ConocoPhillips (NYSE:COP) Q4 2023 Earnings Call Transcript

ConocoPhillips (NYSE:COP) Q4 2023 Earnings Call Transcript February 8, 2024

ConocoPhillips isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Fourth Quarter 2023 ConocoPhillips Earnings Conference Call. My name is Liz, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.

Phil Gresh: Thank you, Liz. And welcome everyone to our fourth quarter 2023 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO; Tim Leach, Advisor to the CEO; Bill Bullock, Executive Vice President and Chief Financial Officer; Dominic Macklon, Executive Vice President of Strategy, Sustainability and Technology; Nick Olds, Executive Vice President of Lower 48; Andy O’Brien, Senior Vice President of Global Operations; Kirk Johnson, Senior Vice President, Lower 48, Assets and Operations; and Will Giraud, Senior Vice President, Corporate Planning and Development. Ryan and Bill will kick it off with opening remarks, after which the team will be available for your questions.

A few quick reminders. First, along with today’s release, we publish supplemental financial materials and a slide presentation, which you can find on the Investor Relations website. Second, during this call, we will make four looking statements based on current expectations. Actual results may differ due to factors noted in today’s release and in our periodic SEC filings. We will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today’s release and on our website. And third, when we move to Q&A, after the prepared remarks, we’ll be taking one question per caller. With that, I will turn it over to Ryan.

Ryan Lance: Thanks, Phil. And thank you to everyone for joining our fourth quarter 2023 earnings conference call. It was another strong quarter for ConocoPhillips as the team continued to execute on its commitment to deliver returns to our shareholders. Now, stepping back and looking at 2023, ConocoPhillips demonstrated solid execution across all aspects of our triple mandate. We reported record production and achieved several milestones across our global asset base. And we delivered a preliminary reserve replacement ratio of 123%, highlighting our ability to continue to replace reserves across our deep, durable and diversified portfolio. We’re also progressing several key strategic initiatives. We advanced our global LNG strategy through expansion in Qatar, FID at Port Arthur and several offtake and regasification agreements.

We FIDed the Willow project in Alaska and have been ramping up construction this winter season. And we opportunistically acquired the remaining 50% of Surmont at an attractive price that fit our financial framework. We were able to accomplish all of this while delivering our returns-focused value proposition to our shareholders. We generated a trailing 12-month return on capital employed of 17% or 19% on a cash adjusted basis. We also delivered on our plan to return $11 billion of capital to our shareholders, which was well in excess of our greater than 30% annual through-the-cycle commitment. Last spring, we further strengthened our GHG emissions intensity targets to a 50% to 60% reduction from a 2016 baseline. And we were recently awarded the Gold Standard Pathway designation by the Oil and Gas initiative part — Methane Partnership 2.0. Now looking ahead to 2024, this morning, we announced a plan to distribute $9 billion to shareholders this year.

We also announced a VROC of $0.20 per share for the first quarter. The remainder of our cash flow will be reinvested into the business as we continue to execute on our plan to grow earnings and cash flows as we outlined at our Analyst and Investor Meeting last year. In conclusion, once again, I’m proud of the accomplishments of the entire organization. Our portfolio is well positioned to generate competitive returns and cash flow for decades to come. Now let me turn the call over to Bill to cover our fourth quarter performance and our 2024 guidance in more detail.

Bill Bullock: Thanks, Ryan. In the fourth quarter, we generated $2.40 per share in adjusted earnings. We produced 1,902,000 barrels of oil equivalent per day, representing 4% underlying growth year-over-year. This was consistent with our full year 2023 underlying growth rate of 4% also. Fourth quarter Lower 48 production averaged 1,086,000 barrels of oil equivalent per day, which represented 9% underlying growth year-over-year. We produced 750,000 from the Permian, 211,000 from Eagle Ford and 110,000 from the Bakken. Full year 2023 underlying growth for the Lower 48 was roughly 8%. Moving to cash flows, fourth quarter CFO was $5.5 billion and this included APLNG distributions of $281 million. Fourth quarter capital expenditures were $2.9 billion, which included $573 million for longer cycle projects.

Full year capital expenditures were $11.2 billion, which included $2 billion for longer cycle projects. Now regarding returns of capital, we delivered $11 billion to shareholders in 2023. For the fourth quarter, we returned $2.5 billion. This was via $1.1 billion in share buybacks and $1.4 billion in ordinary dividends and VROC payments. We ended the year with cash and short-term investments of $6.9 billion, as well as $1 billion in long-term investments. In the guidance [ph], we forecast 2024 production to be in a range of 1.91 million barrels of oil equivalent per day to 1.95 million barrels of oil equivalent per day. This translates to 2% to 4% underlying growth pro forma for acquisitions and dispositions. We expect this growth to be well balanced between both Lower 48 and International.

Our full year forecast includes turnaround impacts of 25,000 barrels per day to 30,000 barrels per day, which is about 10,000 barrels per day higher than in 2023. Now turnarounds are expected to be concentrated in the third quarter, when Surmont completes a one-month turnaround and that turnaround occurs once every five years. For the first quarter, production guidance is in a range of 1.88 million barrels of oil equivalent per day to 1.92 million barrels of oil equivalent per day, a roughly 1% to 3% underlying growth. While the first quarter will have minimal turnarounds, similar to the fourth quarter, it does include a 20,000 barrel per day headwind from January weather impacts. For APLNG, we expect distributions of $400 million in the first quarter and $1.3 billion for the full year.

Now shifting to cost guidance, we see full year adjusted operating costs in a range of $8.9 billion to $9.1 billion, representing essentially flat unit costs on a year-over-year basis. Full year cash expiration expenses are expected to be $300 million to $400 million, and DD&A expenses are expected to be in a range of $9.4 billion to $9.6 billion. Full year adjusted corporate segment net loss guidance is $1 billion to $1.1 billion. And for taxes, we expect our effective corporate tax rate to be in the 36% to 37% range of strip prices, and that’s excluding any one-time items and that’s with an effective cash tax rate in the 33% to 34% range. For capital spending, our full year guidance range is between $11 billion to $11.5 billion, which includes $200 million to $300 million of capitalized interest.

Now on slide eight of the presentation, we provided bridge from 2023 to 2024 with some of the key year-over-year variables, most of which we’ve discussed on prior earnings calls. These include our expectation of $200 million to $300 million in deflation benefits, primarily in the Lower 48; $200 million to $300 million of lower spending in Norway following the startup of our four subsea tieback projects; and $500 million to $600 million in lower LNG spending, mostly at Port Arthur. These decreases are offset by a $900 million to $1 billion increase at Willow, and $100 million to $200 million increase in Canada to account for the acquisition of the remaining 50% of Surmont and the addition of a second rig in the Montney. For Willow, we expect spending to be more heavily weighted to the first quarter and this is consistent with the normal timing of winter construction season.

And for Port Arthur, we expect that our $400 million of equity contributions in 2024 will also be weighted towards the first half of the year. Now as a result, first quarter CapEx could be a bit above $3 billion. So to wrap up, we ended the year with another solid operational quarter. We continue to deliver on our strategic initiatives across our deep, durable and diverse portfolio, and we remain highly competitive on our shareholder distributions. Now that concludes our prepared remarks. I’ll turn it back over to the Operator to start the Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Neil Mehta with Goldman Sachs.

Neil Mehta: Thank you. Thank you, and good morning, team. Ryan, I want to ask you about the Lower 48. Last year, you correctly predicted that many of us who thought production was going to be up 400,000 barrels a day to 500,000 barrels a day, were wrong and the number ended up being closer to your number of 800,000 barrels a day to 900,000 barrels a day. So as you think about exit — to exit this year, how are you thinking about U.S. oil production and tie that into your own Lower 48 development plans. How are you thinking about prosecuting that acreage over the course of the year?

Ryan Lance: Yeah. Thanks, Neil. No. We see a bit of deacceleration in the growth rate coming from the U.S., driven by a number of factors around efficiency and the rig rates. So we would peg the growth, but we’re still growing in the Lower 48 and we’d peg that growth at between 300,000 barrels of oil equivalent to 500,000 barrels of oil equivalent. That’s total liquids. So, yeah, we still see some growth coming from the U.S. shale, the Lower 48, primarily driven out of the Permian. But more modest relative to last year’s growth. Relative to our expected Lower 48, we’re in that same range, low to single-digit kind of growth rates coming out of that on pretty much similar activity level to what we entered into 2023. So we don’t intend — at this time, we don’t intend to be ramping our program in the Lower 48 and are coming into the year at a similar level to what we exited 2023 at.

Neil Mehta: Thanks, Ryan.

Operator: Thank you. Our next question will come from the line of Doug Leggate with Bank of America. Your line is now open.

Doug Leggate: Thank you. Good morning, everyone. I guess, your…

Ryan Lance: Good morning.

Doug Leggate: Thanks, Ryan. Ryan or Bill, I’m not sure who wants to take this one. So we’re always interested to know how you see your portfolio breakeven evolving as it relates to not so much current capital, but sustaining capital. And what we’re really trying to get to is that dividend breakeven, that post-dividend breakeven level. If I may, maybe as a Part B to that, I’m curious whether cash in the balance sheet benefits or is a priority currently as it relates to how you think about cash returns in that dividend context, given that you’re entering a period of elevated spending here for a couple of years.

Ryan Lance: Yeah. Thanks, Doug. I’ll let Dominic roll in. He can give you some specifics around the breakeven, but at our mid-cycle price kind of deck, I think, it’s pretty consistent with what we laid out at AIM. And I can let Dominic give you a few more details to answer that question more specifically.

Dominic Macklon: Yeah. Good morning, Doug. So maybe starting with our free cash flow breakeven, I take you back to our analyst meeting last April for our 10-year plan. And at mid-cycle prices, we highlighted our free cash flow breakeven averages about $35 WTI. That is higher through the first half of the plan, as you mentioned, as we have the sort of pre-productive capital in the first half of the plan and then lower during the second half of that 10-year plan as those projects increasingly come on stream. So that’s our free cash flow breakeven. And for our dividend, you would add an additional sort of $8 to $9 on that right now.

Doug Leggate: That’s helpful. And maybe on the cash on the balance sheet?

Bill Bullock: Yeah. Sure. We’re really happy with where we’re at on the balance sheet right now, Doug. So, we exit the year with $6.9 billion of cash and $1 billion worth of long-term investments, like, I mentioned. Our net debt-to-CFO ratio is in a really good spot. We’re at 0.5 turns and that’s post-Surmont. So we’re quite happy where the balance sheet is at right now. And having a strong balance sheet is a strategic asset for the company. We continue to view it as such and that’s fundamentally one of the reasons why we feel really good about $9 billion of distributions this year.

Doug Leggate: Okay. Thank you.

Ryan Lance: Yeah. In light of arguably a softer commodity price relative to where we started in 2023.

Operator: Thank you. Our next question will come from the line of Roger Read with Wells Fargo. Your line is now open.

Roger Read: Yeah. Thank you. Good morning. I guess I’d like to…

Ryan Lance: Good morning.

Roger Read: … maybe get your thoughts, Ryan, on — yeah, good morning — on the M&A side. Obviously, you did the Surmont thing last year. There’s still transactions going on and just how you think about your cost of supply approach to anything on the acquisition front that’s out there, be it Lower 48 or elsewhere?

Ryan Lance: Yeah. Roger, I appreciate you. There’s obviously a lot of M&A activity going on. There’s a lot of pricing in our business and we’ve said that all along that we think there’s going to be more even yet to come as we think about the consolidation that’s needed in the business. Our approach hasn’t changed. Our approach is, we think about cost of supply, we think about the framework that we’ve laid out to the market over the last four years or five years. That’s how we’ve executed some of our M&A activities. So, again, it’s got to fit that financial framework, how we think about mid-cycle price. It’s got to make our 10-year plan better. The plan that we outlined to the market last year, we think is pretty strong and it’s underpinned by a low cost of supply, diverse asset base.

So, we’ve got to see a way to make that plan better through any inorganic M&A and then, finally, we’ve got to see a way to make the asset better and that’s really dictated how we’ve approached M&A over the last number of years, and I think, as we think about it going forward, that approach is consistent.

Roger Read: Thank you.

Operator: Thank you. Our next question will come from the line of Nitin Kumar with Mizuho. Your line is now open.

Nitin Kumar: Good morning, guys, and thanks for taking my question. Ryan or Bill, I don’t know who wants to take this one, but you reduced the cash return target from $11 billion to $9 billion. Last year, it was very evenly distributed between your dividends, both the fixed and the variable, and the buyback. How should we think about the mix across those three channels in 2024?

Bill Bullock: Yeah. So, first, we think the most important thing continues to be the total quantum of distribution. That’s what we focus on. We think that that’s what matters most. And we’re really happy to start the year with an initial plan to return $9 billion to shareholders. Now, when it comes to mix, we look at a number of different factors and commodity prices, our own stock price and other considerations. And so, for 2024, you’ve seen that, we’ve shifted our mix to be a bit more weighted towards buybacks, about 60% of our total plan distributions, that would put our buybacks essentially flat with what we spent in 2023 at about $5.3, $5.4 billion and we continue to like the value of our shares. So, against that, the total cash component represents about 40% of our expected distributions, and that’s with $0.20 per share on VROC and we think that represents a really solid mix of both cash and buybacks.

As we’ve always said, VROC provides a really flexible tool to achieve our distribution targets as prices adjust through the cycles. It’s continued to serve us well in balancing our mix.

Nitin Kumar: Great. Thanks for the color.

Operator: Thank you. Our next question will come from the line of Lloyd Byrne with Jefferies. Your line is now open.

Lloyd Byrne: Good afternoon, everyone, and thanks for all the detail so far. Ryan, I was hoping just to get your thoughts on the administration’s LNG pause and then in particular Conoco’s positioning and maybe whether it has any impact on your plans or your capital going forward?

Ryan Lance: Yeah. Thanks, Lloyd. I can chime in and maybe ask Bill to add a few more details as well. But it’s unfortunate, it’s clearly more politically driven than fundamental, but I think we feel pretty good. It just makes us feel a little bit better about what we’re doing on the LNG side, because of what we do have permitted. I think it’s quite short-sighted in the short-term. Hopefully it will be fixed in the long-term. I can — Bill can provide maybe a few more specifics around how we’re thinking about Port Arthur Phase 1, Phase 2, as we think about the implications of what was announced.

Bill Bullock: Yeah. Sure, Ryan. We’re really pleased that Port Arthur Phase 1. It’s fully permitted. It’s got not only its free trade agreement permit, but its non-free trade agreement permit. It’s got environmental permits in place. So we’re quite pleased to be investing in Port Arthur Phase 1. We think that actually what you’re seeing right now makes that more valuable. So it’s a good fit in our portfolio. We’re continuing to look at developing a diversified portfolio of offtake. We remain interested in a number of LNG opportunities, because we think the market’s going to be strong for decades to come. We’re focusing on low cost supply, low greenhouse gas intensity resources that meet that transition pathway.