Conoco Phillips (COP) — Q1 2020 Earnings Call Transcript

Thanks, Anera and good morning to our listeners. Thank you for joining us today to discuss this morning's press release which contained our first quarter earnings results, our dividend declaration announcement and an update on our curtailment actions. Our speakers today will be Ryan Lance, our Chairman and CEO; our Chief Operating Officer, Matt Fox; and our Chief Financial Officer, Don Wallette. Ryan will make some very short opening comments, but we'll reserve most of the time on today's call for the question-and-answer session. We don't have any slides this morning but we will post a replay of this call shortly. As you know given market volatility, we have temporarily suspended guidance. However we may make some forward-looking statements in today's call. Please refer to our SEC filings for a description of the risks and uncertainties that could impact future performance. And now I'll turn the call over to Ryan.

Thank you, Ellen and welcome to today's call. Well, here we are at the start of first quarter earnings for the E&P sector and it's a brave new world for all of us. Ordinarily, we would use this call to discuss our recent quarter results in detail and provide guidance for future periods, but the first quarter already feels like a long time ago. And as you know, due to significant uncertainty and volatility in the markets, we will temporarily suspend guidance. So here we are. But while we won't provide guidance, we continue to believe it's important for ConocoPhillips to provide insights. How are we thinking about this environment? What actions are we taking or considering taking to respond? And that's how we'll intend to use this conference call time today. I'll make some very brief remarks then turn the call over to our listeners for a question-and-answer session. There are three themes I want to emphasize in these remarks. First, our underlying business is running very well. You saw our first quarter results in this morning's press release. It was quite a strong quarter operationally despite the COVID-19 pandemic. I'm certainly very proud of our organization. While some activities are changing day-to-day, I assure you that our workforce is all in on safely delivering the business, including our upcoming seasonal turnarounds and our ongoing capital activity. The second theme I want to emphasize in these prepared remarks won't surprise anybody. It's this. The next few months are going to be very bumpy for the industry and for us. A couple of weeks ago we announced plans to begin voluntary curtailments in May. This morning we announced that we expect to curtail about 265,000 barrels per day gross in May from our Lower 48 and Surmont combined. We also announced that we expect to curtail about 460,000 barrels of oil per day gross in June from our Lower 48, Surmont, and Alaska combined. On a net basis, this represents about one-third of our first quarter production. This should be seen as a clear signal that we're willing to use flexibility and balance sheet strength to protect value for our shareholders. And that brings me to the third theme of these remarks. In our previous two market update conference calls, we've emphasized that our actions in this environment are driven not only by our view of the markets, but by the fact that we entered this downturn in a relatively advantaged position compared to most of the industry. You saw in today's press release that we ended the quarter with total liquidity of nearly $14 billion, including the $6 billion available under our revolver. Our portfolio is diversified and relatively low decline. These are the factors that allow us to make rational decisions based on reasonable views and we can continue to assess and monitor the markets then act. We continue to manage the business in a way that preserves our strong relative position, allows us to take additional actions if needed and protects our ability to resume programs in the future. So in summary, here's what I want you to take from my comments. The underlying business is running well. We had a strong first quarter operationally, all things considered and our workforce remains focused on safely delivering our plans. We expect a period of significant volatility over the short term. We know what we need to do. And we are relatively advantaged coming into this downturn and we'll protect that relative advantage as this environment plays out. So with that, I'm going to turn the call over to the operator and we'll begin our Q&A.

Hi everybody.

Hi, good afternoon.

Good morning, Doug.

Ryan, it seems that your production cutbacks have been more responsive to market conditions than those of your competitors. This could be related to the higher share of your operated production or other factors. I'm curious if these are the main reasons behind your decisions to curtail production, and whether there are additional control or economic factors that influence this. Additionally, what risks do you foresee concerning the recoverability of your portfolio once you start restoring output, if you believe these risks are significant?

Yes. Thanks Doug. I can probably take the first one. And Matt maybe you could provide a little bit of color on the second part of that. Honestly, Doug we'd be curtailing as much as we could right now. And I think we just don't think it's right to be accepting these kinds of netback prices for the product that we're producing. We've got a very strong balance sheet as I said in my remarks. We're taking a modeling sort of the short and the longer-term scenarios to guide our decisions, and these curtailment decisions are guided by the way we see the market playing out over the short term. We certainly have more control over things that we operate. We expect things to be coming from governments and infrastructure curtailments, but these are the things we can proactively do based on our recent view of the market, and based on our capacity that we've got on the balance sheet to do these kinds of things. In our view, we see this as a sign of strength, and we're deploying that, and I think acting in a proactive fashion. So I'd let Matt maybe talk a little bit about what recovery would look like on the back end of these curtailments with improved markets.

Yeah. Doug, I think there's two aspects to that answer. One is, how quickly can we bring production back? And are we taking any risks associated with the curtailment reservoir then which are other lines. And basically, we can bring the production back across North Slope Canada, Alaska within a few weeks. It doesn't take months to bring it back so the majority of it can be brought back very quickly. And but to get to full production in a matter of weeks, we are making sure that we're not doing anything that's going to take any risk either from a reservoir or wells or facilities perspective. That's why we're – in Surmont, we're going down to a minimum rate so that we can still provide enough heat and temperature to the steam chambers to keep them intact. In Lower 48, we've got a very specific set of protocols in as to how we shut down and prepare those wells for restart. In Alaska, we're not shutting in completely. We're getting down to a rate plus, there's a minimum sort of operating level that we can consistently operate at for a period of time. Across all of these, there's no risk of reservoir damage there. So we can come back in a couple of weeks and there's no risk of any permanent damage.

Okay. Thanks. And then also Ryan, there's been a lot of commentary surrounding prorationing of supply that would be mandated by regulators over the past several weeks. So, I just wanted to see where you stand on that topic and how you think it's going to play out.

Yeah. We haven't been supportive of that Doug from a regulatory perspective, because we think the market is going to ration that very quickly and either through both voluntary-type cuts that we're taking or infrastructure and storage-related cuts that become involuntary, I guess, to some degree for maybe us and other operators as well. So the market is reacting. The market's working and it's going to drive supply down to match inventory levels and what the demand or what the refineries can take on the other end. So we haven't been supportive of efforts like the Railroad Commission recently has been analyzing and thinking about.

Yeah. Thank you. Good morning. I guess, we've heard different things from different companies about the shut-in elective shut-ins and reservoir issues and I heard your answers to the first question. But I was just curious can you give us any examples of what brings you confidence about reservoir – maintaining reservoir integrity as you go through the shutdowns that you are doing or will be doing in May will be doing in June? And then, if they continue beyond that what gives you that confidence?

Roger that's a fair question. It's really because to some extent we go through this on a regular basis in our field generally just for a shorter duration. For example in Alaska, every other year we do a full turnaround at Alpine. And we go through shutdowns or turnarounds on different processing facilities in Kuparuk. So, we know how to take the wells down and keep them in good condition and bringing them back on again. The same is true in Surmont. Occasionally we've had to put Surmont truly shut down, because of wildfires, where we've had to go down very quickly. So we know how to handle that as well and in the Lower 48, the most recent example is in June Hurricane Harvey, Eagle Ford we had to go down. So we'll get plenty of both pain and experience that gives us confidence that we know how to handle this. We've got the advantage just now that we can plan it and we can get it. And so, there's no reason to be particularly concerned about that. We also understand what our decline rates are. And we also understand what our flush production is that comes back after shut-ins. So that gives us everything that we need to make a sensible economic analysis as well. So trust me Roger this is all pretty well thought through.

Well, I didn't doubt it wasn't thought through. I'm just mostly trying to understand where the experience comes from because there are some different attitudes out there. Switching gears a little bit, Don obviously significant liquidity in the company. I was just curious is there anything else you're looking at balance sheet-wise? And I'm not just thinking about revolvers or new debt or anything like that, but also kind of how you're thinking about the working capital side of the business that we should be thinking of levers, you could pull here in coming quarters?

Not really, Roger. Our working capital is pretty finely managed always has been. So we don't have a lot of optionality there. We don't carry surplus inventories or anything like that. Just thinking about other items coming down the road that would affect liquidity I can't think of anything in a negative way other than the low cash from operations that we expect over the next few months as oil prices continue to be low. We do expect the proceeds from the Australia-West transaction. We still believe that that's going to close in the second quarter. So that will be coming in from a positive direction. But other than that I can't think of any big-ticket items out there.

Good morning team and thank you for the insights shared today. My first question is about the importance of the dividend, and I welcome any thoughts on this topic. We understand that one of your major competitors decided to lower their dividend today. Conoco made a similar move a couple of years back. I’m interested in your perspective on the security of the dividend and the strategy regarding its distribution.

Yes. Thanks Neil. Yes. I think you kind of have answered the question. We declared our dividend today as you saw in our press release. That kind of remains a priority. And really we were committed to a return of cash to the shareholders of greater than 30%. We've outlined that since we reset our value proposition a number of years ago. And the dividend is a fixed part of that that we expect to be able to execute through the cycles. We exercised the flexible part of that return to shareholders with the suspension of our buyback program here a month or so ago. So we're pretty confident. As you described, I mean we took our pain a couple of years ago back in this last downturn and we wanted to set the company up because we knew the volatility was with us to stay. And maybe this is a three or four sigma event that's even beyond maybe what we were thinking about a couple of years ago and what we outlined in November. But through Don's comments on the balance sheet, the strength that we have as a company I think we're well positioned to get through this downturn in pretty good shape.

Thanks Ryan. A follow-up question is around consolidation. I know you spoke to this a little bit on the capital spending call, but I wanted to get any updated thoughts around it. One could argue this is towards the bottom of the cycle and there's a potential to be opportunistic, but curious on your views as you've been patient in the past and had some strong views on bid and ask?

Yes, I agree with you, Neil. We haven't changed our approach. We're being patient and persistent while monitoring the market closely. I believe there will be significant stress across the sectors as you mentioned. We've shown willingness to transact, but any transaction must be beneficial and align with our long-term financial framework that we've communicated to the market repeatedly. Our strong balance sheet is a priority, and we won't jeopardize our liquidity. Overall, it's clear that the exploration and production industry needs structural changes. The current growth model is flawed, and there is excessive general and administrative costs in this business. I found an interesting article by Liam Denning in Bloomberg recently that addresses these issues quite accurately. There are too many companies for investors to consider, which is becoming less significant in terms of market capitalization. We believe that the assets could be managed more efficiently to improve returns rather than focusing solely on growth. Given the severity of this downturn, there are challenging discussions happening between boards and management at the moment. It may take time to see these changes materialize, but I believe they are necessary.

Hi, good afternoon everyone. My first question is on the June production curtailments. The anticipated June curtailments they're a bit more than what you're expecting in May. And so can you talk about how you settled on the June versus the May level? Because I guess when we look at the forward curve, plus the implied CMA rule adjustment, June and July WTI pricing looks stronger than May. So is your decision based on something you're seeing in the physical market versus the paper market? Or are you just being a little bit more conservative here? Or is it just related to something else?

Sure, I’ll address that, Jeanine. This is Matt. Essentially, we reduced our output as much as possible while still fulfilling the contracts we had with buyers. In March and April, we entered into agreements to sell crude oil, which we planned to honor. The reductions we made affected areas where we didn’t have contracts or where buyers were willing to forgo their purchases. In June, we had more flexibility since we have significantly fewer barrels already allocated. This is the main reason for the increased curtailment in June. Additionally, there remains a discrepancy between market prices and the actual netback prices being offered, which was an issue in May and continues into June. I believe both of your considerations hold some validity.

Okay. Great, thank you. That's very helpful. And then, maybe my second question for Ryan. It's on the 10-year plan. So, I'm wondering, do you see the current or medium-term environment simply pushing out the 10-year plan? Meaning that, you would resume pretty much the exact plan maybe a year or two of delay? Or have the conditions changed so much that you could see more value to shareholders if you make more meaningful adjustments to the underlying plan?

Thanks, Jeanine. To add to the last question about Alaska, we're doing an additional 100,000 barrels a day in June that we weren't doing in May. Regarding your second question about the 10-year plan, it embodies a philosophy and principles that we believe E&P companies should adopt to focus on returns and create value for investors. We do not anticipate significant changes to the core elements of that plan. We aim to maintain a strong balance sheet, a diverse and low-cost supply portfolio, and to return more than 30% of our cash to shareholders, ensuring consistent through-cycle returns. I want to remind everyone that we have a resource base of 15 billion barrels with a supply cost of less than $30, which includes a 10% after-tax rate of return. This positions us well for resilience. We've consistently highlighted the importance of being prepared for volatility and lower prices, which are essential for an E&P business. The tactics of the 10-year plan are focused on optimizing our investment decisions. While the initial years of that plan have changed due to the downturn, the shape and speed of recovery will determine how quickly we can resume executing the original plan we outlined last November. Once this event has passed, we expect to maintain our philosophy and approach, although the programs may be staged and phased differently. We fully anticipate emerging with a more competitive plan moving forward.

Hello. Hi. Good morning, everyone. I hope everyone is doing okay out there. Ryan, I wonder, if I could bring you back to…

Hope you are too.

Yeah. Well, I enjoy going to work in my shorts. But we'll save that for another conversation. The breakeven that you have with the adjustments you've made, I'm just wondering if you could give us a refresh with the reduced production capacity with the shut-ins. Where do you think your breakeven is right now just to give us a kind of road map for how your cash flow capacity is coming out the other side of that? That's my first question.

Yeah, Doug, this is Don. I think on a recent call we mentioned that for the remaining three quarters of the year, our breakeven to cover CapEx was under $30 WTI.

Does that include the dividend and the additional curtailments, Don?

It does not include the dividend. So to get to the dividend you'd be in the mid-30s WTI.

And with the curtailments?

And as far as curtailments, it doesn't because we're not projecting them beyond June. We don't know what they're going to be. But I can tell you the CFO impacts of the curtailments that we've announced is quite small, because of the prices that we expect.

Thank you for your response. For my second question, I'm curious about the sustainability of your production capacity. Considering the shut-ins you mentioned and the recovery of those volumes, what happens to your underlying production capacity when you're not drilling in a declining unconventional business? I have to assume that without intervention, your absolute production capacity, particularly for the Big 3 and the Lower 48, will decrease. Could you explain the dynamics involved? Thank you.

Hey Doug, this is Matt. I'll take that one. Based on the capital and operating cost reductions that we announced a couple of weeks ago and assuming no production curtailments, our average production for 2020 would be roughly the same as 2019. So, in terms of capacity, it would be about flat. The actual production will depend on various factors including curtailments. Regarding the profile throughout the year, the capital was front-end loaded, and we're assuming that we won't complete any wells in the Big 3 over the last eight months of the year. This indicates a potential decline in capacity as the year progresses. However, we are not providing specific guidance on this due to many moving parts, including curtailments, as we want to avoid giving misleading guidance. Overall, there will likely be some decline in capacity. It's important to note that we are planning to build around 130 or so DUCs. Any loss in productive capacity can be quickly recovered, so this is a temporary situation we can manage. Still, we are not offering specific details because we are cautious about providing misleading guidance.

Hi. Yes. Good morning. Thanks for taking the question. The first question is somewhat related to a couple of the prior ones. You've talked about this WTI breakeven in the low 30s for the full year and in the high 20s for the rest of the year. Back at your Analyst Day, it's originally going to be about $40, and then over time work its way down to $30 as you ramped some of your production objectives over the next few years. How do you think about this moving beyond 2020? Do you think it makes more sense to maintain a breakeven where you're run rating now? Or does it make sense to ramp spending back up a bit as you see increased visibility?

Yes, this is Matt. The long-term implications of the epidemic on demand and prices are a key consideration. While we could operate at a very low sustaining capital price, the average cost of supply for our investment opportunities is below $30. We believe it is not in our shareholders' best interest to pursue those development opportunities at this low breakeven point, as it would defer many low-cost supply investments. However, we need to see how the situation unfolds and whether it has significant long-term effects on mid-cycle pricing. It is too early to make a decision on that right now.

Yes. I would like to add that back in November, we discussed our asset optimization model. We have analyzed it, and if we encounter a different mid-cycle or long-term price, we would reconsider it. However, we have a solid understanding of the optimal rate of exploitation for our operations in the Lower 48 and unconventionals, which we have applied to our wider portfolio. We take this into account, but it's at a higher level than the sustaining capital level, as there is an ideal investment point that we believe will yield the best returns in our business. Despite the current downturn, we have maintained all our capabilities and have not reduced our organizational capacity. This decision is influenced by our short and medium-term market outlook regarding the potential recovery, and we have chosen to keep this capability so we can return strongly when we decide to.

Sure, I appreciate that it's early to be asking those types of questions. There's a significant variable in the development plan over time, particularly with Willow in Alaska. I'm curious about your current perspective on Willow and the timing. Based on your macro view, considering various potential outcomes, what would be your base case for how you envision rolling forward and the timeline involved?

Yes. So this is Matt again. We're working through Willow and we're in the concept selection stage just now. We have a timeline that would get us to the end of this year with the opportunity to select the concept. And by that, I mean, how big a facility do we build, how many drill centers do we have, and so on. So we're continuing to work towards that decision point towards the end of the year for Willow. And we'll make a decision at that time and then that will dictate the pace beyond. So we have not made the decision to defer Willow but we have that decision ahead of us. So we're continuing to work through that.

And we expect permits here this summer supporting the development at Willow both at the federal and state levels.

Yeah. Thanks. If we could stay in Alaska a little bit. Obviously, you've completed some of your winter program with some appraisals and tests out there. Can you give us a sense of what you have learned from that and how that helps you form your decision to the next year or so?

Yes, Scott. Good evening. We conducted exploration at Harpoon and appraisal at Willow. At Willow, we drilled two wells and planned four at Harpoon, of which we drilled one and planned three. We decided to drill only part of the program due to concerns about having exploration camps far out west on the North Slope in case of a COVID outbreak. Fortunately, we did not experience an outbreak, but out of caution for our team and contractors, we chose to end the exploration program early. We successfully drilled two out of the planned four wells at Willow, and those results met our expectations; we are still on track for a concept select decision. We need to decide whether we want to drill additional wells before making that choice, but we are currently evaluating the data. For the Harpoon well, which is part of the exploration complex in the South, our initial plan was to drill three wells, but we only drilled one. This well seems to have reached the edge of the top set based on its log response, but we will not have confirmation until we drill the second well. Therefore, we are still analyzing the results, and the situation at Harpoon will remain uncertain until we return to finish the exploration program.

Okay. I appreciate it. Good color. Good color. And this one might be for Don. The LNG outlook. And can you provide any kind of color on expectations for distributions maybe over the next quarter or a year if you have information you think that would be good enough at this time?

Sure, Scott. LNG realizations have been stable so far, with our LNG netbacks down only about 4% from the fourth quarter. This is due to the lagged nature of pricing, so we expect to see those impacts as the year progresses. Fortunately, most of our LNG projects are under long-term contracts, which are performing relatively well compared to the weak current spot market. In fact, 90% of our total LNG sales are from long-term contracts, while less than 10% come from the spot market. Regarding distributions, we reported approximately $100 million from APLNG in the first quarter, and we anticipate distributions for the year to be between $500 million and $550 million.

Thank you. I had a related question for Don on the cash flow. I'm just wondering if you could give some, sort of, guidance on how you're thinking about cash tax in this environment. I think if I remember back in 2016 you had substantial tax-loss carryforwards in particularly in the U.S. I was wondering to what extent these still exist?

Yes. We're still Alastair in a non-cash tax paying position in the U.S. And I think coming into this year when markets were still stable or relatively stable we were thinking that we could come out of that position maybe as early as 2021, but probably more likely 2022. So now this is going to obviously set that time frame back because we're going to have some large losses this year. So I don't have an estimate of when we might come out of it now but it's going to certainly be beyond what we thought before.

So does that mean the U.S. is in a minimal 0 tax paying position in 2Q in effect?

Yes. We're in a zero tax paying position in the U.S. and we expect to remain there for quite some time.

Good morning or good afternoon, depending on your location. Ryan, it seems your overall business model remains unchanged; you have a solid approach focused on balanced growth and returning cash to investors. However, given recent events, have any parameters shifted, such as the acceptable leverage ratio or the percentage of reinvestment? If there have been no changes, could you explain why?

Well, I think time will reveal the answer, Paul. We need to navigate through this situation and determine where demand settles, and whether there is any permanent decline in demand due to the pandemic's impact on consumer behavior that could alter our long-term pricing outlook. We're closely monitoring this, much like many others, to understand how supply and demand will adjust as we emerge from this downturn. It might be a bit premature to draw conclusions, but we will continue to focus on the fundamentals of our business, which include a strong balance sheet and a low-cost resource base. We remain committed to the value proposition we outlined last November, which we have reinforced and operated under for several years. Regarding your question about capital intensity and shareholder returns, we will need to evaluate our long-term price outlook and how supply and demand realign as we recover from this downturn.

Ryan, that's reasonable. The issue is that we likely won't know the true long-term effects, if any, for four or five years. I believe that by the end of this year or more so next year, we still may not be able to definitively determine the long-term impact. So, it appears that you may not make any changes until perhaps four to five years down the line, when you have a certain level of confidence about the long-term effects. Is that how we should approach it?

How long have you noticed Paul taking five years to react to the market conditions we're currently in? We have assessed our scenarios and are aware of our strategy. We understand our approach to the business and will align our capital efforts with returns to shareholders, considering where we allocate our balance sheet and how much cash we need based on our current environment. We have confidence because our low-cost resource base allows us to compete effectively in a low commodity price setting. We recognize what strategies are successful, and that will be our focus. We will remain adaptable and ensure that we invest in the right areas of our portfolio in response to the environment we face. We certainly won't wait five years to act.

Thanks everybody. Just on the Alaska volumes, we've typically thought about A&S and Brent just kind of interchangeably there. That relationship has broken down over the past month. Can you just remind us how you sell those volumes and like how that might be different from how you're selling the Lower 48 volumes?

Josh, I'll take that one. Yes. Most of our A&S sales go into the West Coast, which is why you're seeing the traditional relationship between A&S and Brent break down because of the very low refinery utilization rates in pad 5. So we would expect that that relationship would return once demand picks up in California and the rest of the West Coast. Some of our cargoes we do if the opportunity is open for us. We do send them to Asia as well. But generally, our A&S sales wherever they go, they're going to correlate usually very closely with Brent except under unusual circumstances as we're facing today.

Great. Thanks. And then right now there's a lot of defense being played right now, whether it's by Conoco or everybody else in the market. Just wondering where Conoco can play offense in this environment to lower the forward breakeven price. I guess the M&A question was asked before, but is there anything from a service cost standpoint or anything else that Conoco can pull the lever on to get that breakeven price lower?

Yes, we are collaborating with our supply chain partners to explore opportunities for cost deflation in the current environment. We have established strong relationships with our suppliers, and there may be some potential for savings there. Additionally, our company has been heavily focused on innovation for many years, which presents opportunities to advance the adoption of new technology and continue reducing supply costs. We have made significant progress in this area recently, but we still have work to do. Reducing supply costs is a core part of our mission because maintaining low supply costs is crucial in the commodity business. This understanding is shared by everyone here, and we are dedicated to driving down costs as much as we can over time.

And our workforce, Josh, sees the volatility in the market. So they see what happens in these volatile markets and why, as Matt said, we have to continue to lower the breakeven and drive the cost of supply down.

Thanks. Good morning. I guess, I was just curious as you think about bringing back the curtailed volumes. Do you expect to see any sort of material or notable incremental operating costs and/or capital costs associated with bringing those back for things like workovers or ESP refurbishment or any other associated costs that are associated with restarting those volumes?

This is Matt. We have indeed reduced our well work and workover activity as part of our efforts to cut operating costs. When prices improve, we plan to increase production again. However, the reductions in payrolls do not lead to any significant additional workover activity necessary to bring operations back online.

Yes. That's helpful. And, I guess, also as you think about the second quarter, I mean, are there anticipated turnarounds that we ought to keep in mind as well that would go beyond any of these curtailments outside of the Lower 48 Canada and Alaska, just thinking the rest of the global portfolio? Is there something that was already baked in that we just ought to be keeping in mind as we head into the second quarter?

Yes. We have sort of standard turnarounds going on across the portfolio this year. Last year was a very heavy year for turnarounds. It's less heavy this year but we're keeping to that schedule and there are no hugely notable ones that are unusual as we go through the year, but they will be occurring predominantly in the second and third quarter. We did take a turnaround in Qatar in the first quarter, but the majority of them will happen in second and third quarter.

Good morning everyone. There is a significant disconnect between the oil paper markets and the physical markets. Furthermore, within the physical market, there are considerable variations in regional crude prices. Can you discuss how this has been impacting your operations? Additionally, I've heard that very high API crude quality has been problematic. While we are on the subject, could you also address your exposure to natural gas, especially considering the potential for increased prices as production decreases? Thank you.

Yes, Paul. I'll address that. It's been quite different over the past month regarding the physical markets compared to the financial markets, especially in the U.S. This has influenced our decision-making around curtailment, as the netback prices are lower than one might expect from market screens. However, we haven't encountered any issues placing the volumes we aimed to. We refer to these as voluntary curtailments that we are implementing simply because we are not satisfied with the offered prices. We have not struggled to find a market for our crude, both in the U.S. and globally, at least not yet; that may change in the future. On the natural gas front, we are observing somewhat optimistic perspectives, though our exposure has decreased significantly. Our focus has shifted mainly to LNG and European gas markets, with very little domestic production remaining.

Understood. Can you discuss your infrastructure positioning and the current market conditions in North America? I'll leave it there. Thanks a lot.

Yeah, Paul, I guess you're talking more about some of our marketing activities. But we do have long-haul positions on both the oil side and the gas side probably more on the natural gas side because we've been such active marketers of natural gas in North America. So, we've been marketing our own equity gas out of the Permian Basin, generally moving at West towards California, Santa Mexico, Arizona, and up the West Coast as well. But we also move a lot of third party volumes as well.

Great. Thank you. As I read the release, you mentioned the Kamunsu East Field is not moving forward into development. Can you kind of talk to that? And talk about as an example, how is your capital allocation philosophy changed at least in terms of sanctioning projects this year, if it has at all?

Hey Bob, this is Matt. The Kamunsu East situation was simply a financial recognition of the timing related to the development of KME, which is effectively a satellite project to Kebabangan. Since KBB has faced delays due to pipeline issues between Sabah and Sarawak, the license for KME will expire before we can develop it economically. We wanted to acknowledge that in our accounting for the asset. Regarding the second part of your question, I wouldn't say there's been a significant change in our approach to capital allocation. We aim to allocate based on the lowest cost of supply and ensure we do it in the most efficient way. So, there hasn’t been any substantial change in our thinking on that, at least not yet, Bob.

Okay. A quick follow-up on Harpoon. You mentioned that you clipped the top sets, which indicates something about a missing reservoir, but you didn't mention fluids. Did you encounter hydrocarbons in that?

We did encounter hydrocarbons and are still interpreting the results. From a lithological perspective, it appears similar to other signatures we are seeing at the edge of these top sets. However, we have two more wells to drill. We would have gathered much more information if we had completed the program, but we prioritized safety and chose not to proceed.

Hey, thanks for taking the question. There are a few asked already on capital spending in the balance sheet, but I wanted to just follow-up in a bit more detail on that. And you provided back at the Investor Day, your helpful analysis of stress testing. The balance sheet and cash flow profile through a low commodity price period. And clearly what we're seeing right now is a bit unprecedented different than that stress test, but the balance sheet is still a very strong competitive advantage for you. I was wondering if you could just give an update on how you're thinking about the required cash balance and willingness to take on kind of additional leverage here or early in on the balance sheet to the extent we see a sustained period of low prices over the next few quarters to years. And at what point further CapEx cuts become consideration?

Hey, Devin, this is Don. Back at the Analyst Day, we mentioned having an operating requirement of about $1 billion, with the intention of keeping an additional reserve balance of $2 billion to $3 billion. We still generally feel the same way, but technically, those numbers might have decreased slightly. Our operating cash is now somewhat less than $1 billion, primarily due to some asset sales, which means we don't need as much. The reserve cash is a figure we recalculate monthly based on our outlook for the next six to twelve months, and that has likely decreased a bit due to lower spending on capital expenditures and operating expenses, especially following the suspension of our buyback program. It may be around $1 billion lower than our projections from November, but that’s about it. Overall, we believe that as we approach the end of the year, we can maintain cash balances above those operating and reserve levels, which suggests we won’t need to access the debt capital markets.

Thanks for taking the question. You may have mentioned a few minutes ago, are you going to be having any involuntary shut-ins in Norway or Indonesia, both of which were part of the OPEC Plus agreement?

Yes, I’ll address that, Pavel. As you noted, Norway has announced its participation in the OPEC cuts, which includes a reduction of 250,000 barrels per day for June and around 134,000 barrels for the latter half of 2020. We expect to be allocated a portion of that in Norway, although the process is fairly complex and will likely have some impact on our operations there. Currently, we estimate that the effect on our average daily rate for the year will be in the low single digits for barrels per day, but we are still reviewing the details. Additionally, they introduced some notable changes to the tax structure, particularly an accelerated depreciation schedule for capital investment to one year, which is a strategic move from the Norwegian government. Regarding Indonesia, we sell gas there to the domestic market under fixed take-or-pay contracts, so any Indonesian measures in support of the OPEC Plus agreement will not affect us. However, we might see some influence in Malaysia, where the government has expressed intentions to participate in the cuts, though the specifics are still unclear.

So Amera, this is Ellen. We're getting close to the top of the hour, so I'm going to ask that we take just one more question. Apologies to our participants, but we'll wrap it up here with one more.

Yes, thanks. Your oil mix in the Lower 48 has been pretty consistent over the last several quarters in the 57% to 60% range. As you mentioned, you aren't planning on any well completions in this environment. So my question is, if we look 9 to 12 months out, would you expect your oil mix to move significantly lower from that range just as GORs and existing wells naturally move higher without any new volumes to offset that mix shift?

Yes, Phillips, there may be some modest increase in the gas ratio over there as we go through the year, but it shouldn't be that significant. We'll have declining production in the Bakken and the Eagle Ford, the Permian. And with that, there'll be some increases in GOR, but it shouldn't be that significant.

Thanks to our listeners. If we left anyone in the queue, we'll come back to you. Thanks for your participation, and stay safe.