Conoco Phillips (COP) — Q1 2016 Earnings Call Transcript

Thanks, Christine, and good morning everybody. Again, thank you for joining our First Quarter Earnings Call. Our speakers for today will be Ryan Lance, our Chairman and CEO; Don Wallette, our Executive Vice President of Finance and Commercial and our Chief Financial Officer; and Al Hirshberg, our Executive Vice President of Production, Drilling and Projects. Ryan will cover the company level comments, Don will then review the quarterly financials and Al will review the operational highlights for the quarter and our outlook for the rest of the year. Before we start, I wanted to let all of you know that we have set a date of November 10, 2016, for our analyst and investor meeting. The event will be held in New York and we will provide some additional details soon, we just wanted to make sure you got that on your calendars. Finally, we will make some forward-looking statements this morning. The risks and uncertainties in our future performance have been described on page two of today's presentation as well as in our periodic filings with the SEC. And of course that information, in addition to some supplemental data for today's earnings, can be found on our website. Now it is my pleasure to turn the call over to Ryan.

Thank you, Ellen, and thanks to all for joining the call today. Before I jump into the quarterly results, I want to make some general comments about the company and the environment that we find ourselves in today. On the next couple of slides, I'll address how ConocoPhillips is positioning to create value as an independent E&P company. I'll describe our value proposition and how we'll compete in a world of lower mid-cycle and more volatile prices. I'll also describe how we're prioritizing our business activities in the short term, the medium term and the long term. I think it's important for investors to know how we're thinking about the current environment, but also how we have positioned the company for strong performance when prices recover...

Thanks, Ryan. I'll start with our first quarter adjusted earnings on slide eight. As Ryan mentioned, we had a strong quarter operationally, but low commodity prices continued to dominate the quarter's financial results. We reported an adjusted net loss of $1.2 billion, or $0.95 per share, with realized prices down 20% sequentially and 38% year-over-year. First quarter adjusted earnings by segment are shown in the lower right side of the slide. Our segment-adjusted earnings are roughly in line with expectations...

Thanks, Don. I'll provide a brief update on each of our operating segments and then we can move on to your questions. I'll start with the Lower 48 and Canada segments on slide 12. In the Lower 48, our production in the first quarter was 491,000 barrels of oil equivalent per day. That's down 15,000 barrels per day, or 3%, compared to our first quarter production last year, once you adjust for asset sales. The reduction is primarily due to our reduced rig count last year, which is impacting our production this year...

Good afternoon, guys. Let me start off with a macro question. On the last call you talked about potentially adding rigs into 2017 in the lower 48. I know it's a complicated formula, but is there a threshold commodity price that you need to see to add in 2017, given spending and deleveraging objectives? How do you think about that?

Evan, this is Al. I will take that one. I guess, first I should say that as I said earlier, we don't have any plans to add any rigs beyond the three that we're running in the lower 48 in 2016. And of course, we haven't set our 2017 budget yet, so haven't determined how many we would run there. But overall, I would say that there is no set spot price that we're trying to watch as a trigger to start adding back activity...

Thank you. Good morning, everyone. I have to say I love the per share focus, Ryan. A couple of questions, if I may, around that. First of all, on the debt metrics, do you have some kind of measure you're using, whether it be net debt to capital or EBITDA coverage or something like that, that you're aiming to get to in terms of – because I think Jeff had said in the last call that you were happy around $25 billion...

Yes, let me ask – Don's got some comments there, Doug – if you could?

Yes, Doug, we're trying to send a very clear message that we don't want to be carrying balance sheet debt of nearly $30 billion. And so, this is the reason why we set a very clear, specific goal to bring that down to below $25 billion. We think for a company our size and diversity, we're comfortable with the coverage provided across a range of mid-cycle prices with that level of debt.

So I think as a follow-up, I think in 3Q you mentioned you need 16 rigs to hold unconventional production flat, and now you're at three. What's your implied decline, unconventional decline or lower 48 decline, sorry, in your guidance?

Yes, if you look at the overall decline for say full-year 2016 to full-year 2015, we expect it to come in around 10% with the rigs that we are running – with the three rigs.

Hey, guys.

Hey, Neil.

So, on the reduction in capital spending, I think you called out a couple of items in the quarter, but just wanted to make sure I got all of it. So the drivers that got you down to $5.7 billion from the $6.4 billion, if you could just help us walk through that? And then, does that impact the way you think about the $6 billion you need to keep production flat in a $60 world?

Okay. The $0.7 billion of reduction, just about half of that, as I mentioned earlier comes from the reduction that we're taking earlier on deepwater Gulf of Mexico by not drilling Horus and Socorro. The next biggest item after that, actually, is additional deflation beyond what we had already assumed in our numbers. And then beyond that, it's all smaller things around the world in different places, APLNG, China, Indonesia with some small reductions...

Hey. Good afternoon.

Good afternoon, Phil.

First question was, I think, a follow-up to Evan's question where you're talking about reinvestment. And I think in the last call you talked about roughly $2 billion of roll-off spend from 2016 to 2017 that could be used to reinvest and potentially keep production flat, but you also mentioned now that you're not in a hurry to add rigs and unconventionals...

Yep, Phil. That's exactly right. The $2 billion is what we were talking about before and with the step down, that number is now about $1.5 billion, $1.6 billion, it's in that range of roll-off from 2016 to 2017, so that's still there...

Thanks. Good morning. Here in Houston still anyway. Quick question for you on the OpEx side, obviously ahead of pace, Q1 not changing target for the full year, and kind of coming with some of the questions asked earlier about oil prices recovery, you start maybe spending more on CapEx, reducing debt. What is your outlook for the OpEx side? Is this a sustainable level or is there an inflation that's got to come back or some deferrals that are likely to hit in 2017 or 2018 that won't occur in 2016?

Okay. Roger, I'll take that one. First, just remind us where we've been. Go back to just one year ago in April of 2015 at our Analyst Day, we were talking about being at $9.7 billion of OpEx in 2014, and we set a $1 billion reduction target. And we beat that in 2015 by coming down $1.7 billion down to $8 billion. And then we've taken another $1 billion out in our target for 2016, and as you correctly point out, if you look at the first quarter number and multiply by four, you get a number that's less than $6.5 billion...

Yes, I'll take it, Roger. I think we said throughout the years, we ought to be able to invest $1 billion to $2 billion. We'll probably be on the lower end of that...

Good morning, everybody.

Good morning, Doug.

I was off for a few minutes and so if you covered my question, just let me know. First I think, Ryan and Al made it pretty clear that there's going to be a shift in emphasis away from growth and towards returns on capital with distributions to shareholders important too, although that's always been the case for you guys...

Yes, Doug, I guess probably not a real precise formula in how you go through that. A lot depends on how fast from the slope of the recovery as we go forward, how quickly we can get the balance sheet down to the target levels that we're talking about...

Hey, guys.

Hey, Paul.

In terms of your medium-term target for the debt reduction, $25 billion, I'm just curious, given the industry, it seems like every time when we have a major downturn, the industry is caught by surprise. At $25 billion, certainly at a reasonable oil price environment, you are more than comfortable to handle it, but given that our ability to predict the turn of the cycle is close to zero, or at least that's the track record...

Well, I think, Paul, yeah, I mean, we're going to be looking at all those items. So when we say less than $25 billion, that's exactly some of the thoughts that are on our mind is, how do you prepare for the next down cycle?...

Thanks, Asit.