ConocoPhillips (COP) Barclays CEO Energy Conference September 12, 2013 9:45 PM ET
Ryan Lance - Chairman and Chief Executive Officer
Paul Cheng - Barclays
Paul Cheng - Barclays
Good morning. Want to welcome everyone back. Our next presentation is ConocoPhillips, the largest independent E&P company I think in the world. So we are very excited to have CEO and Chairman, Ryan Lance with us to share all the exciting revolution in the company, one they argue that they probably have the best non-conventional oil portfolio in North America among all the mega oil companies to-date.
So with that, without further delay let me welcome Ryan.
Well, thank you Paul. Appreciate the opportunity to update everybody about what’s happening at ConocoPhillips. So let’s go ahead and get started.
So again our just Safe Harbor statement that I’ll be making some future performance comments that could differ from expectations, so I'm sure you have all read this thoroughly right.
So let me start when we launched the company as an independent company back in May of 2012 we certainly set out to offer our investors a new class of investment, one that we believe is going to consistently and predictably deliver stable returns. And we’ll do that by growing organically. We’re going to grow our production, we’re going to grow our margins, we’re going to grow our cash flows and ultimately grow the returns in this business.
And today I think I’ll -- we’ll show you in the presentation that we’re on track to deliver all those commitments that we laid out when we came out as a new independent company.
Maybe a little bit about what we are, Paul mentioned we’re the largest E&P company in the universe today based on production and reserves. And we think that’s a pretty compelling place to be, when you look at some of the metrics there, you see we are, what we produce 8.6 billion barrels of reserves on a 43 billion barrel resource base. And that’s a liquids dominated resource base of 43 billion.
So we have strong technical capability really in all the major resource trends and development trends around the world today. And really I believe a track record of delivering value back to the shareholders.
So that’s a little bit about what we are and when we think about the world and the environment that we’re in we know it’s a pretty uncertain world out there. In the future in terms of commodity price, what’s happening in the business today, and our views of the environment say that diversity in size, scale and scope matter in this business, that’s how you deal with the uncertain world the future has in store for us. We believe that it's appropriate in diversity for a company our size.
So we’re not dependent on any one geography, any one geography or geology and any one product for success in the company. So we think that diversity in size, scale and scope is a competitive advantage in this business.
We employ a pretty disciplined strategy around capital investment, that is focused on organic growth and volumes and margins and one where we can apply our significant technical capability to deliver.
And the goal really at the end of the day is to deliver and maintain the financial flexibility we have, but shift our portfolio a bit to a lower cost of supply through the sale of some non-strategic assets that we’ve talked about and announced when we came out in May; we’re pruning the portfolio and really directing all the capital investment to areas of the best returns in our portfolio.
We are trying to drive the portfolio to a place where we have choices and options that can deliver those best returns for the company. So that’s kind a bit about how we are running the company. Here's what we plan to deliver and this has been unchanged since we rolled out the new company in May of last year.
So it is about focusing on operating excellence, running the company really well, maintaining our high direct operating efficiency and running in a low cost manner. We are going to offer a compelling dividend and a compelling yield that comes with that dividend. We are ramping up our growth to deliver 3% to 5% production growth and on top of that deliver 3% to 5% margin growth.
So that’s about 6% to 10% growth in cash flows plus the yield and we are committed to delivering improving returns as well. And let me take a minute just to talk about that second point about the dividend. We think it’s an important part of our value proposition to our shareholders and really a core part of our capital allocation strategy.
We believe we ought to significantly, deliver a significant portion of our cash flow back to our shareholders each and every year. And as our cash flows and as our margins and our growth develops you ought to see some modest growth in that dividend over time.
It’s differential to our peers in this group and I think those that follow our stock and have been an owner of our stock know that we raised our dividend about 5% last quarter which is really a commitment to our plans and faith and confidence in our plans and really targeting those kinds of increases over time as our cash and margins grow.
Now, let’s go through some of those growth plans. So the left part of this slide shows really how we spend approximately $16 billion every year and really goes to the heart in the strategy of the company. You can see down at the bottom there is about 10% capital that's allocated to our base maintenance. That’s to keep our legacy existing current fields running, running efficiently and running smoothly.
You’ll see above that there is 45% allocated to development programs. These are drilling programs in and around those big legacy assets to manage the decline in the base business. About 30% goes to major projects to provide the top line growth of 3% to 5% that I’ll talk about. And then we are investing about 15% of our capital into the exploration program for growth and development of the company for the longer term piece of this business.
And of note that major project spend, kind of, in the early years of this plan is allocated to named specific projects that are in execution. But as these projects ramp down the math starts to free up capital for some more of the development programs, more projects that we might find through the exploration channel.
And then on the right hand side of this chart is what we expect to deliver from that $16 billion of capital allocation. And you’ll see that the grey part of that is our base, and that as of, starting point is December of last year. The next layer represents those development programs, those drilling programs that we add on to just mitigate the base decline in our portfolio. And then the major projects that are on top of it that add the top line growth to the portfolio.
We have very clear line of sight to deliver 1.9 million barrels a day, grow this company from 1.5 million barrels to 1.9 million barrels a day by 2017 and I’ll talk about where that 400,000 barrels a day is coming from.
And I’ve talked that the growth is real, it’s an execution delay and here is some data on the margins that it will deliver as well. So the left side shows where the major, five major growth areas in our company, in our portfolio where that 400,000 barrels a day is coming from and I’ll talk about it in a little bit more specifics in some later slides.
But you'll see that these investments are in areas where we have a higher liquids production mix and they are coming in areas with effective tax rates that are lower than our base production. And you see the margin diagram on the right hand side.
And it shows in the red dot where our current portfolio is and those projects that we're executing in the portfolio, the margins relative to the base portfolio, and you’ll see that we’re growing, the production is coming with that higher margin in the base portfolio. So it’s not just about growing for growth's sake, it is about growing high margin production and that’s what we're committed to doing.
Maybe if you looked at in a bit more granularity this slide puts maybe that growth and margin story into a bit more perspective. So it captures what’s different in our portfolio in 2017 versus where we’re talking to you today. So that blue wedge represents what I just described, that 400,000 barrel a day going from 1.5 million to 1.9 million barrels and the stack bar at the right shows the mix of that production. And these are net numbers to ConocoPhillips.
And you’ll see that we’re averaging about $40 to $45 barrel margin as noted, with prices noted at the bottom part of this slide. What’s important is this growth, this 400,000 barrel a day coming from these spots, with these kinds of margins add $6 billion to $7 billion of cash flow to the portfolio over this period of time.
So again it’s not just about growth, it’s driving growth with higher margins and higher cash flows and better returns in this business and the returns are important. Let me talk a brief minute about the returns.
So this chart compares return on capital employed to the largest independent E&Ps. Now the integrateds, who we measure our performance against are well, aren’t included on this graph because they include refining and chemicals and other pieces of their business in that. So this tries to just strip out and focus in on the upstream part of the business.
And we compare really well in this particular metric. And we want to see this metric on an absolute basis go up and certainly on a relative pace is improved as well. How do we do that? Well it’s through cost efficiency, it’s maintaining our direct operating efficiency, it’s running our projects and executing on our capital plans really, really well, that’s what we are about, that’s our history, that’s our legacy and that’s what we intend to do over the course of this plan and going on. And that’s our value proposition to the investors.
So let me talk a little bit more about the growth. And I am going to divided this into three sections. So I talked a little bit about the base, now I’m going to talk about our development plans and then I’ll talk about our major projects that we’re executing again back to that first slide of our allocating our capital.
And this is a slide that just talks a little bit about our base performance. What we’re doing on the operating side of the business to maintain the safety, the process safety, the environmental integrity and the direct operating efficiency of our plans. And it’s a foundation to everything we do, it is our license to operate.
And we have rigorous operating excellence systems across our company to make sure that we’re applying all the best practices, that we are knowledge sharing, that we are taking the best practices from one area like our operations center in Norway, that's a fully integrated operations centers [inaudible] that runs the Ekofisk field 300 kilometers to the North. We’re applying things like that to our Eagle Ford development so we can maintain the best and the best processes, the best systems to get the best efficiency out of all the drilling the wells, and the operations that we have in our business today.
Now if I move to the development side of the business, again this is drilling in and around the existing assets that we have legacy assets around the company. This comprises if you remember back to that slide about 45% of the $16 billion of annual capital and it delivers the 600,000 barrels a day, the wedge you see on the right hand side of this slide.
About 250,000 barrels a day will come from our legacy conventional business in and around our portfolio and 200,000 barrels a day comes from our major unconventional programs in the lower 48, this is the Eagle Ford, the Bakken, the Permian and what we’re doing elsewhere in the lower 48, up in Canada.
And you can see by 2017 we expect to have significant contributions from other unconventionals that are early stages of pilot and development as well. And we have really years of low risk identified development inventory in our portfolio that will continue to drive growth well beyond the time period that we’re talking about here. So it’s a pretty significant part of the portfolio.
Let me talk a little bit about what underpins some of that on the development side. This is a slide of our Bakken position. And you can see we’re in the heart, in the Nesson Anticline we have about 200,000 acres sitting in the Nesson Anticline 600,000 acres of mineral fee acreage in around that area, that is prospective down the road for future unconventional opportunities.
At the bottom of the chart you can see where the planned growth is coming from, the product mix relative to the current lower 48 portfolio, what we’re adding in terms of the Bakken production. So you can tell that this is all oil, which you know about, the margins are quite high and how it -- it does materially move the margin in the base portfolio.
So the investment that we are making in the Bakken is adding these kinds of rates, adding the kinds of volumes that we are seeing on the left hand side in the chart and they are bringing them on at much higher margins relative to the base portfolio today.
Today we have 600 million barrels of resource potential in the Bakken. We’ve only booked about 90 million barrels in our portfolio today. That ought to give you some sense of the growth opportunity in terms of the resource potential in our Bakken positions. Then off-course there is the Eagle Ford, certainly a world class unconventional asset. We believe we are in the sweet spot of the heart of this trend, sorry, didn't get it, there it is.
We are one of the first movers into this basin. We plan to add about a 130, get it up to about a 130,000 barrels a day by 2017 and on average that’s about a 16% compound annual growth rate. So this is a pretty compelling opportunity for the company. We’ve got about 1.8 billion barrels of resource, I think that number will grow over time but we are only booked to about 230 million barrels in the Eagle Ford as well. So you can see what some of the future opportunity holds for this basin and this opportunity as well.
We are getting our acreage held, we are moving into pad development drilling. So we’ll see the efficiencies and the opportunities that come with that as well. And if you stay with Eagle Ford for a minute, question I get often to that is how are you competing against some of those smaller independent companies, some of your fence line neighbors in the Eagle Ford. And here is a chart that shows third party data, and we do perform very well against our competitors in this play.
We are one of the top producers overall and we are producing higher average volumes per well, really more than 50% higher than the average of all of our competitors. And if you look at this we identified the sweet spot early and more importantly we got in for $300 an acre.
So that’s the value of organic growth in these kind of opportunities when you kind of valuate them early, find the sweet spots, lease up the land and starting your development we are going to get higher returns than many of our competitors who didn’t buy in to this opportunity for the kind of price that we did.
We are currently running 11 rigs, we are moving into pad development; we got over 1,900 locations identified in the Eagle Ford. So we are pretty excited about what the opportunity today holds for the company in the Eagle Ford and those opportunities that will present themselves over many years to come.
So let me move away now, that’s a little bit of an insight into the development side in our unconventional plays, let me move now to the major project programs that we are executing around the world. And these are typically outside of the lower 48, some of the global, give a sense of the global size scale and scope of our portfolio.
If you look at the right hand side these should add over 400,000 barrels a day by 2017 but you don’t have to wait till 2017. You can see it’s pretty ratable growth over this five year period. It is coming from production and phases at Christina Lake up in the Canadian oil sands that will continue to start up and ramp up over this time frame.
And then even in 2014 when you look at it we expect to add 150,000 barrels a day of incremental production from these projects that are in execution today. It’s oil sands it’s APLNG and in Australia it’s projects in Europe, it’s projects in Malaysia. And I’ll go over each -- some of these in a little bit more detail so you get a feel for the kinds of project, where they are at in their execution phase and what they mean.
So first let me start with Canada and the oil sands. So we got a significant acreage position. We are in the top quartile of steam-oil ratio projects across the oil sands. And we have further opportunity as technology starts to come into play in these oil sands to really further reduce the cost of supply and the margins that we see coming from the oil sands.
We are the second largest SAGD producer in Canada today. We have more than 100,000 barrels a day of current production, this is growing to 200,000 barrels a day over this timeframe. So we are going to double our production out of Canadian oil sands by 2017. And it comes at attractive margins, $40 a barrel and certainly generates strong significant cash flows, reduces capital intensity over time as you develop these billion barrel resource projects for the company.
So we are excited about what we are doing in the oil sands and we really like our position we have up there.
Now to go little bit further east, let’s go to Europe and start with United Kingdom where we have the Jasmine project, one of largest discoveries in the UK over the last five to six years and that project is expected to come online in the fourth quarter of this year; so we are in the final throes of execution with commissioning of the project.
All-in-all when you take the projects and you add them up that’s now 55,000 barrels a day of production by 2015, 2016 and we essentially maintain that kind of production for the remainder of this five year period. And you can see that comes at a cash margin of about $35 a barrel, again above our existing cash margin in the portfolio today with a lot of exploitation and running room potential around projects like Jasmine.
If you go across the line in the North Sea to the Norwegian sector, in Norway we have several major projects that are currently underway that underpin our legacy position in the giant Ekofisk Field. So we have two major platforms that will be coming online over the next couple of years that augment and increase recovery from the Ekofisk Field, one we call Ekofisk South and the other we call Eldfisk.
And those are going to continue to improve recovery, ramp it up, increase the exploitation of the field. Ekofisk South will come online before the end of this year and Eldfisk II will come online next year. So you can see the kind of production that we expect to add 60,000 barrels a day by 2017 and again comes at a higher margin than what the base portfolio exists in today.
Moving further East to Malaysia, now this is an area where we had, we didn’t have a position about six, seven years ago. We look at the opportunities in the Deepwater Basins of Saba Island and saw some pretty prospective opportunities.
We’ve farmed in, gotten an operation, had some exploration success and now we’re in the period of executing about four projects in the Deepwater part of the basin. It's projects like Gumusut, Siakap North-Petai, Malikai and one on the shelf, called Kebabangan or KBB.
And you can see that some of these have started up today and we get some major start-ups coming in the latter part of 2014 with Gumusut, I mean latter part of this year with Gumusut and SNP or Siakap North-Petai.
And when you look at the production graph you see that we’re growing to about 60,000 to 70,000 barrels a day by 2017. Most of that showing up earlier in 2015 and you can see the high margins that we enjoy out of our Malaysian business, considerably higher than the base portfolio today.
And the great thing is we’ve got four additional discoveries that are in the queue. So there is more opportunity, more development coming in Malaysia as we think about the longer term there beyond this five year snapshot.
And then finally on the major project side let me go down to Australia, which is APLNG. This is our large coal seam gas, two LNG project in the Queensland State, with the LNG plant sitting on Curtis Island. We’re building two-trains, two 4.5 million ton trains, we sold the gas on JCC linked contracts to customers in Japan and China.
You can see from the plot that by the end of this period we’ll be at 80,000 barrels a day out of APLNG. We’re on track for start-up of the first train in 2015. And then the second train should start up six to nine months after the first train. That asset's again backed up by trillions of cubic feet of resource behind it. So this will be a flat production profile for a long period of time, underpinning 20 year contract to our customers.
So I’ve been through the base, been through the development programs that underpin the growth in production and margins that we’re talking about. And I talked a little bit about the major projects that underpin that top line growth as well. Let me put a little bit now and talk to the exploration side because we said where we came out in May we’re going to continue to grow this company organically primarily through the exploration channel.
I think we’re off to a pretty good start. It’s a program we’ve been building capacity and capability in the company and now we’re into some important critical years to execute and then deliver on the exploration program. I talked about it through two lenses; I talked about it through an unconventional and a conventional lens. At the highest level what we’re really trying to do on the exploration is to really have a value based balance of both unconventional and conventional exploration opportunities in our portfolio.
And in fact in 2013 when you look at the exploration spend that we had we were spending about 50% of our dollars in the unconventional space and 50% of our dollars on conventional exploration.
Now we built this portfolio over the last three, four, five years and we’re now getting into a place where the inventory is becoming a drilling state. And we’re really focused on what we think is competitive on a cost to supply robust deepwater opportunities around the world and globally today and building on our unconventional inventory, both in North America and around the globe.
Let me talk about a few specifically, this is Angola where we built the program here similar to other players in industry where it represents what we think is the conjugate margin to the sub salt play in Brazil. We have two large blocks, Block 36 and 37. And in fact earlier this year we were able to increase our interest with a ground floor deal to 50% in one of the blocks 36 from Sonoco.
Offsetting this block is the Cameia discovery which certainly de-risked the play, demonstrated that the carbonate reach underneath the salt are an active controlling end system. So we are pretty excited about this opportunity. We’ve shot 3D seismic, it's showing some great prospectivity. We have a rig coming in the end of this year, first part of 2014 and begin to drill out a four well program in 2014. So we are pretty excited about the opportunities that Angola has.
Let me talk briefly about the deepwater Gulf of Mexico, we are getting a little bit of wind in our sails, we had a lot of activity over the last couple of years in the deepwater Gulf of Mexico and we currently now have an inventory of over 2 million acres, one of the top acreage holders in the deepwater Gulf of Mexico and announced two pretty significant discoveries earlier this year in Shenandoah and Coronado and we got a lot of activity going on today.
We are appraising the Tiber discovery which was made pre-incident in the Gulf of Mexico. We are on another well called Gila where we have increased our interest in, holding interest in what we think is a pretty exciting prospect there and we are drilling out what we call the Deep Nansen project, and spud that well.
So we’ve got not only some announced discoveries we've got some pretty critical and important wells in our portfolio that are starting to drill today and we should have results on in the near future. So a really exciting time for the exploration side of the business. Like I said we’ve been building this inventory over the last three-four-five years, now it’s into a drillable state.
So this year and next year pretty are important years for us to demonstrate our capability in that we have the capacity and the ability to successfully succeed in the exploration side. That's evidenced by Shenandoah and Coronado, some pretty sizable discoveries that we are excited about and we think there will be future opportunity, not only in deepwater Gulf of Mexico but globally when we think about the Norway, the Barents Sea, Bangladesh, we think about Browse Basin, we think about more drilling solid deepwater offshore Saba Island, the Gulf of Mexico Angola and other areas that we are focused on.
So that was the base development, the major projects, a little bit about exploration. Let me kind of sum it all up a little bit for you and then take some questions. That was kind of a quick overview of ConocoPhillips but I hope what’s apparent is we are at an inflection point since we came out as the new independent company in May of 2012.
We have several important growth milestones ahead of us, continue to ramp up development of our development programs, major field start-ups that are coming in the end of this year and into 2014, 2015 and 2016. So it is about delivering on those, it’s about maintaining safe and efficient operations, that we are really committed to financially.
It is about maintaining a strong balance sheet. We know the commodity prices are in a cycle in this business. We think our balance sheet is the differentiator. We have a strong balance sheet, we got the capacity to fund through the cycle should that be necessary.
We are focused on improving not only growing but growing the cash margins that I’ve said in this business. We are focused on growing the returns and on strategic side we are well placed to deliver on the asset dispositions that we talked about coming out in May to really core up the portfolio and reinvest those proceeds back in to higher return opportunities that exist in the portfolio today, that really underpin this growth in development over the next five years and beyond as we think about the exploration program.
So really the bottom line I’ll go back to where I started, this is what we’ve committed, this is our proposition, this is our promise to the shareholders right now. It is creating this long term value by really offering a compelling dividend and the yields that comes with that.
We are really ramping the growth engine to deliver the 3% to 5% growth but it’s not just about growth, it’s about growth in your margins as well. So really a 6% to 10% growth in your cash flows plus the yield that comes from the dividend and then finally it is about returns in this business.
You can’t do this without focusing on the kind of returns that you are getting for the capital that you are investing and we are investing a lot of capital. And we think we are really good stewards of that capital and only putting those in our best things in your portfolio that are competitive globally not only within our company but within our industry and offer a compelling opportunity for our shareholders.
So that’s the story of ConocoPhillips, the update. We are on track, we are delivering we have more coming, we have more to go and certainly this is a -- it's not a race to the finish line but it’s just long-term stable delivery and running, running really well, efficiently and delivering on the goals that we set for ourselves.
So let me stop there and be happy to take any questions.
Earnings Call Part 2:
- Investment & Company Information