Conoco Phillips (COP) — Q3 2021 Earnings Call Transcript

Thank you, Sanera, and welcome everyone to the Third Quarter Earnings Call. In the room with me today are Ryan Lance, our Chairman and CEO; Bill Bullock, our Executive Vice President and Chief Financial Officer; Tim Leach, our Executive Vice President of the Lower 48; Dominic Macklon, our Executive Vice President of Strategy, Sustainability, and Technology; and Nick Olds, our Executive Vice President of Global Operations. Mark Keener, our Vice President of Investor Relations, is also in the room today. The format of our call will consist of some very brief prepared remarks, and then as Sanera mentioned, we'll go to Q&A. A few reminders. In conjunction with today's earnings release, we posted a deck of supplemental material addressing third quarter earnings and cash flow results, as well as some fourth quarter full year 2021 guidance updates. Today, we will make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in today's press release and in our periodic filings, and we'll mention some non-GAAP financial measures this morning. You can find reconciliations to the nearest corresponding GAAP measure in this morning's press release and on our website. With that, I will now turn the call over to Ryan.

Thank you, Ellen. As Ellen mentioned, I'll make a few opening comments and then Bill will address a few details about this quarter's results, and then we'll begin the Q&A session. In this morning's release, I referred to the quarter's results as notable. Obviously, financial and operating results were outstanding, but the context for describing them as notable meant something different. For the past year, we've been integrating Concho, improving underlying metrics across the business, and creating the most competitive E&P for the energy transition. The significance of this quarter's performance is that it represents the post-Concho, going forward baseline for the Company. On a run-rate basis, the integration is essentially complete. We've captured the announced $1 billion of synergies in savings from actions the Company took in connection with the transaction, all ahead of schedule. We're unhedged, but even more importantly, our torque to upside is helped by having high conversion of revenue to income and cash flow. The core executable of our global operating plan is delivering as expected. We'll close out 2021 as a stronger Company compared to any time in the past decade. Every aspect of our triple mandate is moving in the right direction. Our underlying portfolio of costs to supply is improving, our overall GHG intensity is lower, our emissions intensity reduction targets are more stringent, underlying margins are expanding, and our trailing 12-month return on capital employed is headed towards an estimated 14% by year end, reflecting the benefit of more than just stronger commodity prices. Between now and year end, our top priority is closing the Shell transaction, which we expect to occur in the fourth quarter. Once we close, we will be working diligently to integrate these properties and capture efficiencies in a similar fashion to what we've achieved through the Concho integration. In addition to layering in these properties on top of our existing high-performing platform, we're continuing to high-grade our portfolio and optimize the business drivers everywhere. The setup for next year is notable. We're now in the process of setting our 2022 capital plans, which we expect to announce in early December. Directionally, we don't anticipate a significant departure on CapEx from what we included in our June update, excluding Shell. In June, we provided an outlook based on a roughly $50 per barrel price that included a modest ramp in the Lower 48 to reactivate our optimized plateau plans, some incremental base Alaska investment, and some longer cycle low cost of supply investments in Canada, in Montney and in Norway. Since June, we see some inflation pressures, especially in the Lower 48. However, at this point, we would expect to adjust Scope modestly in order to tune response to maintain our base capital at a level that is roughly consistent with our June update, and then of course, we'll add CapEx for the Shell properties once we've brought them into the portfolio. As we finalize our 2022 plans, we're watching the macro closely, keeping an eye on inflation and potential OBO pressures, and undertaking our typical capital high-grading processes. It goes without saying, the market certainly appears to be more constructive, but we must always remember that this is an incredibly volatile business. But there's more to come on that in December. It's certainly been a busy year for the Company, but incredibly successful one so far, and that's thanks to our dedicated and talented ConocoPhillips workforce. We believe we're entering a very constructive time for the sector. But even so, we know that there will be relative winners. The relative winners will be companies with the lowest cost of supply investment options, peer-leading delivery of returns on capital, and visible progress on lowering emissions intensity. That's what we offer. Our third quarter represents a glimpse and a strong jumping-off point to what you can expect from ConocoPhillips going forward. So now let me turn it over to Bill, who will cover some of the key items from this quarter.

Thanks, Ryan. To begin, adjusted earnings were $1.77 per share for the quarter. Relative to consensus, this performance reflects production volumes that were slightly above the midpoint of guidance, better than expected price realizations, and lower than expected DD&A. As for the better realizations, we captured a higher percentage of Brent pricing in our overall realized prices. We provided supplementary information in this morning's material to address the realizations variance, and as Ryan mentioned, we're unhedged, so we're getting full exposure to the current higher prices. As for DD&A, we're trending lower compared to the previous guidance as a result of positive reserve revisions due to higher prices. You saw in today's release that we lowered full-year 2021 DD&A guidance from $7.4 billion to $7.1 billion. Excluding Libya, production for the quarter was 1,507,000 barrels of oil equivalent per day, which represents about 2% underlying growth. Lower 48 production averaged 790,000 barrels a day, including about 445,000 from the Permian, 217,000 from the Eagle Ford, and 95,000 from the Bakken. At the end of the quarter, we had 15 operated drilling rigs and 7 frac crews working in the Lower 48. Across the rest of our operations, the business ran extremely well. In particular, our planned seasonal turnaround activity across several regions went safely and smoothly. You have noticed that we provided production guidance for the fourth quarter and for the full year 2021 in this morning's release. This reflects the impact of a decision we're making to convert Concho 2-stream contracted volumes to a 3-stream reporting basis as part of our ongoing efforts to create marketing optionality across the Lower 48. We expect to convert the majority of our contracts in the fourth quarter. Reported production is expected to increase by approximately 40,000 barrels a day, and both revenue and operating costs will increase by roughly $70 million. In other words, this conversion is earnings neutral. Besides DD&A in production, there were no other changes to 2021 guidance items. Once we've closed the Shell acquisition and conceived where the ongoing U.S. tax legislation conversation lands, we'll provide updated earnings and cash flow sensitivities that consider such factors as projected 2022 price ranges and how those ranges might impact our cash tax paying position in various jurisdictions around the globe. Coming back to third quarter results, cash from operations was $4.1 billion, which was reduced by about $200 million for nonrecurring items, so a bit higher than the average of external estimates on an underlying basis. Free cash flow was almost $3 billion this quarter, and on a year-to-date basis, this is about $6.5 billion. Through the first 9 months of the year, we've returned $4 billion to shareholders, and we're on track to meet our target of returning nearly $6 billion by the end of 2021. This is through a combination of our ordinary dividend and buybacks. So to summarize, as Ryan said, it was a notable quarter. The Company is running exceptionally well, and we've achieved a significant reset of the base business post-Concho. That creates a powerful platform for entering next year. We're focused on closing the Shell Permian acquisition so that we can begin the work of getting those properties fully integrated into the business. Setting our capital plans for 2022, maintaining a leading position of returns on and up capital, and lowering our emissions intensity. That's the triple mandate. That's what ConocoPhillips is all about, and we look forward to providing additional information in December. I'll now turn the call over to the operator to begin the Q&A portion of today's call.

Yes. Thank you. Good morning. Hopefully, you can hear me.

Good morning, Roger. Yes, we can hear you. Good morning.

Sorry. It was really quiet there. Anyway, I just want to come back to the inflation question. I know you'll talk more about CapEx in December, but maybe an idea of what you have seen today, where you think the bigger inflation headwinds may arise?

Sure, Roger. Like I said in our opening comments, we're in the middle of putting all our plans together. Right now, the supply chain organization tells me that globally, we're thinking about mid-single-digit kind of inflation rates as we go into 2022. But it's bifurcated into two pieces: the U.S. being, depending on where you are geographically, anywhere from the low double-digits to the higher single-digits, the Permian being the area probably the most influenced. The rest of the world, though, is still at about 2% to 3% inflation rates globally. The categories that you can imagine are inflating right now certainly include those that are in need here in the U.S. as we start to recover out of the low point, things like OTCG, labor, sand, pressure pumping, and the likes. I think as we think about it going forward, it's an opportunity for us to try to offset as much of that through some modest scope production efficiencies, which I think is where Tim is focused in the Lower 48. I can ask Tim if you want to add anything to that relative to the Lower 48 in the Permian.

No. I think that covered most of it. But I would say that while we are seeing inflation on those items, we have size and scale advantages of our combined organizations, and the operations continue to improve in the Lower 48. So I think there are many ways that we can mitigate those inflation factors.

Okay, great. Thanks. Then just since it's been in the news quite a bit, what's been going on in Alaska? I was just curious about Willow can't go forward. What do we think about in terms of other opportunities in Alaska? Have you noticed any meaningful changes since Hilcorp became the other partner in Prudhoe Bay?

Yeah. Roger, this is Nick. Just maybe a quick update on Willow. As you've probably seen in the press, both Department of Justice and ourselves decided not to appeal the Alaska District Court decision. We feel the best and most efficient approach there is to really work through the three substantive issues that were identified in the district court ruling. We'll do that through additional NIP analysis. We're currently engaged with the BLM and the cooperating agencies up there, just working through those three particular issues. As you look forward, as we mentioned, we continue to work through our detailed engineering and service of continued refinements of our costs and schedule and many development modifications, all in service of doing an FID. If you look at 2022, our capital program will reflect the continued engineering work, and then from a shareholder standpoint, we still see significant support from the Alaska delegations, the state of Alaska, as well as the North Slope borough. So we remain committed on this front. As far as other projects, we spoke about in the June 30th market update. For example, we've got Nuna and Coyote. These both leverage existing infrastructure, so existing pads, facilities, and pipelines—very low cost of supply opportunities that we're progressing. On the Prudhoe front, we're seeing great efficiency improvements and safety performance. They continue to reduce costs across the board. So our teams are heavily engaged, and all three legacy assets are performing well.

Hi. Good morning, everyone. Thanks for taking our questions.

Good morning, Jeanine.

Good morning. Our first question is on Scope 3. In conjunction with the Shell Permian acquisition, you announced an improvement in your Scope 1 and 2 emission intensity targets, which is great. At this year's meeting, I believe shareholders voted in favor of the Company setting Scope 3 reduction targets as well. So could you maybe update us on the Company's strategy for addressing that vote? Perhaps any color on feedback that you've received from your shareholders regarding Scope 3 production targets for Conoco?

Yeah. Sure, Jeanine. Let me make a few comments and I'll turn it over to Dominic, who's been involved in all our shareholder engagement activity. That's a normal part of our process this time a year, but yeah, you saw coincident with the Shell acquisition announcement that we increased our targets related to Scope 1 and Scope 2. We think the industry needs to move to a net equity perspective. So we're pretty focused on our commitment to reducing our Scope 1 and Scope 2, and as you state, we did get a resolution that got 57% of the vote—not binding, but one that we have to engage with our shareholders on. So we've been doing that on the Scope 3 side specifically, and I can get Dominic maybe to comment on what that looks like or what we've heard so far from shareholders.

Well, thanks, Jeanine, for the question. We're all continuing in dialogue with shareholders. This is an ongoing process on this very important matter. I think to share some key elements of that dialogue, as an E&P Company, we continue to believe our Paris-Aligned Climate Risk Framework that we launched about a year ago is both credible and ambitious and addresses the realities of our triple mandate that you often hear us talking about—responsibly meeting transition pathway demand, delivering competitive returns, and achieving net zero emissions on the emissions we control, which are Scope 1 and Scope 2. We established just earlier this year a dedicated low-carbon technology group, and they're supporting our business units in ongoing progress to achieve our Scope 1 and 2 targets and our net-zero ambition. But we are not ignoring Scope 3 end-use emissions. Our new low-carbon groups are also working to develop opportunities and low-carbon businesses with a focus on carbon capture and storage and hydrogen, both of which have a strong adjacency to our core business and our competencies. But those opportunities must deliver competitive returns for shareholders, and on the policy side, we continue to advocate for a well-designed, economy-wide price on carbon, which we see as the most viable solution for addressing demand and actually reducing Scope 3 end-use emissions. But we don't believe a Scope 3 target for a Paris-aligned E&P Company like ConocoPhillips makes sense, as it wouldn't address consumer demand and it would shift supply away from top-tier ESG producers to less accountable producers and jurisdictions. We believe, in fact, that a Paris-aligned E&P Company with a focus on low-GHG intensity and low-cost supply production has a valuable and crucial role to play in energy transition. Of course, we take our shareholders' views very seriously and we're continuing our engagement to understand their perspectives. It's an ongoing process. We'll continue that through the next couple of months here, but that, perhaps, gives you a flavor of the nature of the dialogue.

Okay, great. That's really helpful. We look forward to the carbon capture and hydrogen development. I guess our second question, maybe a little housekeeping item here is on the affiliate distributions. The distributions were slightly below what we think was implied by prior commentary on the 2Q call. It was a little bit below our forecast. We're just wondering if there was anything unexpected related to the timing of distributions? We understand if there's seasonality for the quarter or if there is any change in the full-year outlook of $700 million in APLNG distributions for this year?

Sure. Jeanine, we received distributions of $85 million from APLNG in the third quarter, and that brings our total year-to-date to $430 million for the year. We now expect full-year distributions of around $750 million from APLNG this year. As you noted and as a reminder, we typically receive lower distributions in the first and third quarters and higher distributions in the second and fourth quarters. As you think about APLNG due to the pricing lag with APLNG long-term LNG sales, there's really little sensitivity to price for the remainder of 2021 distributions. As LNG pricing is essentially set, we feel very good about the $750 million for the full year.

Good morning, team, and let me start by thanking Ellen for her service to the industry and to the investment community. Congratulations on your retirement, Ellen. You are going to be sorely missed.

Thank you, Neil. Yes, she appreciates the call-out. We're going to miss her as well.

Yeah, Ellen, you can't escape us. So you know where to reach us.

But I'm not going to try.

She's not going to escape us completely either.

You're in great hands. It's been an honor, everybody. Truly an honor, and ConocoPhillips won't miss a beat.

That's great. Well, you've left them in great shape. Ryan, I want to kick off on a big picture question for you, and then Tim, I had a follow-up for you on the Permian. But the big picture question is, Ryan, do you think we're in the beginning of a structural upcycle here? We've been through 7 years of a very dark period of oversupply in the industry; underinvestment might be kicking in here. Do you see multiple years ahead of a potential recovery? To the extent we actually are at the beginning of the structural upcycle, the last time we had one, the industry destroyed a lot of value over the long term by not seizing the opportunity appropriately. So as the leader of the E&P industry, what is the message you're telling your folks about how you do it differently this time to create structural value to the extent you have a period of excess cash flow?

Yeah. Thanks, Neil. Certainly, it looks pretty constructive for a number of reasons. We're seeing the demand recovery post-pandemic, and for all the reasons you stated, this turns into a supply problem, and I think that's going to provide some pretty constructive tailwinds for the industry. So yeah, you ask a bit of a provocative question there. Here’s what I would say: For my peers, I'd say we need to restore sector sponsorship, and that's only going to happen through consistent returns on capital employed, and they have to be competitive with the market. I think that's the opposite of what we saw in this boom-bust industry. I think investors need to keep us on a short leash, and I think that would be good for this sector. So that's kind of what I would tell my peers. What would I tell investors? It is different right now because I think this industry is being run as a free cash flow business, so now we have short-cycle inventory that can be managed for returns of and returns on capital. But I think you have to remember that the quality of inventory really does matter. Because the operators with the best inventory, like ConocoPhillips, are going to be able to make market competitive returns, and we can do that without pushing for aggressive growth. So with modest growth, we can deliver those kinds of market competitive returns for people that have high-quality inventory, and I think that's a significant paradigm shift. Lastly, and this would be for investors and my peers, is that the energy transition is happening. We are going through a transition today, but I think that requires a new lens to look at this business, and it requires a bit of new thinking, which I think Dominic just referred to in the last question that Jeanine had about our triple mandate. We must accomplish those three objectives simultaneously and execute them really well. So we must meet the demand for energy transition, supplying it with low-cost production while meeting our net-zero ambition by 2050.

You guys absolutely have delivered the playbook. That’s a good dovetail. Tim, just your perspective on the Permian position at this point—specifically, talk about where we are in terms of the integration of the Concho assets, and you've probably gotten more time to take a look under the hood of the Shell assets. How do you feel about what you've acquired?

Yeah, it's pretty exciting. First of all, I'm really proud of our team for being able to integrate this Concho acquisition and deliver on all the production and cash flow, getting the wells drilled, and not missing a beat on execution, while delivering all the synergies we discussed. The blocking and tackling of our business is going really well in the Permian. In addition, ConocoPhillips has four really great Shell basins in the U.S., and watching how information is being transferred and the teamwork going on between those groups is encouraging; they're continuing to improve everything. The wells are getting better. We are delivering more efficiency all the time. So that's exciting for the future. When you look at the opportunity with the Shell acquisition, we can create value with those assets, and that's what our teams are focused on, the opportunity to enhance that and realize value out of it. So I'm pretty excited and proud of the work that's being done right now.

Thank you. I was wondering if I could follow up on that last question with Tim. Tim, I appreciate that you haven't closed the Shell transaction yet and having gotten your hands on the assets, but it seems to us one of the big areas of upside could come from equalizing working interest and some swaps and trades and blocking up your total position including Shell. Could you just talk a little bit about that opportunity as you see it? And have you had incomings from the industry knowing that you will be the holder of those assets in short order?

Yeah, managing assets like that is what I think we do best, and there are so many different ways that we can create value—from the way the wells are drilled to how they're completed, to the marketing arrangements. This also gives us the opportunity, with those additional assets coming in, to have much more flexibility on what we can dispose of and how we can high-grade our portfolio. It enables us to do what I think we're really good at, from an operational and property management standpoint, enabling swaps and trades. We have a dedicated group around that, and they can create a lot of value in the basin. All the operators are trying to avoid excessive outside-operated constraints and create longer lateral drilling opportunities.

Yes. Sure. Happy to. So first starting with the CV monetization program, we've sold about 67 million shares year-to-date. That's about 30% of our original balance, and so we reduced our equity stake in Cenovus's from about 10% to about 7%. Those proceeds have been used to buy back about $600 million of Conoco shares through the third quarter. You'll note on our slides for cash that that was about $400 million for the third quarter. We have accelerated our sales and expect to exit our position sometime in the early part of next year, executing those sales in a thoughtful and measured way. We continue to monitor market conditions as we move forward, assuming that they remain supportive; we'll be out in the early part of next year. You also asked about the contingent payments from Cenovus. During the quarter, we recognized about $100 million in pre-tax earnings, bringing our year-to-date total to about $200 million so far from Cenovus's contingent payments. At current pricing, we'd expect to recognize another $100 million in the fourth quarter. The contingent term expires at the end of the second quarter of 2022, but at current strip prices, we would expect to continue accruing contingent payments in the first and second quarter of next year. It's worth mentioning that we are still continuing to receive contingent payments from our San Juan sale, we’ve accumulated $30 million in pre-tax payments this year with $21 million accounting for the third quarter and expect to accrue another $21 million in the fourth quarter, and at current prices, that should continue through calendar year next year.

Thank you. Let me add my congratulations to Ellen. I'm pretty sure I'm not going to be on that call, but good luck and thanks for all your help over the years. Really, we're going to miss you. A couple of things if I may. Ryan, I know we get to the cash return question a lot when I come to question you on the spot. I just wonder if my thinking is evolving any. What I'm looking at is you're pretty much bigger than BP at this point. You're knocking on the door of Total and Shell in terms of scale, and on average, your yield is running about 60% of those peers; you could easily step that dividend up and get greater recognition for the value proposition, in my opinion. Why not?

Yeah. I think I've tried to be pretty clear, Doug. I appreciate the question and the push. I think what I've tried to be clear about is that our 30% of cash flows are going back to the shareholders as a commitment you can take to the bank. So with this run-up in prices that we’ve seen here lately, you should expect to get 30% of our cash from our operations. You asked, what about the channel? I'd say maybe before the channel consideration with the Shell acquisition, we'll probably look to try to put more money onto the balance sheet as we go through this. But more directly to your question about the channel, I've been comfortable based on our outlook and our view of the macro currently to split the distribution between the ordinary dividend and share repurchase. How do I think about the ordinary dividend? For me, it needs to be something that’s incredibly reliable, transparent, growable, solid, and something you can count on. It must work in the downside of this sector whenever we go through downturns. That's how I think about the dividend, and I think you can get euphoric when the times are good, but you've got to think of the dividend as a commitment: reliable, always present, and growth-oriented. So that's my perspective on the dividend. But importantly, you should expect to receive 30% of our cash from operations. That’s our commitment, what we've done for years and what we are going to keep doing. So if cash flow goes up, you will get those dollars. We've been communicative about the potential for other channels to emerge, so we’re not locked into a specific channel for doing that. So I take your point; I probably think about the ordinary dividend just a little bit differently.

I appreciate the answer. I guess it’s more about trying to figure out what the market reacts to best, which is what's behind my question, but I appreciate the answer. Thank you.

The recognition, Doug, needs to be over the long term, not just over a month or a quarter; it’s about what builds value and what’s the right model over the long haul in this very volatile business.

Sure. Very different capital structure today for you guys than a few years ago. My follow-up very quickly: you touched on high-grading the portfolio. I don't think we've heard you say that in a little while, and obviously, you have a very large slug of production coming in, and I just wonder if I could push you a little bit to touch on some of the things you were thinking there to flush that out, and I'll leave it there. Thank you.

Yeah. No, thanks, Doug. I think we sold through this quarter a couple of hundred million worth of assets. Those are largely in the Lower 48. We've got another couple of large packages in the Lower 48 on the market today that are significantly larger than what we've talked about closing today and a couple of other things. But we're pretty committed. We announced after the Shell transaction that we would sell $4 billion to $5 billion. We had $2 billion to $3 billion out in the market from the June market update. We're well on the road to delivering that $2 billion to $3 billion. We upped that to $4 billion to $5 billion due to the Shell transaction, as when we get a first look at the portfolio, primarily in the Permian, we think there’s cleanup we can do with Tim’s team, and the trading and swapping that you described earlier, as well as some outright sales. So I feel pretty comfortable with that $4 billion to $5 billion target. Obviously, that will carry us into 2023, but we're making a lot of progress through the first half of next year delivering those targets.

Hi. Good afternoon. My first question is just on the prior guidance or the pending fourth quarter cash balances, post the Shell acquisition of about $4 billion in cash. Any updated thoughts there now that we've gone through 3Q, and any other moving pieces that you talked about in the call here today?

Yes. Sure, Phil. We still feel very good about that $4 billion of ending cash. The Shell transition headline price is $9.5 billion, but the effective date is July 1st of this year, and so as we go through the year, we expect to end up with a little over $4 billion of cash by the end of this year.

Okay. And then second question, Bill, for you would be: you gave a little teaser in your prepared remarks on cash taxes. Do you have any updated thoughts around when you would become a cash taxpayer factoring in the impacts of the Shell acquisition, the higher oil prices, etc.?

Yes. Sure, Phil. If current pricing continues into 2022, we would expect to move into a significant tax-paying position in the U.S. by early to mid-2022.

How about just for the overall Company?

Well, the overall Company would be similar. Many of our international assets are already in a cash tax-paying position, so the main change is in the U.S.

All right, thank you. Let me add first my congratulations to Ellen and wish you a wonderful and healthy retirement. Thank you for your help.

Thank you.

Two questions. Maybe this is for Tim, but maybe we read too much into it. In the third quarter, cost production actually decreased sequentially. I think in your 10-year strategic long-term plan, the target may be reaching around $300 in the longer term and staying there for an extended period. So I'm wondering with the Permian asset if that's still the game plan and what we've observed in the third quarter—was that just the timing of wells coming on-stream or should we read more into that? So that’s the first question, and maybe I will ask the second question later.

Good. Thank you. The way we think about managing the Eagle Ford, Bakken, and Permian is as one asset that we can allocate capital around. We've said on this call before that the Eagle Ford and Bakken are much closer to being at their optimal plateau than the Permian is. The Permian doesn't get there for a long time, but we are increasing activity in the Eagle Ford. It will be at the optimal plateau rate that you referenced, and the sequential quarter-over-quarter decrease is more about timing with things like wells coming online. But I'm very pleased with the performance of that asset, and there have been improvements like refracturing and other initiatives we've talked about that have continued to enhance the performance of the Eagle Ford.

Tim, production rates in 2024 or 2025, or maybe sooner? So in other words, how aggressive are you going to be?

Yes. We haven't given guidance on those specifics. Generally, it reaches its plateau much sooner.

Thank you. The second question maybe is for Bill or for Ryan. I think when you set up the $6 billion in cash return last phase on the $60 WTI for this year. Obviously, the price is much stronger. So should we assume that you're going to return more than that, or because of the Shell transaction, are you going to stick to that and just have additional cash to strengthen the balance sheet?

At this point, our guidance remains at $6 billion in returns this year, and stay tuned for what that looks like for next year. But yes, we’re sticking to the plans we have in place for 2021 that gets us pretty close to $6 billion in total return. This comes through the ordinary dividend and the shares we're buying and the shares we are swapping with Cenovus.

Ryan, just a quick follow-up on what you just said. I want to make sure I was clear on the shareholder return on the $6 billion. It looks like a good sign in that I think a third of it is coming this quarter. Is that just a result of how it played out from the stated cash flow payout?

Yeah. I think you probably saw some ramp-up in the swap with the Cenovus shares. The dividends are obviously ratable across the four quarters other than the raise that we announced recently, and we restarted our share buybacks outside of the Cenovus swap after the first quarter. So yes, they're not quite ratable. You saw that ramp-up in the third quarter. If you look at our results, you should assume that that continues into the fourth quarter.

Okay, great. That clarification. And then, probably for Tim: you just mentioned earlier on the activity. My question is more on Permian activity that you were discussing. I know one of your peers suggested a notable increase in Permian activity for the remainder of this year, turning into 2022. I’m just wondering, post the Shell deal, are we going to see a ramp in that? I just want to see if that’s what you're indicating since you mentioned it. Could we see some ramp there, or is it still in the works and the whole thing's steady? Obviously, I know you don't have guidance for '22 or '23 out yet.

We haven't completed all our planning for next year. That's what Ryan referred to as we're still going through it. But I would tell you that as we’re planning for Shell, until we get our hands on the steering wheel, we’re just continuing at the level of activity they currently have going on there. I believe in steady progress, so as we add activity, it will be ratable. I wouldn't call it a ramp; I would call it slow and steady growth, as I think that will build the most efficiency in our operations.

Good afternoon. Thanks. I want to revisit the 10-year plan, which obviously got enhanced after the Shell transaction. When I think about the different toggles you have, obviously, given the unhedged nature of the portfolio, you have talked about if you do have a $10 or higher oil price, your assumption is an incremental $35 billion, and I'm just trying to make sure I’m on the same page with how you're looking at that. The last time that free cash flow got enhanced from the Shell transaction was an incremental $10 billion over that 10-year plan. That full $10 billion basically went to the incremental shareholder distributions. I'm just trying to understand what it would theorize for you to look at something other than that 30% of production. Does it not really matter what the oil price is? Does the incremental just go to shareholder distributions, or just how do you think about that?

Thanks, John. Yes, that's correct. You should think about it on top. Again, the market update plan was at a $50 barrel price deck. Our commitment to our investors is that 30% of the cash will go back to our shareholders. With the price increase and cash flows increasing, you should expect the distribution to the shareholders to also increase. However, we’re still going to maintain a strong balance sheet, and having some cash on the balance sheet is important for the Company. We will deliver modest growth, but that's always been an output of our plans. We want to ensure that we have good visibility on where the macro is going for the next year. We will set our capital budget plans to deliver the strongest returns on that capital that we can manage. We don't want to be put into a phase of very high super inflation; we've seen what that does to returns. So we'll be very conscious of that as we look at what we believe is a constructive view of the macro going into the next 2 to 3 years. You should expect us to act as we have in the past. We will be very judicious in setting our capital to maximize every dollar, and shareholders should expect to receive 30% of their cash back through dividends and share buybacks. Remember, adding Shell has made the Company better, more resilient, and more cash flow positive, so that means there will be more returns of capital to the shareholders. And we’ll manage the Shell assets exactly like our Lower 48 assets at about a 50% to 60% reinvestment rate. Again, we're executing the Shell differently than what this industry did a number of years ago.

Sanera, this is Ellen. We'll take John's second question and then wrap it up.

Okay. Thanks, and then just my follow-up question. Ryan, you talked about the inflationary pressures seen in the Lower 48, with that kind of high single-digit to low double-digit inflation versus the international part of your portfolio, which is still rather modest—around 2% to 3% inflation. Obviously, Tim and his team have done a great job on the efficiency gains in the Lower 48, but it doesn't sound like, at least for the 2022 plan, we should anticipate any material shift in sort of that mix, I guess international versus Lower 48. I realize this is over-simplifying it, but how wide would that spread need to be from a service concentration perspective between the Lower 48 versus international for us to lean a little bit more on the international portfolio?

I don't think we'll allocate capital based solely on how we see those different inflation rates developing. So I think we just want to be clear about how we perceive it in significant categories of spending that we have in the Company and strive to give you an idea of what we see today. We will continue to monitor it. If we see hyperinflation running away from us, we may adjust our scope modestly but won’t force any shifts based on that at this point. So again, it's focused on ensuring that returns are adequate for the capital being invested. I know Tim said in one of his responses, we’re a large Company with a sophisticated supply chain organization, with a very sophisticated commercial organization, and the efficiencies we’re extracting still exist within the business. So we believe we have some ways to mitigate much of it, and we’ll adjust our plans if it begins to spiral out of control, but that’s where we stand out as an E&P Company. We’re global, we’re large, and that’s a huge benefit to us regarding the impacts of these issues.

Terrific. Thank you to our listeners. Thank you, Senara. I really appreciate it. Feel free to ring Investor Relations if you have any additional comments. Have a wonderful day and week. Be safe. Thank you.