ConocoPhillips (COP) Q1 2014 Earnings Conference Call May 1, 2014 12:00 PM ET
Ellen DeSanctis – VP, IR
Jeff Sheets – EVP-Finance and CFO
Matt Fox – EVP, Exploration and Production
Paul Cheng – Barclays
James Sullivan – Alembic Global Advisors
Doug Terreson – ISI Group
Paul Sankey – Wolfe Research
Ed Westlake – Credit Suisse
Blake Fernandez – Howard Weil
Doug Leggate – Bank of America Merrill Lynch
Faisel Khan – Citigroup Inc.
Roger Reid – Wells Fargo
Pavel Molchanov – Raymond James
Asik Sen – Cowen and Company
Welcome to the Q1 2014 ConocoPhillips Earnings Conference Call. My name is Christine 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. Please note that this conference is being recorded.
I will now turn the call over to Ellen DeSanctis, Vice President, Investor Relations and Communications. You may begin.
Thanks Christine and good morning to everybody. With me here today are Jeff Sheets, our EVP of Finance and our Chief Financial Officer and Matt Fox, our EVP of Exploration and Production. Jeff will cover the quarter’s financial highlights and then Matt will take us through the quarter’s operational highlights and provide some color on what to watch out for what’s to pay attention to for the remainder of the year. Then we’ll have Q&A in the last. During Q&A, if you can limit your questions to two. Of course, jump back into the queue if necessary.
We will make some forward-looking statements this morning. And the risks and uncertainties in our future performance are described on page 2 of this morning’s presentation material and also in our periodic filings with the SEC.
This information as well as our GAAP to non-GAAP reconciliations and additional supplemental information can be found on our website.
Now we’ll turn the call over to Jeff.
Thank you, Ellen. Hello everyone and thank you for joining us today. As you know, we just recently held our 2014 analyst meeting in New York where we reaffirmed our plans to deliver double digit returns annually to our shareholders.
We outlined our production in margin growth plans for the next few years and hopefully gave you increased confidence on our ability to deliver on those plans.
We have an exciting year ahead and as we reported this morning, are off to a strong start. So Slide 4 lists our key highlights for the first quarter.
Operationally, we have a very good quarter. We produced 1.53 million BOE per day from continuing operations excluding Libya. Adjusted for dispositions and downtimes, this is up about 3% compared last year’s first quarter, so we’re seeing growth.
We also made progress on key activities that will continue to drive organic growth. We delivered on key milestones around our major projects and continued our strong performance on the unconventionals.
Exploration and appraisal activities continued during the quarter in the North American unconventional across Mexico deep water, Australia and elsewhere. These activities are key to our reserve and production growth beyond 2017.
Financially, this was also a very strong quarter. We achieved adjusted earnings of $2.3 billion or $1.81 per diluted share. This was quite higher than expectations and I’ll address some of the drivers of this stronger than expected performance on the next slide.
During the recent quarter, we generated $4.4 billion in cash from our operating activities alone. We also had positive working capital change of about $600 million in a distribution of $1.3 billion from FCCL, so a total cash from operations of $6.3 billion.
And our balance sheet remains very healthy with over $7.7 billion in cash and short-term investment fund on hand as of the end of the quarter.
Strategically, we delivered on both production and margin growth this quarter. We continue to expand our inventory organic growth opportunities to support our growth to support our growth goals. And importantly, we remain committed to deliver in double digit returns to our shareholders annually including a compelling dividend. So all in all, the first quarter was very strong operationally, financially and strategically.
So now I’m going to turn to Slide 5 for a discussion on earnings. First quarter adjusted earnings of $2.3 billion were up 29% compared to last year’s first quarter and up 30% sequentially.
Adjusted EPS of $1.81 was higher than consensus, about a dime of the difference of roughly $100 million was due to North American natural gas price realizations that were stronger than the realizations indicated by changes in market prices.
Another dime or about another $100 million was due to gains from marketing of third party natural gas during the quarter.
As a reminder, we have a strong commercial gas marketing organization that markets both equity and third party gas in North America. Given the high volatility in the first quarter gas prices, our commercial team was able to capture some benefit by supplying both equity and third party gas into premium markets.
This benefit from our third party activities is not necessarily repeatable, but it speaks to our strong marketing capability.
First quarter segment earnings are shown in the lower right side of this chart. So the financial details for each segment can be found in the supplemental data that accompany this morning’s release. But then we address a couple of items about the segments.
Lower 48 earnings included the marketing gain. I just talked about it as well as strong realizations for natural gas.
Canada segment earnings were very strong and again reflecting stronger business prices and the gas realizations.
Gas realizations for the quarter were $5.81 reflecting both strong acre pricing and the placement of some volumes in the premium markets during the quarter.
Canada segment earnings also included approximately $60 million benefit from foreign exchange which was offset mostly by foreign exchange losses across other parts of the portfolio.
The last was pretty straightforward with nothing unusual to highlight in the quarter.
Europe operations performed well in the quarter with growth coming from several major projects. And if you look over the past several quarters, we’re starting to see the benefit of volume growth in this segment.
Our Asia-Pacific and Middle East segment was impacted by lift timing differences in China and Western Australia but otherwise was in line with expectations.
And finally, our corporate segment was in line with our previous guidance.
So if you’ll turn to Slide 6, I’ll cover our production results for the quarter. As you know our convention for production is continuing operations less Libya. On this basis, our first quarter averaged 1.53 billion BOE per day. Normalized for disposition and this is compared to 1.495 million per day in the first quarter of 2013.
The waterfall shows that over the period, we had 6,000 BOE per day more plan and unplanned downtimes and in the first quarter of 2013 and net growth of 41,000 BOE per day. That represents a 3% increase compared to a year ago.
The box on this stage illustrates the composition of this 41,000 BOE per day of growth. As we discussed at our recently analyst meeting we are growing in the highest marks and portions of our portfolio and this growth of higher margin production is driving growth in the company’s cash margins.
And we’ll discuss that margin growth on the next slide which is Slide 7. This slide show changes in our cash margins from the first quarter of 2013 to the first quarter of 2014. And also, on a sequential basis.
On the left side of the chart are the margins on as report basis which were up over 20% year-over-year on strong natural gas prices.
And on the right are the margins on a price normalized basis. So on a price normalized basis, margins increased 13% year-over-year. Over this improvement, over a third or 5% is due to our underlying liquids growth especially in areas with more favorable fiscals.
The remaining 8% margin improvement was due to the benefits related to equity and third party gas marketing activities that we’ve just discussed as well as Libya being down.
So we are delivering on our commitment to improve margins as we grow, not just generating growth for growth’s sake.
I’ll conclude my prepared remarks with our cash flow waterfall which is another good story. So I’ll move that now to Slide 8. This shows our cash flow performance for the first quarter. We began the first quarter with $6.5 billion of cash in short-term investment from the balance sheet.
You can see we generated $4.4 billion of cash from operating activities. Had a $1.3 billion FCCL distribution and a working capital benefit of $600 million.
We had capital expenditures and investments of $3.9 billion. And after paying our dividends and returning debt of $500 million, we ended the quarter with $7.7 billion of cash in short-term investment from the balance sheet.
We’ve reduced our debt to cap ratio to 28% from 29% the beginning of the year. So we’re in great financial shape and well-positioned to execute our investment programs for the company.
That concludes the review of our financial performance. Now, I’ll turn the call over to Matt for an update on our operations.
Thanks, Jeff, and good morning everyone. So to begin, I’ll provide a first quarter operations update for each of our business segments. Then I’ll go over our production outlet for the remainder of the year. And I’ll conclude with a preview of some key activities to watch over for the rest of 2014.
As we talked about each segment, you’ll hear a comment spread through the presentation and that’s true. As we progress through 2014 and then to 2015, we expect to see growth in almost every segment of our business.
And we’re not just growing volumes. We’re growing margins. Virtually, all of our growing production will be at margins higher than our average margins to be.
So let’s go to Slide 10, our Lower 48 in Latin America segment, which continues to lead the way on strong growth of the company.
First quarter production averaged 507,000 BOE per day for this segment which is 7% increase from the first quarter of 2013. But more importantly, our crude production increased 16% over the same period.
The biggest contributor to this growth with the Eagle Ford with just an average of 147,000 BOE per day during the quarter. Our daily peak rate for the quarter was 163,000 barrels a day. So we achieved good momentum after the weather problems early in the quarter.
But currently our trail [ph] of operated rigs running in the Eagle Ford, I mean we brought 48 wells on line in the first quarter. We’re transitioning to the 80-acre high low developments, spacing to outline our analyst meeting a few minutes ago. And we have additional pilots and progress that are testing other than spacing.
In the Bakken, we average 43,000 BOE per day and achieved a peak daily rate of off 54,000 barrels a day in the first quarter.
We’re also performing pilot test in the Bakken to optimize our drilling and development programs.
Unconventional drilling and testing continues in the Delaware and Midland basins in the Permian as well as in the Niobrara.
It’s still early days, but as we said in the analyst meeting, we remain optimistic about these amazing place [ph].
In addition to our unconventional activities are appraisal drilling in the deep water goal for Mexico continues at Tiber and Coronado, and exploration drilling continues at Deep Nansen.
In Slide 11, we’ll give you some highlights from our Canada segment. Operationally, our Canada business performed very well in the first quarter. We produced 280,000 BOE per day which includes a 9% increase in liquids production from the first quarter o 2013.
Surmont 1 deep automating [ph] is progressing and the major project in Surmont 2 remains on schedule for first team in the middle of next year. At the end of the quarter, the project was 68% complete.
Christina Lake Phase E is approaching full capacity and Foster Creek Phase F remains on track across production and the third quarter of this year.
As part of our Western Canada winter drilling program, we successfully drilled 25 horizontal wells in the liquid rich plains across our acreage position.
This program continues to deliver good returns and also a lot of drilling inventory. And we achieved a big milestone on the first quarter by drilling the longest horizontals onto well effort [ph] drill in Canada over 13,000 feet.
There’s an impressive operation on technological accomplishment. And it shows we’re working 10-year [ph] to optimize the programs. We also continue to explore and appraise our own conventional place in the Duverny and Montney where we’re encouraging early results.
I’ll now cover the Alaska segment on the next slide, Slide 12. Alaska production was about flat sequentially at 200,000 BOE per day.
We remain encouraged by the improved –fiscal ‘10 [ph] was brought why the passage of the More Alaska Production Act last year. And no, we plan to spend more capital in Alaska in 2014 than we’ve spent over the past three decades.
This increased investment will mitigate the claims and legacy fields and provides growth from new satellite fuels into the future.
We’re making good progress at Drill Site 2S and Kuparuk. The Greater Moose Tooth [ph] is one project in the west from slope. And the one inch [ph], north east west side project. That one inch [ph] news project is a third new project that have been initiated by the company since the passage of the More Alaska Production Act last spring.
We’ve had a good one to construction season ad at CD 5 and remain on track for stock up in [ph] late 2015.
We drove two exploration wells in the western north slope. This one’s and flat top one. And we’re in the process of evaluating those results.
[Indiscernible] but the contract is saying to deliver six cargos in 2014 with first shipment this month.
In April, enabling legislation was passed by the state legislation to allow the State of Alaska’s equity participation in the AK LNG project. That is a positive step forward for the project, but there’s still a lot of feasibility of what to do. And we hope to move into [indiscernible] in the near future.
Alaska has become an attractive area for investment. We’ve got a lot of activity underway. But we expect to provide additional growth opportunities for this segment in the future.
I’ll next cover our Europe segment on Slide 13. Like the Lower 48, this segment recovered well from very challenging weather conditions late last year and early in the quarter.
Production for the quarter averaged 220,000 barrels a day which is about 12% higher sequentially.
On our last quarterly call, we discussed the startup of Ekofisk South and Jasmine. Eko South were ramping up volumes in conjunction with drilling activity. At Jasmine, we recovered from some minor startup delays and averaged 25,000 BOE per day for the quarter. And we brought [indiscernible] Jasmine in March. We also commissioned and started up a new San Juan Gas Plant at this Irish Sea.
On to our construction activities and nearing completion, the Eldfisk II for early 2015 startup. And also a commissioning is ramping up for the Britannia Long-Term Compression project for startup and the third quarter of this year.
In Poland, we continue exploring in the Baltic Basin just to the west of Gdansk. We completed two vertical wells in sidetracked one of them horizontal during the first quarter.
We’re currently completing the horizontal section with an Eagle Ford style frack. And we intend to conduct an extended floor test later this year.
As you can see at the bottom left of the chart, there’s a heavy turnaround activity planned in the UK during the second and third quarter, which I’ll discuss in a bit more detail in a later slide. So our Europe segment is positioned for growth from high margin production this year.
And finally, let’s look at our Asia-Pacific and Middle East segment on Slide 14. In this segment, we produced 319,000 BOE a day, 9% higher than the fourth quarter. And over this period, we also saw a 20% increase in high margin and liquids for this segment. Our 1Q plan turnaround at Train 7 in Qatar was completely ahead of schedule.
In Indonesia, we achieved first gas in the South Belut Project in April which is the fifth phase of block B [ph] oil and gas development.
We also achieved first oil in February at Siakap North-Petai and our non operated commissioned project is progressing towards that to open the third quarter of this year.
At Kebabangan, our topsides are schedule for sail away in the second quarter. And we’re on track for first reduction by the end of this year.
And exploration, we drilled a successful appraisal well in Malaysia at Limbayong-2. And we remain encouraged by our findings there. So there’s clearly a more growth potential in the Malaysia business.
APLNG also remains on track for our mid-2015 startup. From a combined downstream and upstream basis, we were 67% complete by the end of the first quarter.
Our appraisal programs continue in Australia and the Browse Basin and at the Barossa field for well start [ph] in March and April respectively. Both of these wells should TD [ph] later in the second quarter.
We expect this segment to provide significant production growth over the next couple of years.
Before I move to the next slide, let me briefly touch on other international segment. The key activity in this segment is exploration related. In Senegal, we spudded the first well two weeks ago.
In Angola, a rig is now on transit to block 36 and we expect this to spud the Kamush [ph] well late this quarter or early in the third quarter.
I’ll cover the production outlet now on Slide 15. We showed this slide in our analyst meeting last month. We slightly exceeded our guidance for first quarter volumes, but otherwise our expectations are unchanged.
As you can see, we expect production to drop during the second or third quarter due to seasonal maintenance activities across our operations. And on the left side of the chart is a list of the key turnarounds and tying up entities [ph] for the next two quarters.
This activity will start late in the second quarter beginning in the UK, but the majority of our turnaround activity will occur in the third quarter.
And these turnarounds impact almost all of our segments. The key activities in the third quarter will be in Alaska, Canada, the UK, and the Bayu-Undan field in the Asia Pacific region.
Bayu-Undan is particularly noteworthy as this is a 36-day shutdown that includes brown field activity for the tie-in at two new subsea wells.
By the fourth quarter, our seasonal maintenance should be complete and additional projects should be coming on line. I’m going to expect to exit the year at or above 1.6 million BOE a day.
Full year production guidance for continued operations is 1.51 to 1.55 million BOE a day excluding Libya. And this is unchanged from a prior guidance and in line with our 3% to 5% production growth target.
At this point, the biggest uncertainty in the ranges is startup of our non-operated commissioned project in Malaysia.
I’m going to wrap up my comments with what to watch for in 2014. There are several activities underway to drive growth. Major projects, startups are expected at Gumusut, Foster Creek Phase F, Kebabangan and the Britannia long-term compression project.
These are important activities that should impact the 2014 exit ways [ph] and drive 2015 performance. We also expect to continue growth both in the Eagle Ford and the Bakken relate as some development program, details of the recent analyst meeting. And these are the expectations with this place over the next few years.
We’ll continue our North American unconventional exploration and appraisal programs with the focus on the Permian and Niobrara. We’ll also test that unconventional plea in Poland which the extended production test that I spoke about.
The company also found and to see additional blocks in Colombia last year with explorational commands in the second half of 2014 to test the prospectivity of the La Luna Shale.
Gulf of Mexico would be – more drilling continues in Tiber, Coronado and Deep Nansen. And we’re also preparing to begin and operate the drilling program late this year or early next year.
Finally, as I mentioned earlier, we’ll begin explorations drilling in Senegal and Angola this year. And if successful, these programs would be catalysts for growth into the next decade.
So here’s what I hope you’ll hear from our comments today. 2014 is off to a good start. We still will recover from some weather and startup delays early in the first quarter and exited the quarter in a strong position to deliver on our volume expectations for the year.
Our unconventional programs are performing very well and our major projects are ramping up or progressing towards that top.
We have another year of significant second and third quarter turnaround activity. But we’re optimistic about achieving our 3% to 5% production growth in the momentum we built to continue that growth into 2015 and beyond.
Our exploration activity is focused on drilling and testing a high quality set of conventional and unconventional prospects. And there’s sort of a lot to update you on the coming months.
So this ends our prepared remarks and we’ll turn over for questions. Thank you.
Earnings Call Part 2: