ConocoPhillips : First-Quarter Earnings Conference Call Transcript

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EDITED TRANSCRIPT

Q1 2023 Conocophillips Earnings Call

EVENT DATE/TIME: MAY 04, 2023 / 4:00PM GMT

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MAY 04, 2023 / 4:00PM GMT, Q1 2023 Conocophillips Earnings Call

CORPORATE PARTICIPANTS

Dominic E. Macklon ConocoPhillips - EVP of Strategy, Sustainability & Technology

Nicholas G. Olds ConocoPhillips - EVP of Lower 48

Philip Gresh ConocoPhillips - VP, Investor Relations

Ryan M. Lance ConocoPhillips - Chairman & CEO

Andrew M. O'Brien ConocoPhillips - SVP of Global Operations

William L. Bullock ConocoPhillips - Executive VP & CFO

CONFERENCE CALL PARTICIPANTS

Alastair Roderick Syme Citigroup Inc., Research Division - MD & Global Head of Oil and Gas Research

Devin J. McDermott Morgan Stanley, Research Division - VP, Commodity Strategist for Power Markets & Equity Analyst of Power and Utilities Research Team

John Macalister Royall JPMorgan Chase & Co, Research Division - Analyst

Joshua Ian Silverstein UBS Investment Bank, Research Division - Analyst

Kaleinoheaokealaula Scott Akamine BofA Securities, Research Division - VP in US Oil Equity Research Leo Paul Mariani ROTH MKM Partners, LLC, Research Division - MD

Neal David Dingmann Truist Securities, Inc., Research Division - MD

Neil Singhvi Mehta Goldman Sachs Group, Inc., Research Division - VP and Integrated Oil & Refining Analyst Paul Cheng Scotiabank Global Banking and Markets, Research Division - Analyst

Raphaël DuBois Societe Generale Cross Asset Research - Equity Analyst

Roger David Read Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst Ryan M. Todd Piper Sandler & Co., Research Division - MD & Senior Research Analyst

Sam Jeffrey Margolin Wolfe Research, LLC - MD of Equity Research & Senior Analyst

Scott Michael Hanold RBC Capital Markets, Research Division - MD of Energy Research & Analyst

Stephen I. Richardson Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Oil and Gas & Exploration and Production Research

PRESENTATION

Operator

Welcome to the First Quarter 2023 ConocoPhillips Earnings Conference Call. My name is Michelle, and I will be your operator for today's call. (Operator Instructions). I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.

Philip Gresh ConocoPhillips - VP, Investor Relations

Thank you, Michelle, and welcome to everyone to our first quarter 2023 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO; Bill Bullock, Executive Vice President and Chief Financial Officer; Dominic Macklon, Executive Vice President of Strategy, Sustainability and Technology; Nick Olds, Executive President of Lower 48; Andy O'Brien, Senior Vice President of Global Operations; and Tim Leach, advisor to the CEO.

Ryan and Bill will kick off the call with opening remarks, after which the team will be available for your questions. A few quick reminders. First, along with today's release, we published supplemental financial materials and a slide presentation, which you can find on the Investor Relations website; second, during this call, we will be making forward-looking statements based on current expectations.

Actual results may differ due to factors noted in today's release and in our periodic SEC filings. Finally, 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. With that, I will turn the call over to Ryan.

Ryan M. Lance ConocoPhillips - Chairman & CEO

Thanks, Phil, and thank you to everyone for joining our first quarter 2023 earnings conference call. Since we just hosted our analyst day and investor meeting in New York a few weeks ago, we are going to keep our prepared remarks fairly brief today.

ConocoPhillips delivered a strong first quarter result, setting a new production record for the company as well as in the Lower 48.

Underlying production growth was 4% year-on-year, including 8% year-on-year growth in the Lower 48. We are confident in our outlook for the rest of the year, and we are increasing the midpoint of our full year production guidance. We're keeping our full year capital and

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MAY 04, 2023 / 4:00PM GMT, Q1 2023 Conocophillips Earnings Call

operating guidance unchanged.

Shifting to returns on and of enough capital, we continue to demonstrate our returns-focused value proposition in the first quarter. Our return on capital employed once again exceeded our goal of being top quartile in the S&P 500. And as we highlighted at the recent Analyst and Investor Meeting, we remain confident in our ability to achieve this objective in a mid-cycle price environment over the course of our 10-year plan. On return of capital, we are on track to deliver on our planned $11 billion for 2023, which represents greater than 50% of our projected CFO and is highly competitive with peers. And we are able to achieve all of this while investing in our attractive mid- and long-term opportunities.

Our first quarter was also quite busy from a strategic perspective. At Port Arthur LNG, we acquired a 30% equity interest in the joint venture upon final investment decision on Phase 1. At Willow, we are pleased to receive a positive record of decision and began road construction. And at APLNG, we announced plans to become upstream operator following the closing of EIG's transaction with Origin and to purchase up to an additional 2.49% in the project.

We also accelerated our 2030 greenhouse gas emissions intensity reduction target to 50% to 60% versus a 2016 baseline as we further advance our net-zero operational emissions ambition.

I know everyone has the question on Surmont, so let me address that right now. We acknowledge that we received our right of first refusal notice, and we're certainly reviewing it carefully.

Now in conclusion, as we shared at our Analyst and Investor Meeting last month, our deep, durable and diversified asset base is well positioned to generate solid returns in cash flow for decades to come. And as I said then, we challenge any other E&P company to show you a plan with this kind of duration.

Now let me turn the call over to Bill to cover our first quarter performance in more detail.

William L. Bullock ConocoPhillips - Executive VP & CFO

Well, thanks, Ryan. In the first quarter of 2023, we generated $2.38 per share in adjusted earnings. First quarter production was a record for the company at 1,792,000 barrels of oil equivalent per day, driven by solid execution across the entire portfolio. The Eagle Ford stabilizer expansion and Qatargas 3 planned turnarounds were both successfully completed. And Lower 48 production was also a record, averaging 1,036,000 barrels of oil equivalent a day, including 694,000 from the Permian; 227,000 from the Eagle Ford; 98,000 from the Bakken.

And Lower 48 underlying production grew 8% year-on-year with new wells online and strong well performance relative to our expectations across our asset base.

Now moving to cash flows. First quarter CFO was $5.7 billion, excluding working capital at an average WTI price of $76 per barrel. This included APLNG distributions of $764 million. Now first quarter capital expenditures were $2.9 billion, including $400 million for Port Arthur Phase 1 and $100 million in Lower 48 acquisitions.

Regarding Port Arthur, as you will recall from our fourth quarter call, we said we plan to spend about $1.1 billion in 2023. So first quarter spending was fairly front-end loaded relative to the full year. In the first quarter, we also received $200 million in disposition proceeds. And regarding capital allocation, we returned $3.2 billion back to shareholders. And this was via $1.7 billion in share buybacks and $1.5 billion in ordinary dividends and VROC payments.

Turning to guidance. We forecast second quarter production to be in a range of 1.77 million to 1.81 million barrels of oil equivalent per day. This includes 10,000 to 15,000 of planned seasonal turnarounds. We have also increased the midpoint of our full year production guidance by 10,000 barrels a day. Our new range is 1.78 million to 1.8 million barrels of oil equivalent, up from [1.76 million] (corrected by company after the call) to 1.8 million previously. For APLNG, we expect distributions of $350 million to $400 million in the second quarter. And for the full year, we expect APLNG distributions of $1.8 billion. All other guidance items remain unchanged.

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MAY 04, 2023 / 4:00PM GMT, Q1 2023 Conocophillips Earnings Call

So to wrap up, we had a strong first quarter. We remain confident in our outlook, leading to our increase in full year production guidance. And we expect to return $11 billion to our shareholders this year. And we're well positioned to deliver on our commitments throughout this year. So that concludes our prepared remarks. And now I'll turn the call back over to Phil.

Philip Gresh ConocoPhillips - VP, Investor Relations

Great. Thanks, Bill. Before we move to Q&A, just a quick reminder that we are sticking to one question per caller this quarter, since we just hosted the analyst day a few weeks ago and it is obviously quite a busy earnings day for everybody. So with that, Michelle, let's move to the Q&A.

QUESTIONS AND ANSWERS

Operator

(Operator Instructions). The first question comes from Stephen Richardson with Evercore.

Stephen I. Richardson Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Oil and Gas & Exploration and Production Research

Ryan, I was wondering if you could talk, I mean, on the return of capital, obviously, outperforming 50% of cash flow from ops and setting up really strongly versus the $11 billion target. Just wondering if you could address -- the environment is not straightforward. There's a lot of volatility out there. And just from a shareholders' perspective, how do you think about balancing VROC buyback and just the general flexibility as people consider kind of the volatility in the commodity environment?

Ryan M. Lance ConocoPhillips - Chairman & CEO

Yes. Thanks, Stephen. I think let me just start by recognizing the volatility that's currently in the market. But even with that, as we look at the first quarter, average prices were in the mid-$70s, WTI quarter-to-date in the second quarter in the high $70s. So that's close enough to our planning framework that we set out early in the year that, close enough to $80 and delivering the $22 billion in cash for the year.

So we're not going to overreact to kind of what we're seeing in the volatility right now. So we're on track, and hopefully, you see that with the VROC that we set for the third quarter, on track to deliver the $11 billion distributions that we set out at the beginning of the year. We're comfortable with that. We have the balance sheet to support it if prices turn out a little bit lower, as well.

So, it would take a structural change, and we certainly don't view this volatility that we're seeing right now as a structural change in the marketplace. In terms of the mix and the balance, we said we'd do about 50% shares. We leaned in a little bit in the first quarter on the shares. But through the year, we expect to be about 50-50 between our VROC and the shares to deliver the $11 billion of returns back to the shareholder. Hopefully, you see that with the third quarter setting of the VROC at $0.60 a share. That should give you comfort that we're on track to deliver that.

Operator

The next question comes from Neil Mehta with Goldman Sachs.

Neil Singhvi Mehta Goldman Sachs Group, Inc., Research Division - VP and Integrated Oil & Refining Analyst

Yes. Congrats on a really good Lower 48 quarter in particular. Ryan, I think you sort of cut -- headed this question off, but I'd love you to comment to the extent you can on Surmont, recognizing it's an active situation. And as you think about that asset, first of all, it seems from the analyst day that it is a core position for you guys. And just any thoughts on whether it makes sense to be a bigger part of the portfolio to the extent you can comment at all?

Ryan M. Lance ConocoPhillips - Chairman & CEO

Yes, Neil, thanks. I can let Andy maybe make a few comments about the assets, which would be kind of reiterating what we said at the analyst meeting. But, yes, we're in receipt of the notice on the transaction between Total and Suncor. We have a right on the Surmont asset, which we know really well because we own 50% and operate it. So we're in the process of taking a pretty serious look at that. I can maybe have Andy reiterate some of our thoughts about the asset that we described in the analyst meeting.

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MAY 04, 2023 / 4:00PM GMT, Q1 2023 Conocophillips Earnings Call

Andrew M. O'Brien ConocoPhillips - SVP of Global Operations

Neil, yes, as we said in the analyst meeting, we do like Surmont as the nice sort of long-life, low capital-intensity asset for us. As we covered in the analyst meeting, that low capital intensity is an important part of our portfolio. And just to sort of reiterate that, the maintenance capital on Surmont -- I'm referring now to our 50% share of Surmont, has been in the $20 million to $30 million a year range for the last four or five years.

And you'll recall, I mentioned that we're drilling our first new pad since 2016. That pad, for example, will be in the $40 million to $50 million. So it's a very low capital-intensity asset for us with that sort of basically flat production profile. And as you know, sort of -- pretty much all of our other driver information we disclose in terms of our production data, our bitumen realizations, our operating costs, that's all out there. So you can form your own view on the asset, but it's an asset that is a core asset in our portfolio. I'll probably just stop there.

Operator

The next question comes from Roger Read with Wells Fargo.

Roger David Read Wells Fargo Securities, LLC, Research Division - MD & Senior Equity Research Analyst

I guess I'd like to follow up on Port Arthur LNG. Obviously, the Phase 1 was covered. There's always a possibility of greater expansion in LNG. Just what would be the things we would watch coming up in terms of the second phase?

William L. Bullock ConocoPhillips - Executive VP & CFO

Yes. Sure, Roger. This is Bill. As we talked about at the Analyst and Investor Meeting, we're currently really satisfied with 30% for Phase 1 and our 5 million ton equity offtake, and we're prioritizing market development over any additional offtake in equity right now. We really think we've got sufficient capital allocation to Port Arthur, and we're looking for ways to optimize our current investment. So our plate's pretty full, and we don't need, see need to allocate significant additional capital in the near term. And so there need to be some pretty unique reasons to make it attractive.

Operator

The next question comes from Doug Leggate with Bank of America.

Kaleinoheaokealaula Scott Akamine BofA Securities, Research Division - VP in US Oil Equity Research

This is actually Kalei on for Doug. My question is a follow-up on Surmont. So our understanding is that Suncor could receive certain tax benefits as part of their deal. And I'm wondering if those tax benefits would be available to you if you exercise your right of first refusal? And I'm asking the question because I think yours would look more like an asset deal, while there's is more of a corporate deal.

Ryan M. Lance ConocoPhillips - Chairman & CEO

Well, as we said, Kalei, that we're currently reviewing the proposal that we got and the terms and the conditions. So it's a bit early to comment on tax pools.

Operator

The next question comes from Sam Margolin with Wolfe Research.

Sam Jeffrey Margolin Wolfe Research, LLC - MD of Equity Research & Senior Analyst

The capital efficiency looks like it's going in the right direction with the production guidance and the capital plan in line. At the analyst day, you made some comments where you thought it was at least possible that you could start to see inflation ease, if not reverse. And the question is just as you think about this production results, is that an outcome of maybe an opportunity to press activity a little bit as costs are easing? Or is this -- is it more of a well results-driven outcome?

Dominic E. Macklon ConocoPhillips - EVP of Strategy, Sustainability & Technology

It's Dominic here. Just to talk to inflation a little bit first. I think overall, our capital inflation for the company, we still expect to be in the mid-single digits year-over-year. So we certainly see that all leveling off. As you mentioned before, we've certainly seen deflationary trends in steel tubulars, oil price-related commodities such as fuel and chemicals. Beyond that, on the rig frac and other services, they've

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