Conoco Phillips (COP) — Q4 2019 Earnings Call Transcript

Thanks Zanera. Hello to our listeners and welcome to today's call. With me in the room today are Ryan Lance, our Chairman and CEO. Don Wallette, our EVP and Chief Financial Officer, Matt Fox, our EVP and Chief Operating Officer; Bill Bullock, our President of the Asia-Pacific, Middle East region. And Michael Hatfield the President of our Alaska Canada and Europe region are also with us today. Dominic Macklon, President of our Lower 48 region was unable to join today's call. Page 2 of the presentation deck contains our cautionary statement. We will make some forward-looking statements during this morning's call. Actual results could differ due to the factors described on this slide and also in our periodic filings with the SEC. We will also refer to some non-GAAP financial measures today and reconciliations to the nearest corresponding GAAP measure can be found in this morning's press release and on our website. And with that I'm going to turn the call over to Ryan.

Thanks Ellen and welcome again to all our listeners. While it's early in the New Year and the sector is already off to another volatile start. Volatility can certainly be tough on an industry or company if you're not built for it. Well, we're built for it. With clear resilience to lower prices, full upside to higher prices and a shareholder-friendly framework that works through the cycles. All of our usual results and outlook details can be found in today's published materials, but we're going to keep our prepared remarks pretty short. Our main goal is to reinforce why ConocoPhillips offers an attractive way to invest in a cyclical business, that's the key theme as we reflect on 2019. And we look forward to the future. 2019 capped off a successful 3-year period in which we transformed our business model and significantly improved the underlying performance drivers across our entire business. Slide 3 summarizes those 2019 results that contributed to this transformation. In the financial column, we delivered strong earnings and generated cash from operations of $11.7 billion, delivering free cash flow of over $5 billion. Our balance sheet got stronger. We ended 2019 with over $8 billion in cash in short-term investments and lowered our asset retirement obligation by almost 30%, largely due to dispositions. Our North Star return on capital employed was 11%. We delivered on our volume projections for the year with roughly 5% underlying growth, including 22% growth from the Big 3 unconventionals, and the rest of our portfolio delivered strong base performance. We progressed new projects and exploration opportunities across our regions. Our world-class portfolio keeps getting better as part of our high grading efforts. We generated over $3 billion of disposition proceeds and we have another $2 billion of announced dispositions that we expect to close in early 2020. But we're not just selling. We're also on the lookout for opportunities to add low cost of supply resources through the portfolio like we did last year in the Lower 48, Alaska, and internationally. When reserves closed for the year, we replaced 117% of our production organically. 2019 was another outstanding year for delivering on our disciplined shareholder-friendly strategy. We returned 43% of our CFO to our shareholders. That's essentially all of our free cash flow. We paid $1.5 billion in dividends, including a 30% increase in our quarterly dividend and we repurchased $3.5 billion of shares. In today's announcement, you saw our Board approved an increase of our existing repurchase authorization by $10 billion to a total of $25 billion. This demonstrates our commitment to executing a consistent long-term buyback program. Finally, our execution focus goes beyond just the numbers. We continue to take a leadership role in environmental, social, and governance matters through target setting, engagement, disclosure advocacy, and stakeholder alignment. We call this performance with purpose and it's an imperative. So 2019 is over and we're in the starting gates for New Year and a new decade. In November, we laid out a powerful 10-year plan that can deliver on all the elements; we believe investors want from this sector. A disciplined strategy framework, consistent execution, strong free cash flow, and compelling returns of and returns on capital. That's the path we set for ourselves in 2016. That's what we delivered in 2017, 2018, and 2019. And that's what we're ready to do again in 2020. We're focused on executing a strategy that we believe is right for the future of our industry and certainly right for ConocoPhillips and our investors. So with that let's go to your questions.

Thank you. Good morning, everybody. I appreciate the opportunity for a lengthy Q&A session. So I've just got a couple. And now let someone else jump on. I guess first of all, there is a number of headlines that have been circulating for quite a while now around the Alaska tax and that's obviously a little different from the last time you presented through this back in November. So I'm just wondering if you can offer your perspectives. Just how you think, what do you think is going on there and how do you think that plays out whether they get the signatures and what the implications could be as to how you respond to that. And my second one is really on the production outlook for 2020. Obviously, the Malaysia pipeline issue appears to be back on the table again. So I'm just wondering if you could walk us through the cadence of how we should expect production to evolve through the year. I'll leave it there. Thank you.

Yes. Thanks, Doug, this is Michael. I'll answer the first question about the Alaska tax. So you asked where we are in this process. The division of elections in Alaska is currently certifying signatures now. They were gathered as part of the initiative for this November ballot. We anticipate that the initiatives will be part of the ballot. So they are in the process of certifying those now. As we showed in November, we're currently planning to invest about $25 billion of capital over the next 10 years in Alaska. These investments will increase the state's production and mitigate the current decline through tax. In fact, in 2020 alone our net capital and OpEx spend in Alaska is expected to be roughly $3.4 billion. On a gross basis in 2020, total industry capital and OpEx spend in Alaska is expected to be about $6 billion. Now, if there is a negative change in this fiscal regime, our investment plans will change, but we've been in Alaska for over 40 years. We know Alaskans understand the industry; it’s the lifeblood of the state's economy; we believe Alaskans will understand that short-term revenue gain as a risky and fleeting proposition if it comes at the cost of billions of dollars of investment over the coming years. We've had ballot measure challenges over the past few years that would have negatively impacted our business and Alaska's economy. After understanding the issues Alaska voters that voted no on all of them. Now we're part of an industry group that will provide information to voters about the benefits of the current fiscal regime, the benefits that it has on jobs, investment, oil production, and long-term revenue to the state. So the bottom line is we're working hard to ensure Alaskans understand the significant benefits that investment by this industry brings to the people and the state of Alaska under the current fiscal structure.

So as things stand right now, no change in your current plans, more of a wait-and-see type situation.

That's correct. So in terms of our current plans, we're waiting to see. We're executing on our current plans, but we are gearing up to help Alaskans understand our view on the benefits the current fiscal structure brings to the state and the people.

Okay, thank you for that. And on the production cadence.

Hey, Doug, this is Matt. I can give you an update on that the - so the most significant update in our production guidance, as you mentioned was associated with the KBB production in Malaysia. And as you know, most of KBB's gas is sold through the third party Sabah-Sarawak pipeline to the Malaysia LNG plant and is exported from that plant. So under normal operating conditions for 2020 we would have anticipated about 20,000 barrels a day being exported through MLNG via the Sabah-Sarawak pipeline, but at the beginning of the year, there was a significant operational issue with the pipeline. Our expectation for the year, given that we don't operate that, is that might not be repeated at all through the year. So that's what we're assuming at the moment. We are hopeful we might get access to some domestic gas off-take, but the magnitude of that and how long it might last is uncertain. So that's the vast majority of the adjustment to guidance. We also had some puts and takes across the business units. And we also adjusted our expectation for the timing of dispositions. But the new range of 1220 to 1270 is our best guess at the moment on what we should expect for this year and that's about a 4% growth on an underlying basis.

Okay. I don't want to press the topic, but are there any particular dips in the quarterly cadence as we go through the year?

Well, we obviously have a turnaround as we go into the middle of the year. We have one in the first quarter in Qatar, and then we have, as usual, turnarounds in Alaska and elsewhere as we go through the second and third quarter. So a similar profile to previous years.

Good morning, everybody. So, Ryan, you guys are one of the few, if not the only big or other E&P with higher rather than lower normalized returns on capital in recent years and while your stock has been a top five performer in S&P Energy for three years in a row for this reason, in my view, your cash position is building a strong, and you have better valuation in your equity than a lot of peers, and so you're basically better positioned than your peers for strategic activity. At the same time, you guys outlined a pretty compelling multi-year investment plan in November, which suggested that you can attain your return profile even without meaningful strategic action. So, my question is with the ongoing decline in upstream values that we've seen in public and private E&P, one, have strategic actions become more appealing to you guys? Are they more compelling and what effect on return on capital employed is needed for you guys to move forward in this area? So two questions.

Well, thanks, Doug. Yes, I think we believe we are on the right track with what we're doing in terms of what you describe our return profile focused on shareholder distributions, focused on free cash flow generation and hyper-focused on our return on capital employed. As I said, 2019 was 11% that is our guiding North Star as we think about how we're executing the business. We have built a bit of cash on the balance sheet, which we believe we needed for the volatility we're experiencing in the marketplace. Just look at the month of January alone. I think people were thinking it added to $70 a barrel and now people are thinking it might be going to $40 a barrel. So that's the kind of volatility we see in this business and we're keeping the balance sheet so we can execute on our consistent programs, pay our capital fee from the dividend. Pay our buybacks back to our shareholders. So we're executing that consistent program. We believe in it and that's what we set out to do and that's what we described to everybody in November, that it's not just one or two year plan. This is a plan that's got a lot of legs and can go on for the next decade; we have the portfolio and the people to execute on that plan. Now we have been in the bolt-on acquisition game. We had some assets that I described in my opening remarks, and we keep on the lookout for some of those kinds of opportunities, but we also I think laid out a pretty consistent framework at our Analyst Meeting in November about how we think about both kinds of opportunities. And I think you and others have reported there. There needs to be consolidation in this business. But there's still a pretty big gap between buyers and sellers is what we see in the business. So we don't have to do anything because we've got a solid plan in terms of what we are going to do, and we are not applying to what's going on around this in the industry either. So we try to lay out a pretty consistent framework and how we think about resources both organically through the exploration channel, conversion within our resource portfolio and inorganically when we think about that piece of business as well. So we are happy with where we are, but we obviously watch everything very closely.

Good morning, team. And thanks for taking the time today. The opening question I had is around Venezuela recognizing there are sensitivities around securing the cash flow that is owed to the company. How should we think about modeling that on a go-forward basis and what are the steps you are taking to ensure that the cash can be collected?

Okay. Neil, this is Don. I'll address that question. I think the first thing I would say is a kind of repeat of what I've said the last six or seven quarters which is we've never forecasted that we would be receiving those payments just because of the risk involved. And so we would never encourage anybody else to delve into the forecast as well. We did manage to receive six or seven quarterly installments from PDVSA but as of the fourth quarter, we received no payments. And what we've done as a result is that after October, November we issued default notices to PDVSA. As of today, they have not cleared the breach. As a consequence of that, we resumed our legal enforcement actions. Of course, we're not the only creditor out there; it's a competitive marketplace. So I think you'll understand that I can't go into any details at all about what those enforcement actions entail. But as you saw from us in 2018, you can expect us to vigorously pursue all legal remedies that we have available to us.

And we appreciate that. The follow-up question is just around some of the demand issues in Asia. And I was hoping, Matt and Ryan, you could put into context how we should be thinking about some of that demand weakness in the context of other demand checks that you've seen and just how does it affect the way you think about your business, if at all.

Yes. And Neil, you're talking about demand for oil as opposed to say LNG.

Both would be interesting actually.

Both, well, yes. So we do see some. I mean we're factoring in some demand loss in the first quarter of this year, and that translates into some reduction in demand as we go through the course of the full year. I think our estimates still as we look at the markets and look at the global economies. We're still projecting something on the order of 1 million barrels a day of demand growth as we go through 2020. Now that's probably down 100,000 barrels or 100,000 to 200,000 barrels a day because of the current issues that we're facing with Coronavirus in China. So we do see some impact of that; it will flow through to the storage side of the equation. So we'll see some building storage. We believe in the US and in the non-OPEC countries around the world as well. So that will put obviously some pressure on prices. We see inventory draws though coming later in the year and we still see pretty good supply growth in terms of total liquids coming out of the US that probably eats up most of the demand growth that we see coming from around. So it's going to be another volatile year and that's what we've been preaching for the last 3 to 4 years because it's an oil-supplied world and any small changes in demand or changes in what OPEC or others might do on the supply side will create that volatility that we've seen in seen spades here in January. We do see some weakness in the spot LNG market; it's had some pretty warm winters around the world. So demand has been weaker. Demand growth, we still see over the long term in the LNG markets. But we've seen softness in the LNG side and of course how that lags in terms of how it manifests itself our cash flows for the company. But we still are long-term believers in the growth in the LNG market and still participating in that channel of the business.

Hi, yes. A couple of quick questions, first, just looking at the quarter in the Lower 48, we saw some declines in the oil production quarter-over-quarter NGLs and gas were up, I presume that was mostly mix effects in the Big 3. The Bakken and the Eagle Ford down but just any thoughts you could share around that as well - as we look out to 2020 and your guidance for 410,000 barrels a day there. Just any color you can provide around rig count and production cadence specifically for the Big 3. Thanks.

Yes, Phil, it's Matt here. Yes. So I think you probably saw our numbers for the production individually for the Big 3 in aggregate it was relatively flat. The Eagle Ford was down a little bit just because of the timing of when we're bringing wells on and there was growth in the Permian. In the Permian, production was a bit gassier than the Eagle Ford production. So that's why there was that slight mix shift and in terms of the activity, we averaged 12.5 rigs in the last year and it's across the Big 3 and seven in Eagle Ford, 3 in Bakken, 2.5 in the Permian and that was -those were supported by 6 frac crews. You'll have seen in our capital that as we go into 2020 it is pretty much the same level of activity in aggregate to the same capital cost for the Lower 48 as last year.

Okay, great. Second question for Don. The cash flows in the quarter looked a little bit light there. I think there is another bucket that had some headwinds, if you could just elaborate what might have been in that bucket and just generally how we think about cash flow for 2020, if there are any moving pieces we should think about. Whether it's distributions or other things. You already talked about PDVSA but anything else we should think about. Thanks.

Yes. Phil, I can point to a few items that may help explain the cash flow in the quarter, the way we look at it, we take our ratable guidance items along with the cash flow sensitivities that we publish and if you do that and nothing else, you come up with an estimate of about $2.9 billion, CFO. I think a lot of analysts came in at a number similar to that, whereas our actual results were about $2.7 billion. So to start LNG realizations were about $100 million lower than what our sensitivities would have predicted because we don't incorporate a 3 months lag to Brent pricing. Brent was up about $1 quarter-on-quarter but JCC fell $5. So that's what's causing that impact. In addition to that, our adjustable controllable costs for the year came in at $6.14 billion versus our guidance of $6.1 billion. So that's about $40 million or about $0.03 a share on that and that came through the SG&A and the items on, and you all have noticed that SG&A was up quarter-on-quarter and what drove that increase was basically two things about equally split, the mark-to-market on compensation because of the good quarter that the stock enjoyed in the fourth quarter. The other was due to an accrual that was made related to employee-based incentive compensation. So those were kind of unusual items and we also made a pension contribution to the US qualified plan that was probably about $50 million higher than what our typical quarterly run rate was. If you look at those items, and even though we don't try to encourage people not to include the PDVSA $90 million payment we know that some do. So that may have been a contributing factor for some folks. As far as 2020, I think we've been pretty clear about what our distribution plans are; $3 billion of buybacks, nothing has changed on that. Our dividend rate is what our dividend rate is until we consider adjusting it probably towards the end of the year, so that won't have much impact. As far as CFO, you've got some new sensitivity that has been updated for 2020 in the appendix of the materials that we published today. As far as a benchmark expectation on CFO at, say, current prices around $50 WTI. We would expect about $8.5 billion to $9 billion of CFO.

Okay, great, that's very helpful. Just one clarification with the proceeds from distributions, the $2 billion. I assume that's gross. Is there a net amount that you might have for that? Thanks.

I don't know that I can provide you a net on that. I know of our Australia headline, Australia West headline number there is about 1.4 and we would expect cash proceeds to be about 1.1 based on our expectations of closing at the end of this quarter. And then, Niobrara, the proceeds on that are going to be close to 400 about 380, but I haven't seen the estimates on cash on that, but I would expect it to be close to the proceeds. Then the remainder is just smaller assets that will do to round off to the $2 billion.

Thank you and good morning. And I think that was probably the shortest management introduction I've been on the call in at least for the last several years. So congrats on that. A couple of questions to follow up on. One on Neil's question about the demand issues in Asia and maybe more specifically on LNG there. There have been some reports that some of the buyers in China made it clear force majeure and that's kind of a just-in-time market, so I get that. If they're not getting offtake they're going to run into other issues. So I was curious about your direct exposure to China as you think about it. And then the second question on the LNG front, just an update of where we are with the Qatar expansion and everything.

Hi, Roger, it's Bill Bullock, I'll take this one. First, we've heard similar concerns raised in the market about force majeure into Asia. To date, we haven't had any force majeure declarations. So we are continuing to watch the market and see if we do, we'll be addressing those with spot sales or domestic sales in the market and managing appropriately. So nothing to date, but we have heard similar concerns. With respect to Qatar, we continue to be very interested in Qatar. We are well placed. Qatar is a great location that serves the global market with low cost resources and is a strategic location that works well for both Europe and Asia. We are still in the process. That process is being managed by Qatar Petroleum and they are in control of that pace. We're moving along at a good pace as they provide updates. I can't say any more on that at this time. What I can say is that we're very hopeful. The opportunity is going to be a competitive cost of supply addition to our portfolio and as we laid out in November, it needs to be a competitive cost of supply to be an attractive addition. So that's kind of where we're at for Qatar.

Thanks. Just a quick follow-up; is there any reason to think anything material has changed in the projects since kind of late last summer when it picked up and certainly the Analyst Day in November?

No, no, GP continues to manage a very good project.

Hi, good morning, everyone. My first question is on ROCE. Good morning. My first question is on ROCE was 11%, very strong for 2019. The 10-year plan calls for a 1% to 2% improvement per year assuming you're $50 WTI with some inflation so ROCE about 16% in 2025. So in terms of what is contributing to this improvement. Can you talk about the ROCE of the incremental addition, incremental production adds relative to what you're achieving today? So perhaps any color you may have on the absolute ROCE of the Big 3 or maybe some future Alaska projects or in the other conventional projects.

Yes, Jeanine. This is Don. I'll address the ROCE question. So, yes, at the Analyst Day in November, we showed ROCE growing between 1% and 2% over the 10-year period and that's being driven primarily by production growth because we're working at $50 WTI real. There is a little bit of contribution there. But the other thing that I would point to is our capital efficiency. Our DD&A is actually very flat while our production is going up. I would point to those two being the primary drivers behind the improvement.

Okay, thank you. That's very helpful. And my second question, it's on Alaska and I think exploration in the event that Alaska activity is either slowed or pushed further to the right for either regulatory reasons or otherwise. Can you talk about what other opportunities may move into the activity queue as a result and I'm guessing these are mainly exploration activities because we assume that the Big 3 in the Montney, all of those are already optimized for your 10-year plan.

Jeanine, are you referring to what we would do in Alaska or what we do elsewhere in the globe?

Elsewhere in the globe?

Yes, so this year about half of our exploration capital is going into Alaska and half is going elsewhere. So the primary areas outside our Norway exploration program that we discussed. And Michael discussed that at the November Analyst Day, and we also have an exploration program going on in Malaysia and the shallow water and shelf of Sarawak. We have exploration activity going on in Argentina, both in the south of the country and in Vaca Muerta. Those are the primary new exploration activities outside of Alaska.

I would add, Jeanine, we set an allocation for exploration and if we don't have the opportunities to compete for the cost of supply that we said, we'd bring down that allocation. But today we're spending the $300 million on our exploration that we've allocated to that channel.

Hi, good morning, guys. I think first question maybe is for Matt. Matt, in Permian, the fourth quarter we see a big jump sequentially, should we look at it as just the normal lumpiness because of the well coming on stream or is that this is signaling a beginning of accelerating development pace and that we should assume the growth starting in this year will be accelerating compared to the last couple of years?

Yes. Thanks, Paul. Yes, we did a very strong growth quarter-on-quarter in the Permian. It was about 23% growth, and but that is, as you sort of comply this real lumpiness as we bring on new pads there. So we actually expect Permian to be relatively flat in the first quarter and then growth will resume again through the rest of the year. We had an unusually lumpy fourth quarter production.

Matt, when do you think the Permian would take on a more accelerated growth and when do you think you will have sufficient delineation and the infrastructure in place for that to happen?

Yes. So what we leave and this - in November was we were running at about 2.5 rigs, we will build over the next few years to about 6 rigs running in the Permian, but that will be measured growth as we get the confidence much like we did in the Eagle Ford and the Bakken and we're doing in the Montney. We make sure that we're at the right spacing and stacking and completion design. So we're still in a bit of a learning mode there and we'll ramp up the rigs to be optimum and over the next 2-3 years. There is a significant growth coming in the Permian, but that will be a piece is consistent with the pace of which we're learning and we hope to optimize the completion and spacing and stacking.

Thank you, Matt. The second question is for I think Ryan. Ryan, over the last 12 months ESG all of a sudden become a far more active topic among investors even for the North American investor. And we are also in the last 2 or 3 years, we have seen some of the international integrated oil companies lay off that and move outside on making a lot of the investment that was signed into oil and gas for the transitioning of the low carbon fuel; transitioning on low carbon. From ConocoPhillips standpoint, I mean, how do you guys look at that and say that with the transition in the low carbon world, are you going to essentially stick to what do you guys are doing in the oil and gas or that you will be evaluating other opportunity sets to supplement that.

Yes, Paul. I guess right now we're focused on the E&P business; that's the kind of company we are. And that's what we're doing. We have a strong record on ESG in terms of transparency, how we think about that piece, how we manage the transition, we're focused on eliminating emissions from our operations. We've done that over 7 million tons over the last number of years. We're the only E&P Company, I believe, that has an emissions target that is out there for our business. So we're focused on doing that when we get the external recognition for our climate stance, how we think about our climate action report, how we think about our sustainability report and how we describe that; how we're doing what we're doing in our business to make it a more sustainable oil and gas business. So we're focused on being a low cost of supply and really taking care of our own business in terms of our mission footprint. And what we're doing in our activities to reduce our greenhouse gas emissions, flaring fugitive emissions, methane all the above; that's we are about. That's what we're trying to do and that's how we're managing this aspect of the company.

Good morning. Thanks for taking my questions. My first one is on Alaska from an operational standpoint. As you continue helping to inform voters on the potential ramifications of the ballot measure, can you just give us a reminder of what operations over 2020 will focus on in Alaska? And then any color on learnings from ongoing appraisal will be helpful as well.

Yes, regarding our core operations, we are actively executing a large operation at both our main site and at Alpine. There are also some smaller projects we need to complete this year, including the launch of the ERD rig in the second quarter at Alpine. We currently have extensive drilling activities underway. In terms of our exploration program, we are currently in the midst of that effort. We plan to drill four appraisal wells and conduct one flow test at Willow, with the first well already spud at the end of January. We also intend to drill three exploration wells at Harpoon, with the first spud expected towards the end of February, allowing us to operate two rigs for both Willow and Harpoon projects. Additionally, we have the Norwell opportunity we discussed in November, where a production well was drilled and tested, achieving a flow rate of up to 4,500 barrels a day before being shut in to monitor pressure buildup. We've since drilled an injection well that reached total depth in early December, and after cleaning it recently, it achieved a peak flow back of around 2,500 barrels a day. This injection well is now being prepared for an interference test with the previously drilled producer well, which will provide crucial information for optimizing future development planning. We are quite encouraged by the results we have seen in Norwell. In summary, we are executing a comprehensive program across our assets in Alaska, including non-operated assets in Prudhoe Bay.

Great, thank you for the detail on that. But my second question, just a follow-up to the discussion on how you all look at inorganic adds and the potential for those to come into the portfolio mix. As you look at potential opportunities, compare them to the existing asset base, what would you say are the disconnects between what you think could fit and what clearly doesn't? Are you seeing quality packages with just different parameters on valuation? Is there a lack of availability of assets in areas where you look at potentially adding exposure? And then lastly, are there any key differences between the domestic and international A&D markets as you guys look at the landscape today? Thanks.

Hi, Jeff. I think I'll take that. This is Matt. Yes, you saw the last year on the inorganic front, we did about $300 million of inorganic additions in the Lower 48, Alaska, and internationally. And we've laid out - Ryan alluded to this a bit earlier we laid out some very clear guidelines we hope and the certainly clear internally as to what it would take in order to make an inorganic addition to the portfolio attractive. And we'll say that has to have an all-in cost of supply including the acquisition cost of below $50 a barrel and it has to have a development cost of below $40 a barrel to compete for capital. So we've been very clear on that the criteria we would have to achieve. It is the same criteria for larger scale corporate activity and for exploration program and for resource conversion within the portfolio. As we look around the portfolio, we can see some potential for incremental bolt-ons much like we did last year, but we're not at the stage of consummating any of those at the moment. But there are still opportunities out there that could be attractive additions to the portfolio as we go through time, as long as they meet those two criteria that I mentioned a minute ago.

Thanks. I think this one is for Don. Can you discuss with the KBB pipeline down, how does that impact the financials? I mean on a relative basis how does that generate cash flow relative to say the Conoco as a whole?

Yes, Scott, yes for 2020 and as Matt said, we're not counting on the resumption of that Sabah-Sarawak gas pipeline. So the financial impact that we're estimating is about $90 million of cash flow and about $60 million on net income and that's built into the sensitivities in our that we published this morning.

Okay, I appreciate that color. And turning really quickly back to Alaska again. How has the process or progress gone with evaluating a sell down in 2020 on that asset considering obviously the propositions that are out there? Do you find it's going to be a little bit more challenging in front of the November ballot to get something done?

Yes, Scott. So I'll take you back just for a second to November at the Analyst Meeting when we provided in our preliminary 2020 capital and production outlook. And at that point, we reflected that we would retain our current ownership level through this year. So through 2020 and at this point, we only plan to sell down after the uncertainty related to the citizens’ initiative has been resolved and after we fully interpreted the results of our 2020 exploration and appraisal program. When we progress through Willow through the concept select gate. So after we've satisfied those three current criteria that's when we plan to execute this sell down so that pushes the sell down most likely well into next year. We won't execute a sell down in a way that causes us to lose control of the investment pace. We're already confident that there are multiple quality parties that are interested in these great assets. We would be open to an equal value strategic transaction or a swap rather than cash if that makes sense. So that's where we are in the process, we're going to resolve some of these uncertainties and then we'll approach the market.

Thank you. On Libya is with the situation in Libya now is production basically zero at this point and you having any thoughts on the outlook? And I know you don't guide for production in Libya. But what are you assuming in terms of your cash flow? What production level are you assuming for your cash flow guidance?

Yes. So you're right, we don't guide for production in Libya. Our guidance is excluding Libya. Right now because of the disruptions associated with this conflict, our Libya project company and the Libya National Oil Company has declared force majeure, and so we're just in the process of tapering down our production. We are not quite at zero now, but we expect to be fairly soon. So our hope is that these parties can resolve this conflict, and then we can restart operations soon. But right now, we're tapering down towards not producing.

In terms of your cash flow guidance for this year, are you assuming that Libya is offline for an extended period or are you assuming kind of flattish production from the fourth quarter level?

Yes, we're assuming that it will just be offline then.

Okay, that's helpful. And on the defined benefit contribution. My understanding is that it was around $100 million in the fourth quarter and that you're guiding for about $100 million each quarter through 2020. So beyond 2020 should we assume the same kind of constant quarterly contribution or is this just kind of like a five-quarter catch up? And could you talk about sort of the cash impact?

Yes, Joe, this is Don. Let me address that. So in the fourth quarter, our contribution to the US plan was, I believe, close to $80 million. We probably rounded up to $100 million, but we plan to continue contributions at that pace for the next three quarters. So quarter one, two, and three in 2020 and so what's occurring here is that we've implemented a liability management strategy that's intended to de-risk the pension liability over time. So the contributions that we make this year are going to allow us to shift more of our assets from equities into fixed income, and that's how we're going to be de-risking the plan and hopefully reduce contributions as we go forward. After the third quarter, you should expect that our contributions will reduce significantly and then hopefully depending on asset performance and interest rates continue to be quite small as we go into 2021 and beyond.

Thank you, everybody. And thank you again, Zanera. If you have any calls, please feel free to reach out to Investor Relations and look forward to seeing all of you over the next several months. Thank you.