like it was up about 317,000 barrels a day versus the fourth quarter of 2021. So I'm wondering if you could which looked to be well in excess of the contribution from Concha which I think closed kind of mid-January here. Just trying to get a sense of what kind of drove that strong performance. Was there maybe like a larger group of wells that maybe came on you know in such a fashion that you saw a bunch of upside in the production? Is it stronger well performance? Kind of what drove that here in the first quarter?

Yeah Leo. This is Tim. You know we were projecting entering the first quarter at a pretty hot rate coming out of last year and then with the storm slowed the capital down but didn't really slow too much of production that was coming in from our carry on activity. And so I think as Ryan said you'll see kind of a more steady approach throughout the rest of the year. But yeah it was an excellent quarter. Everybody is in all the regions are hitting on all cylinders. I'm really pleased with the performance.

Thank you. Our next question comes from Raphael Du Bois from Societe Generale.

Hello thank you very much for taking my questions. The first one is on the Northfield expansion with so many players earmarked with interest. Can you tell us a bit more about how you can get involved in this project? It cannot just be about the price tag you're willing to accept I guess. So what are you going to bring to Qatar that will make them accept to work with you? That would be my first question please.

Yeah Raphael I think it goes back to our long-standing commitment to Qatar. And you know we're in train six Cutter Gas 3 project been there for a long time. And you know I think we've demonstrated the value. We have a water center in Qatar. So we've had strong relationships with the Qataris. And to your point it's not only about sort of the bid level. It's about the long-term relationship and the past relationship, the historic relationship that you've had. So they've been a great partner, a great owner to deal with. So I think just like anybody in our competitors you know we rely on the history that we've got in the country and the opportunity that sits there. And then we'll have to be competitive in our bid. But it has to work for us. So it has to be competitive in our financial framework. So it cuts both ways. Great.

And I have to ask you an ESG question. I understand you have this net zero emission target by 2050. You gave an intermediate target for 2030. Can you, without preempting too much with what you will tell us in June, how to bridge the gap between 2030 and 2050? Do you already have an idea of what will be another layer of absolute reductions and what will be the offset, the use of offsets that you will be contemplating?

Yeah, Rafael. It's Dominic here. So I mean I think there's really two main thrusts there. The first is that we have a tremendous amount of work going along around the business units around reducing emissions. This year we have about 50 projects reducing our Scope 1 and 2 emissions by $80 million. Some great examples across Law 48 and around the world. But in addition to that sort of incremental gains each year, we have launched our low carbon technologies team, and that's very much in support of our Paris-aligned climate risk strategy. Their primary focus is on those opportunities most relevant to our core business to support this and also to our core competencies. So areas of focus include renewable power sources to further reduce the emissions intensity of our operations. That's our Scope 1 and 2. Carbon capture, use and storage and also carbon offsets are areas of initial focus. So I think that these are the areas that we're looking at right now, and we expect to develop those very much through the coming years.

Thank you. So this is Ellen. We'll take one final question if you don't mind.

Thank you. The question comes from Neil Digman from Truist Security.

Thanks for squeezing me in. Maybe a question for you or Tim. Just given you've talked about all the debt repayment you're doing, and I was looking obviously you've still got a massive lower 48 portfolio, my question is, and you know, thirdly to add even to that, we've seen some very outstanding sales. The most recent was a smaller Bakken one just the last day or so. My thought is pertaining to your Bakken, I noticed Tim mentioned I don't think any rigs running in that area. Would you think about bringing forward either value from that or any other assets forward given the large size of your entire international portfolio?

Well, I mean, we're looking over everything, Neil. So globally and here in the U.S., I think post the transaction with Concho, we want to make sure that every asset's competitive in the portfolio. And we're not lost on the fact that it's a reasonable market right now for sales. So you'll hear more about that in June.

Hold up. I think we'll go ahead and wrap up. If you don't mind, give our listeners any closing instructions. Appreciate everybody's time and attention. We'll see you in June.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.