ConocoPhillips

Q2 2024 Earnings Conference Call

8/1/2024

speaker
Liz
Operator
Welcome to the second quarter 2024 ConocoPhillips Earnings Conference Call. My name is Liz, and I will be your 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 1 1 on your touchtone phone. I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.
speaker
Phil Gresh
Vice President, Investor Relations
Thank you, Liz, and welcome, everyone, to our second quarter 2024 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO, Bill Bullock, Executive Vice President and Chief Financial Officer, Andy O'Brien, Senior Vice President of Strategy, Commercial, Sustainability, and Technology, Nick Olds, Executive Vice President of Lower 48, and Kirk Johnson, Senior Vice President of Global Operations. Ryan and Bill will kick it off with opening remarks, after which the team will be available for your questions. A few quick reminders. First, along with today's release, we published supplemental financial materials and a slide presentation, which you can find on the Investor Relations website. Second, during this call, we'll make four looking statements based on current expectations. Actual results may differ. due to factors noted in today's release and in our periodic SEC filings. We will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release and on our website. Third, when we move to Q&A, we will take one question per caller. With that, I will turn the call over to Ryan.
speaker
Ryan Lance
Chairman and CEO
Thanks, Phil, and thank you to everyone for joining our second quarter 2024 earnings conference call. It was another busy quarter for the company. We continued to execute on our returns-focused value proposition. We announced a 34% increase in our ordinary dividends starting in the fourth quarter. We announced the planned acquisition of Marathon Oil, and we further progressed our global commercial LNG strategy. Now, starting with results, we delivered record production in the second quarter with strong contributions from the entire portfolio. In the lower 48, we still expect to deliver low single-digit production growth in 2024 at a lower level of capital spending relative to 2023. Internationally, production continued to ramp up at Surmont Pad 267 and the Montney in Canada, Ojai Phase 4B in China, and four subsea typhax in Norway. And we continue to make strong progress at Willow and on our LNG projects at Port Arthur and Qatar. Shifting to commercial LNG, we recently signed two additional long-term regasification and sales agreements to deliver volumes into Europe and Asia, both of which will start in 2027. With these agreements, we have now secured just under 6 million tons per annum of volume placement for our offtake commitments. And we continue to work new offtake and placement opportunities as we look to expand our commercial LNG portfolio up to 10 to 15 million tons per annum in the coming years. Now, regarding our planned acquisition of Marathon Oil, we remain very excited about this transaction, and integration planning activities are underway to ensure a seamless transition upon close. the Marathon Oil shareholder vote has been set for August 29th, and we are working through the FTC's second request that we received in mid-July. We still expect to close the transaction late in the fourth quarter. On return of capital, we remain committed to distributing at least $9 billion to shareholders this year on a standalone basis. As we said back in May, we will be incorporating our VROC into our base dividend starting in the fourth quarter, representing a 34% increase in the ordinary dividend. And consistent with our long-term track record, we are confident that we can grow this dividend at a top quartile rate relative to the S&P 500. Finally, as we previously announced with the marathon acquisition, we will be increasing our annualized buyback run rate by $2 billion upon closing with a plan to retire the equivalent amount of newly issued equity in two to three years. So to wrap up, we're pleased with our operational execution, and we are looking forward to closing the Marathon transaction later this year. Now let me turn the call over to Bill to cover our second quarter performance and 2024 guidance in more detail.
speaker
Bill Bullock
Executive Vice President and Chief Financial Officer
Well, thanks, Ryan. In the second quarter, we generated $1.98 per share in adjusted earnings. We produced 1,945,000 barrels of oil equivalent per day, representing 4% underlying growth year over year. And this includes the impact of 18,000 barrels per day of turnarounds. Lower 48 production averaged 1,105,000 barrels of oil equivalent per day, with 748,000 in the Permian, 238,000 in the Eagleford, and 105,000 in the Balkans. Alaskan international production averaged 839,000 barrels of oil equipment per day, also representing roughly 4% underlying growth year-over-year, excluding the surmine acquisition effects. Now, this highlights the benefits of our diversified global portfolio. Moving to cash flows, second quarter CFO was $5.1 billion. which included over $300 million of APLNG distributions. Working capital was a $100 million headwind, which was lower than our guidance of $600 million, as the expected timing of some of our tax payments shifted into the third quarter. Capital expenditures were just under $3 billion. We returned $1.9 billion to shareholders in the quarter, including $1 billion in buybacks and $900 million in ordinary dividends and VROC payments. And we ended the quarter with cash and short-term investments of $6.3 billion and $1 billion in longer-term liquid investments. Now, turning to guidance, for the third quarter, we expect production to be in a range of 1.87 to 1.91 million barrels of oil equivalent per day. And this is inclusive of the 90,000 barrels per day of turnaround impacts that we discussed last quarter. The primary driver of that is our once every five year turnaround at Surmont, which will impact production by about 50,000 barrels per day during the quarter. For the full year, we have raised the midpoint of our production outlook, reflecting strong second quarter results. Our new range is 1.93 to 1.94 million barrels of oil equivalent per day, which implies roughly 3% underlying growth year over year. Our full-year turnaround forecast continues to be about 30,000 barrels per day. On income statement guidance items, we have lowered our DD&A guidance to a range of $9.3 to $9.4 billion, and we have lowered our annual after-tax adjusted corporate segment net loss to a range of $800 to $900 million. These decreases are partially offset by higher forecasted adjusted operating costs, which we now anticipate to be in a range of $9.4 to $9.3 billion, primarily due to increased transportation and processing costs and inflationary pressures in the lower 48. For CapEx, we expect to spend approximately $11.5 billion. Now, this reflects strong progress on our Willow Scope for the year, as well as some additional capital allocated to lower 48 partner-operated activity that has highly competitive returns. On cash flow, we are increasing full-year guidance for APLNG distributions by $100 million to $1.4 billion, and we expect $400 million of these distributions in the third quarter. Additionally, we're going to have a $100 million pension contribution in the third quarter. Finally, regarding working capital, we anticipate a $500 million outflow based on a tax payment shift I mentioned from the second quarter to the third quarter. And as a reminder, guidance excludes the impact of pending acquisitions. So in conclusion, we continue to deliver on our strategic initiatives. We remain focused on executing our plan for 2024. We are committed to staying highly competitive on our shareholder distributions, and we're progressing towards closing the marathon transaction. That concludes our prepared remarks. I'll now turn it back over to the operator to start the Q&A.
speaker
Liz
Operator
Thank you. We will now begin the question and answer session. In the interest of time, we ask that you limit yourself to one question. If you have a question, please press star 1 1 on your touchtone phone. If you wish to be removed from the queue, please press star 1 1 again. 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 1 1 on your touchtone phone. Our first question will come from the line of Neil Mehta with Goldman Sachs. Your line is now open.
speaker
Neil Mehta
Analyst at Goldman Sachs
Good morning, Ryan and team. Thank you for taking the time. My question is just around everything buyback. So if you could just talk about the share repurchase strategy and remind us, you know, between now and August 29th, you're probably going to be out of the market, but your commitment to come back in the back half the year and get to that over $9 billion buyback at or above the nine billion dollar capital return number so your perspective on taking advantage of some of the volatility and and as you plan for the back half as it relates to share repurchases yeah neil uh we're very confident in at least nine billion dollars of distributions for the year and if you look at things we've paid out about 40 of cfo in the first half of the year
speaker
Bill Bullock
Executive Vice President and Chief Financial Officer
And that's despite having some restrictions on open market repurchases that are related to the marathon transaction that we've had in place since May. And so as you look at things, as a result of those restrictions, our $4.2 billion in distributions in the first half, that's a bit below a $9 billion annualized run rate. But as you know, the proxy is now mailed out. With regulatory requirements that we have in place, we're restricted from buying back any of our shares until that marathon shareholder votes. But that is just right around the corner. That's August 29. And so to answer your question, once the marathon shareholder votes complete, you should expect us to be leaning into buybacks. And we think that's really important because we've consistently been one of our largest buyers of stock every quarter. And you can run the math on that. It's pretty straightforward. That's at least $3 billion of buybacks that you should expect through the third and fourth quarter. And that would put us really right in line with our long-term track record of retiring about 5% of our shares on an annualized basis that we've had since the strategy reset. And then as Ryan reiterated in his comments, once we close Marathon, we expect to be increasing our annualized buyback rate by $2 billion. That would put total annualized distributions at a run rate above 11, inclusive of the base dividend increase slated for the fourth quarter. So Yeah, leaning into buybacks as we go through the remainder of the year and really quite a little bit of things to be looking forward to, pretty excited about.
speaker
Ryan Lance
Chairman and CEO
And, Neil, I would add that, you know, look, the share price has been frustrating to watch, you know, through the first half of the year. And we get it. We've been out of the market due to the marathon transaction. I would just remind everybody that, you know, the shareholders come first in our value proposition, and that's been consistent since we reset in 2016. You know, we retired over 400 million of our shares over that period of time. And I think the average price per share that we've purchased is somewhere in the $70 per share price. So it's been, the program has been managed really well. If you look at cumulatively our return of capital over that period of time from 2017 through what we expect to do the end of this year, that's nearly $57 billion of capital has gone back to our shareholder Over that period of time, representing about 45% of our market cap today. And why we're excited about the marathon transaction is we're going to be bigger, but we're going to be better. And we're going to have more free cash flow. And we're going to have more funds to distribute back to our shareholders. And we'll retire the shares, as I said in my opening comments. you know, two to three years just, you know, based on our plans as we see it today. So, you know, this is an important question. It probably got some undercurrent around the share price performance, which we're not pleased with as well, but we're determined to be back in the market as soon as we can and buy back the shares to hit our return to capital target for 2024.
speaker
Liz
Operator
Our next question will come from the line. of Doug Leggett with Wolf Research. Your line is now open.
speaker
Doug Leggett
Analyst at Wolf Research
Sorry, guys, trying to turn off the mute button. How's everybody doing, Ryan? It was good seeing you a couple of weeks ago. Thanks for taking my questions. So I got done out of a question last time, so I'm going to stick to one, but I want to make one comment very quickly, and that is that Market recognition of value, Ryan, flows through the dividends for companies of your size. So I commend you on your decision on the dividend decision. And I think you only have to look at CNQ to see what I'm talking about. So congratulations on making that decision. My question, however, is on the deal you announced while I was out. And more importantly, the tax benefits that I don't think were really fleshed out on the Q&A. Marathon has a lot of legacy NOLs, and what I'm trying to understand is how you use that and whether or not that was incorporated into your risk view of synergies, and if not, what that could look like ultimately in terms of value.
speaker
Bill Bullock
Executive Vice President and Chief Financial Officer
Yeah, sure. Hi, Doug. This is Bill. Yeah, Marathon had, what, $2.8 billion of NOLs as of the end of year last year of December 31, 2023. That's That's a tax-effective value of about $600 million, and we certainly expect Marathon will be using a portion of those losses in 2024 prior to closing. But as you point out, this is a stock transaction. As such, we'd be assuming Marathon's tax basis and its assets, as well as any of those net operating losses that they have, or NOLs. And so just as a reminder, we're in a full tax cash-paying position right now. And at today's pricing, we would expect to be able to use any remaining NOLs within the first three years or so. And so what I think is important about this is that we don't consider NOLs as synergies. We tend to think about synergies as things that we're going to be taking action on. So we didn't bring the NOLs up as part of the deal announcement. But, yeah, tax benefits are certainly something we consider as part of this transaction. They are real values.
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
And Doug, this is Andy, and as Phil mentioned, we didn't include the NOLs as part of our synergies, but in terms of the synergy, things are progressing really well there too. We remain very confident of achieving that 500 million synergy run rate within a year of closing, and we see upside to that number. Our activities are now progressing well. As we mentioned previously, we expect this to be a pretty seamless integration. We've stood up our integration teams, They're focused on reviewing the organizational structures and systems so that we can be ready to close as soon as we get the go. There are some obvious G&A synergies, primarily focused on the back office support, the corporate function duplication, as well as system integrations. The other synergies that we're looking at are on the operating cost side of things. There's clear adjacency of the operating areas, which is going to lead to efficiencies such as improved productive time of our field staff, We're also going to be able to rationalize the field office. And on the capital side, we've been really digging in here too. We've worked the cost-saving opportunities from several angles here. A couple of examples would be our ability to run the consistent program of scale is going to drive savings. As we look deeper, we see opportunities to bring the use of our super zippers and remote frack operations to the Marathon Eagles position. So, you know, on the synergy side of things, you know, we're progressing really well. We're going to be ready to go day one as soon as the transaction closes.
speaker
Ryan Lance
Chairman and CEO
And I'd say, Doc, just one last thing. I appreciate your comments on the dividend. Look, I'm probably the holdout on the team, given the history and having to make the decision back in 2016. But, look, the company has gotten a lot bigger. We've gotten a lot better. And we've gotten a lot – we've lowered our cost supply significantly. dramatically more resource, more free cash flow, more cash flow at lower prices as we've lowered our sustaining capital as well. Balance sheet's in great shape. So it all lent itself to doing the dividend action that we're going to do in the fourth quarter, consistent with the close of the marathon transaction to your earlier comment. And lastly, we do this integration really well. Just look at our Concho experience, the Shell experience. We'll do this one really well, and we will over-deliver on the synergies.
speaker
Liz
Operator
Our next question comes from the line of Scott Hanold with RBC Capital Markets. Your line is now open.
speaker
Scott Hanold
Analyst at RBC Capital Markets
Thanks. My question is around LNG, and it'd be interesting to hear about how your strategy is evolving, specifically your recent REGAS agreement, the Zubrugge and the Asia agreement. How are you thinking about regional targeting and contracting on the future takeaway to get to that 10 to 15 that you've stated out there?
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Hey, Scott. This is Andy. I can take that one. As you mentioned, yeah, we have made further progress on marketing our LNG. We did secure 0.75 MTPA of regas capacity at the Zabruga Terminal in Belgium. And then we also entered into a long-term sales contract with an Asian buyer in approximately 0.5 MTPA. So these recent placements take our total now from the 4.5 we previously communicated to 6 MTPA. As a reminder, two of that is in support of the SPAs we have with Qatar. Now, for competitive reasons, we don't talk too much about in advance where we're developing offtake sources or regas capacity. But as you can see from this quarter, we're making really good progress on both fronts. And as we previously communicated, over the long term, 10 to 15 MTPA would be a good range of capacity for us. At that size, we can achieve the full benefits of scale really across our organization. So I think we're really happy with the progress we've made this quarter, and I think everything's on track for what we're trying to achieve here.
speaker
Liz
Operator
Our next question comes from the line of Betty Jung with Barclays. Your line is now open.
speaker
Betty Jung
Analyst at Barclays
Good morning. Thank you for taking my question. So I want to ask about the upward movement in CapEx to the upper end of the guidance range, which was specifically attributed to Willow and then the non-operated activity. Can you give us an update on how Willow is tracking versus your plan? And is that responsible for most of the increase in the budget?
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Sure, Betty. This is Andy.
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Maybe I'll start by just sort of clearing sort of the total guidance, then Kirk can take your willow question directly. So we initially set a guidance range of $11 to $11.5 billion at the beginning of the year, and that included a number of uncertainties, including willow. So we now have wrapped up a successful winter construction season, and we're halfway through the year. And we now have line of sight of achieving the scope of work at Willow around $1.5 to $1.7 billion this year. On any large project such as Willow, achieving scope and milestones on time or early in the first few years is really quite critical. It sets the foundation for us for success and de-risks our project execution. The other area we specifically called out is the lower 48. Now, there are a couple of moving parts here. We see an increase in our partner-operated scope, and specifically here, When we're balancing on attractive, low-cost supply opportunities by partners, we're going to participate. And then also on the operating side of things, we are seeing more wells as a result of our efficiencies. So both the partner-operated activity and the efficiencies, they're going to provide us with production benefit in 2025. So when we think about it, we're pleased with the scope of work we've achieved so far this year and then the scope we've locked in for the second half. Given we're halfway through the year, We're now comfortable guiding that capital for the total year is going to be about $11.5 billion.
speaker
Nick Olds
Executive Vice President of Lower 48
And, Betty, this is Kirk, and I can give a little bit more color here on Willow specifically. Certainly, as Andy spoke to, our strong execution and the accomplishments that we've realized here in the first part of this year just continues to give us a strong view of what Willow Capital will be here in 2024, and that's That's why we're moving into this $1.5 to $1.7 billion range. Again, it's just a function of really strong execution across our workflows, and that is, of course, factored into our total company guidance. On any large project such as Willow, achieving our scope and our milestones across the full suite of workflows, from engineering through fabrication and construction all the way through supply chain in these first few years, especially having just taken FID here late last year, It's just critical, and this sets the foundation for our success going forward as a project. Certainly, as you heard from me last quarter, our winter construction season here in 2024 wrapped up, and we were able to achieve all the critical scope that we had planned here despite some pretty challenging weather that caused some early delays. But ultimately, we were able to get all of that critical scope completed. You know, on fabrication, The largest of our operation center modules we completed ahead of schedule. Those modules shipped, and they've now actually arrived in Alaska, and we have plans to take offload from barge to shore here this month in August. Engineering is also on track, and when we couple up the fact that we're just doing really well on engineering as well as wrapping up these operation center modules a bit early, It's allowed us and our contractors to roll directly from FAB of the Op Center modules into the central processing facility modules. And we're able to do that actually a couple months better than planned, which just puts us in a strong position as we set this foundation for the large project. In fact, we cut steel here just last month in July. So I'll wrap it up by, again, just reinforcing this first year post-FID is important. And it's also important in procurement. All of our major facility contracts have been landed and equipment orders. And in fact, we're now at a place where we can say 80% of our total facility spend is wrapped up within contracts. And we continue to make progress on that here as we move into the second half of the year. So again, across all the workflows, just hitting these milestones early is really important. And it gives us a lot of confidence to reinforce our prior guide on total project capital and and we're still on track for a 2029 first oil.
speaker
Ryan Lance
Chairman and CEO
And, Betty, I would step back just at a very high level, a couple comments on my side, too. You shareholders should want us doing this. This is de-risking the big project, as Kirk described. And on the extra OBO work that Andy talked about, look, our choice is to cut back our operating program to hit some capital number for the year, and that's not a good decision either. rather than cut back an operating program just to cover for additional ballots we're getting from other operators, doesn't make a lot of sense to us given the cost of supply of those opportunities. So we're wanting to fund both of them at this stage.
speaker
Liz
Operator
Our next question comes from the line of Steve Richardson with Evercore ISI. Your line is now open.
speaker
Steve Richardson
Thank you. I wonder if you could just follow up on that last comment, Ryan, in terms of activity in the lower 48. So it sounds like a combination of more OBO and also maintaining your program. Can you talk a little bit about what you're seeing on the leading edge of service costs and appreciate that that probably doesn't show up in the high-level numbers in terms of the second half of this year, but if you could foreshadow kind of what you're seeing on the leading edge and what that could mean for 25.
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Maybe I'll just start that, then Nick can talk to the details of the lower 48. So in terms of inflation and deflation, as we previously communicated, we're seeing a bit of a bifurcation this year with lower 48 seeing deflation, while ANI is experiencing some inflation. Now, I'd say right at the margin, we're seeing slightly more deflation than we expected in the lower 48, while ANI is slightly higher than expected. But that's right at the margin. our full-year expectation is still in the low single-digit annual average deflation company-wide as we previously guided. I'll let Nick provide a bit more color on the low of 48, but industry-wide, what we're seeing, we've seen a 20% drop in rig and frack activity over the last 12 months driven by efficiency gains and activity reductions. And those efficiency improvements are still resulting in higher production. Specifically to the low of 48, we are seeing high single to low double digit deflation in some of our key spend categories.
speaker
Nick Olds
Executive Vice President of Lower 48
Yes, Steve. This is Nick. Just a little more commentary. For the first half, we've seen continued deflation around pumping services. There's an oversupply of propping out in the Permian, so we're seeing some price reduction in there. We think that'll continue into the second half. And we spoke about OCTG as well. We see that will probably continue in the second half as well. We'll probably see a little bit of curtailing or decrease in deflation in the second half going into 2025 because we've seen fairly large gains over the first half of 2024. But overall, we're capturing that. And when you look at lower 48 general, we'll have a full run rate. If you look from July through December, we'll capture that deflation. That's where we see the fact that Our 2024 budget is modestly lower than 2023, primarily driven by that market deflation capture.
speaker
Liz
Operator
Our next question comes from the line of John Royal with J.P. Morgan. Your line is now open.
speaker
John Royal
Analyst at J.P. Morgan
Hi, good morning. Thanks for taking my question. So my question is on production. I'm just looking at your guidance for 3Q and then backing into the guidance for 4Q from your full year guidance. It looks like a pretty steadily increasing profile throughout the year if I add back the turnaround impacts in 3Q. And I think that's in line with how you've talked about the year generally. But maybe you could just give a little color on the moving pieces in production between the different regions as we progress the back half of the year outside of the turnaround impacts you've already called out.
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Sure, I can take that one. And, you know, I think the short answer is, you know, yes, it is pretty steady when you adjust the turnarounds. You know, we're expecting organic production to grow 2% to 4% in 2024, and that should be pretty consistent across the lower 48 and Alaskan international. And as Bill said in his prepared remarks, organic production was up roughly 4% year over year in the second quarter, which is towards the top end of our guidance, again, with a balance across the lower 48 in ANI. Now, if you look at our production profile this year, and I think this is what you were alluding to, is that if you – If you exclude the turnarounds, we're basically growing at 1% each quarter. It's pretty straightforward. The profile is being a masked a bit in the third quarter, as that's one of our heaviest turnaround quarters in some time, with a 90,000 barrels a day of turnaround impact that Bill mentioned in the prepared remarks. Maybe just to give a little bit more color on that, that 90,000 barrels is split 50 in Canada, 20 in the lower 48, 6 in Alaska, 5 in Norway, and then 4 in Malaysia and Qatar. And in the lower 48 specifically, our second quarter actually outperformed our expectations. And we are expecting production to be fairly flat in the third quarter. And that's due to the turnaround I just mentioned of the 20,000 miles a day that we have at Eagleford. Then we'll be up in the fourth quarter versus the third quarter. So bottom line, we're tracking right in line with our guidance. Just the quarter-to-quarters are somewhat masked a bit with the turnaround activity that you're seeing.
speaker
Liz
Operator
Our next question comes from the line of Roger Reed with Wells Fargo. Your line is now open.
speaker
Roger Reed
Analyst at Wells Fargo
Yeah, thanks. Good morning. Maybe come back on the guidance side on the OpEx front. Obviously, you know, you're talking about costs going up a little bit. You've talked about some of the things on the CapEx side. I didn't know if those were tied together like higher activity, higher costs. What part of this is, you know, kind of internal versus external? And broadly speaking, what are the inflationary pressures?
speaker
Andy O'Brien
Senior Vice President of Strategy, Commercial, Sustainability, and Technology
Sure, Roger. This is Andy. I can take that one. As Bill mentioned in the prepared remarks, we have raised the guidance to 9-2 to 9-3 for the full year. Now, about half of this is from our lower 48 non-operated position, and then the other half is our own lifting costs. It's primarily a result of the higher transportation and processing costs, some higher utilities, and some additional work over activity. And we have been experiencing some of these impacts in the second quarter, and we're now incorporating those into the four-year guidance. Another point I would make is that, as a reminder, the third quarter is going to be our large turnaround that I just referred to. So with that, we will actually see the third quarter be the high point of the controllable costs for this year.