ConocoPhillips (COP) Q2 2013 Earnings Conference Call August 1, 2013 1:00 PM ET
Ellen R. DeSanctis – Vice President-Investor Relations and Communications
Ryan Michael Lance – Chairman and Chief Executive Officer
Jeffrey W. Sheets – Executive Vice President- Finance and Chief Financial Officer
Matthew J. Fox – Executive Vice President-Exploration and Production
Janet Langford Kelly – Senior Vice President-Legal, General Counsel, Corporate Secretary
Faisel Khan – Citigroup Inc.
John P. Herrlin Jr. – Societe Generale
Scott Hanold – RBC Capital Markets LLC
Ed G. Westlake – Credit Suisse
Paul Cheng – Barclays Capital, Inc.
Doug Leggate – Bank of America Merrill Lynch
Paul B. Sankey – Deutsche Bank Securities, Inc.
Katherine L. Minyard – JPMorgan
Welcome to the Q2 2013 ConocoPhillips' Earnings Conference Call. My name is Sheri, 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, the Vice President, Investor Relations and Communications. Ellen, you may begin.
Ellen R. DeSanctis
Thank you so much, Sherry and of course thank you to our listeners for joining this second quarter earnings call. I’m joined in the room today by Ryan Lance, our Chairman and CEO; Jeff Sheets, our EVP of Finance and CFO; and Matt Fox, our EVP of Exploration and Production.
It’s a very busy day for earnings activity. I know all of you are pressed for time. So we’re going to jump right into the material today really quickly before we get started. If you would please turn to Page 2 you will see our Safe Harbor statement. That of course described the risks and uncertainties in our future performance. Those are also described in our periodic filings with the SEC.
I’m going to turn the call over to Ryan now.
Ryan Michael Lance
Thank you, Ellen, and good afternoon, everybody, and thank you for joining us today. Well, it’s been just over a year since we launched the independent ConocoPhillips as a new class of investment. We’ve laid out a plan that would deliver growth and volumes and margins with a compelling yield. I think as you’re all hear and see today the key pieces of our strategy are falling into place.
For the second quarter in a row, organic volumes net of dispositions and planned downtime are growing. Margins are improving. We’re maintaining our commitment to a compelling dividend reflecting our confidence in our plans and our financial position remained strong. So the theme of today’s call is pretty simple. We are successfully executing on our business plan. We’re doing what we said we would do. We continue to keep our eye on the ball and the top priority for of all of us at ConocoPhillips is to operate safely and execute our plans and programs.
So let’s get started on Slide 4. Operationally our business performed very well this quarter. We produced 1.552 million BOE per day on a total company basis and 1.51 million BOE per day on a continuing operations basis.
Adjusted for dispositions and planned downtime, this represents 4% organic growth compared to a year ago. Last quarter we grew 2% on the same basis. So the organic growth is showing up in our performance.
This quarter’s volume performance exceeded the high end of our guidance range and this is primarily due to two things; better than expected performance at Eagle Ford in our Europe and Asia Pacific regions and our seasonal maintenance and planned downtime was executed ahead of plan. Based on this quarter’s stronger than expected volume performance we’re raising our third quarter and full year volume guidance, which Matt will cover in more detail.
As you know, the second quarter was a very active period for planned maintenance and we successfully executed key turnarounds. That’s essential to projecting our base assets. In addition, our development activities also have performed well this quarter. And remember, these are lower risk programs with years of inventory that completely mitigate our base decline. Of these, the Eagle Ford stood out in the second quarter. Production averaged more than 120,000 BOE per day, almost double last year’s second quarter rate and up 20% sequentially.
Our major growth projects are also on track. These are projects that will generate step-function growth during the next several quarters and years and we have several near-term startups that Matt will also describe in detail. So operationally, we are hitting the milestones we set for ourselves.
Now moving to the financial results, adjusted earnings were about $1.8 billion or $1.41 per diluted share. Adjusted earnings were up 17% year-over-year. Excluding working capital, we generated $4.4 billion in cash from continuing operations and ended the quarter with $4 billion of cash in short-term investments.
On a year-to-date basis, our cash from continuing operations plus our proceeds from asset sales have covered our dividend and capital programs.
Cash margins grew compared to last year’s second quarter, reflecting the impact of product mix, prices and location and strategically this is one of the keys to achieving our value proposition is high-grading our portfolio by selling non-strategic assets and redeploying those proceeds into organic investments that will drive future growth and we’re making good progress on our announced divestiture program. Since the beginning of this year, we’ve received approximately $1.7 billion in proceeds from asset sales and we expect to close Algeria, Nigeria and Kashagan by year-end. These would add approximately $9 billion of additional proceeds in 2013.
As we previously discussed, our portfolio efforts will now shift to improving and rebalancing the asset base. We’ll take opportunities to divest the smaller non-strategic assets such as southwest Louisiana conventional assets that we sold in the second quarter. And we’ll also look for ways to rebalance our interest and assets like the oil sands. These are great assets, but one where we believe we’re bit overweighted in our portfolio today.
At the same time, we’re monetizing assets. We’re also adding to our conventional and unconventional exploration inventory globally and we’re running this program at a high level of activity. Exploration success like we’ve recently seen at Coronado and Shenandoah is key to sustain any organic growth longer terms.
Despite this high level of activity, our 2013 capital outlook is relatively unchanged. We expect to spend about $15.9 billion on continuing operations and $600 million in discontinued operations. That’s a total of $16.5 billion which is an increase of about 4% compared to our announced total company budget. Of this 4% increase, about half reflects our updated expectations around completing the sales of Algeria, Nigeria and Kashagan.
So this is capital that will come back to us as adjustments at closing. The remainder of the increase are about 2%, reflects various adjustments across our asset base including high quality additions to our exploration portfolio.
Finally, we remain committed to returning capital to our shareholders. Right after the quarter ended, we increased our dividend by 4.5%, reflecting confidence in our growth plans and we have remained committed to consistent dividend increases over time.
So in summary, we have a strong quarter operationally, financially and strategically. So next you’ll hear from Jeff and Matt who will give you all the details. So if you please turn to Slide 5 and let Jeff begin his comments on our financial performance.
Jeffrey W. Sheets
Thank you, Ryan. This quarter’s adjusted earnings were $1.75 billion or $1.41 per diluted share. This was above consensus, driven primarily by the higher than expected volumes that Ryan just mentioned. Second quarter adjusted earnings were up 17% compared to last year’s second quarter and on an earnings per share basis, adjusted earnings were up 19%, reflecting the impact of our 2012 share repurchases.
The year-over-year increase in adjusted earnings was primarily driven by higher margins. The higher margins reflect the continued shift to higher-value liquids in the portfolio as well as the shift to more favorable fiscal machines. Average realized prices were flat and total company volumes were up modestly.
Now I’ll cover our production performance for the quarter. So if you’ll turn to Slide 6. Total company production in the second quarter was 1.552 million BOE per day. These results included 42,000 BOE per day from discontinued operations. This chart shows the change in both continuing and discontinued operations compared to the second quarter 2012, but I’ll focus on the continuing operations.
Second quarter 2012 production from continuing operations was 1.48 9 million BOE per day. Adjusting for dispositions of 33,000 BOE per day, normalized production from continuing operations was 1.456 million BOE per day in last year’s second quarter and that’s the middle blue bar on the chart.
During the second quarter of 2013, planned downtime was 10,000 BOE per day higher than last year’s second quarter, which was mostly due to downtime in the North Sea.
Growth of 219,000 Boe per day more than offset decline of 155,000 Boe per day. So normalized for 2012 dispositions and planned downtime, our production from continuing operations increased by 64,000 Boe per day, which I will explain more in the next slide.
Year-over-year this represents a 4% organic growth and the second consecutive quarter on this upward trend. So let me take a moment and talk about cash margin trends on slide 7 and 8, starting with contributions from our production growth.
So this chart on slide 7 is a new one, it shows how our second quarter growth and changing mix drove cash margin improvement compared to last year. As I just mentioned, volumes from our continuing operations were up 64,000 Boe per day year-over-year, adjusted for dispositions and planned downtime. This chart shows the change in this quarters volumes by segment and product compared to last year’s second quarter.
So as you can see the relative growth which is shown in the green bars is primarily from higher value of liquids. In addition, it’s occurring in areas with more favorable fiscal terms in the company average, and this isn’t by accident as we are focused on shifting our portfolio and our investments to places with higher margins and better returns.
Normal fuel declines in Alaska, Europe and North America natural gas somewhat offset the growth. The impact of the shift on our cash margins can be seen on the next slide, slide 8. This slide shows sequential and year-over-year cash margins both on a reported basis and a price normalized basis.
As you can see on the chart on the left cash margins grew on a reported basis, despite flat overall realized prices compared to the last year’s second quarter. In terms of prices we generally saw North America natural gas prices being offset by decreases in Brent crude prices. So the chart on the left reflects the impact of product mix, prices in location, and you can see this from the chart the cash margins grew both sequentially and year-over-year. But the right side of this chart shows, this is an estimate of what our cash margins would have been, if we had the same pricing in all quarters and we have used the second quarter of 2012 at the baselines, that’s pricing $93 at WTI, $108 Brent, and $2.20 Henry Hub.
You can see that on this price normalized basis, the cash margins grew significantly year-over-year and also grew sequentially. So this metric will tend to be volatile on a quarter-by-quarter basis. However, we expect this trend to continue as we shift our production towards higher value products in places with more favorable fiscal terms. We will continue to periodically track and report this metric as growing both production and margins is a key aspect of our value proposition.
So now I will turn to the segment slide, beginning with Lower 48 on slide 9. Production in this segment was 491,000 BOE per day, that’s up 11% compared to last year’s second quarter and up 3% sequentially. We saw this improvement despite the sale of the Cedar Creek Anticline assets in the first quarter of 2013.
Total liquids production in the segment increased 20% compared to the same period a year ago and now represents 48% of the total mix for the segment and we expect our liquids percentage to continue to grow.
During the quarter, combined production from the Eagle Ford, Bakken and Permian Basin averaged 203,000 BOE per day and that’s up 47% from a year ago. These assets made up less than 9% of our total company production a year ago and today these assets comprise 13% of our total company production and we expect they will continue to grow.
Segment adjusted earnings this quarter generally reflects higher realized prices compared to the same period a year-ago, but they also include the foreign dry hole costs and leasehold impairment of approximately $70 million after-tax. Excluding that charge, segment adjusted earnings would have been almost $250 million as you can see the leverage and earnings due to the growth and the shift to liquids.
Now, let’s cover the Canada segment on Slide 10. Production in this segment is $271,000 BOE per day, roughly flat compared to last year’s second quarter. Liquids grew 12% year-over-year while gas production declined 9%. The shift has increased segment margins, which continue to improve margins overtime. Production was impacted in the second quarter by 9,000 BOE per day as a result of planned downtime at Christina Lake. Canada’s adjusted earnings of $5 million this quarter reflects stronger product pricing compared to last year and sequentially. And as a reminder, the WCS prices in our supplemental information represents one month lag, which better reflects our pricing for Bitumen.
Now, let’s move to the Alaska segment on Slide 11. Production in Alaska was 197,000 BOE per day, this quarter, this was down sequentially due to planned downtime at Kuparuk and Prudhoe and normal field decline. But despite lower sequential volumes, adjusted earnings were $585 million this quarter, which is up compared to last quarter. Differences between the timing of production and sales explain much of the variance; the first quarter of this year included an adverse impact earnings of approximately $50 million from these lift timing impacts while this quarter included the benefit of about $25 million, a positive swing of $75 million.
We continue to analyze the impact to our business related to the recent passage of Senate Bill 21 and we expect to pursue additional opportunities for investment over time.
I'll turn now to Slide 12 and talk about our Asia-Pacific and Middle East segment. Production in this segment was 324,000 BOE per day during the second quarter, up 20% compared to year ago and up 2% sequentially. Key drivers of year-over-year performance were the resumption of normal production and growth at Bohai Bay, growth at the Panyu project in China, and early production from Gumusut in Malaysia, which started late last year. Adjusted earnings this quarter were unfavorably impacted by weaker prices and impacts from lift timing are minimal this quarter.
Europe, the next segment is found on Slide 13. Production for the Europe segment was 173,000 BOE per day during the quarter, a decrease of 34,000 BOE per day sequentially. This was driven by significant downtime in Greater Ekofisk area in Norway and the J-Area in the UK.
Compared to a year ago lower production is driven by higher planned and unplanned downtime, normal field declines, and dispositions. Second quarter adjusted earnings for the segment were $261 million, and segment performance should improve when major projects startup occur in the UK and Norway.
Before I wrap up, the financial section of today's call, with the discussion of cash flow, let me provide an update on our corporate segment. Our corporate segment adjusted earnings were negative $164 million in the quarter. We are updating our annual guidance for this segment to be $750 million after-tax, that's an $150 million improvement compared to our prior guidance.
Additional information for the corporate segment and the other international segments are included in the supplemental information that we provided with the earnings release.
We turn to Slide 14, I'll cover our year-to-date company cash flow waterfall. Through the first half of 2013 we’ve generated $8 billion in cash from continuing operations excluding working capital. Through June working capital was a better wash for the year.
Year-to-date we’ve generated $1.7 billion in proceeds from dispositions primarily from the sale of the Cedar Creek Anticline assets and partial working interest in the Browse and Canning Basin. So far we’ve funded $7.5 billion capital program for continuing operations and paid out $1.6 billion in dividends. Note that cash flow from operations and proceeds from dispositions have covered our dividend and capital program.
The $1.3 billion in debt and other reflects the repayment of approximately $900 million of debt at maturity during the quarter, as well as capital associated with the discontinued operations. Now something to note, although we paid down $900 million in debt during the quarter, our debt balance was unchanged as we recorded $900 million capital lease obligation for the Gumusut Floating Production System. We have $4 billion in cash and short-term investments on hand, which is just slightly lower than where we started the year.
So in summary, our balance sheet and financial position remains strong and we believe are well positioned to execute our investment programs and our value proposition for the company.
I will now turn the call over to Matt for an update on operations beginning on Slide 15.
Matthew J. Fox
Thank you, Jeff. As both Ryan and Jeff mentioned, the main theme of this quarter’s operational performance is that we are on plan just like last quarter. So I am going to cover the operations material by our capital categories beginning with our high-quality base assets. And as a reminder, our base assets refer to the assets that we’re producing at the end of last year.
In June, the second quarter these base assets performed very well across all of our operations and with minimal unplanned downtime. So that means on average everything ran back better than expected because in our forecast we actually assume some unplanned downtime.
We protect the operating integrality of our base assets through plant maintenance. As we discussed in the previous quarter call we have significant plant maintenance and tie-in scheduled for the second and third quarters of this year. And our operated assets (inaudible) minority the downtime of 30% higher than our five year historical average.
The chart in the lower left shows the major planned events for 2013 and their duration. As you can see many projects commenced later in the second quarter and a couple of these are still underway and others are scheduled to start in the third and fourth quarters.
And now a few highlights; in the North Sea turnarounds were successfully completed ahead of schedule at Ekofisk, Eldfisk in the J-Area. These activities included tie-ins for the major projects Ekofisk South, Eldfisk II and Jasmine. Turnarounds in the Lower 48 were successfully completed as well as the planned maintenance at Christina Lake. We have additional planned downtime scheduled during the third and fourth quarters in Alaska, the UK, Foster Creek and Qatar.
So our base operations are running well and our turnarounds are on or ahead of schedule.
Moving on to our development programs on page 16, these development programs consists of lower risk drilling lead activities around the world, that completely mitigate our base declines in generally higher margins and attractive returns. These programs remain on track to deliver about 600,000 Boe per day of production by 2017 as shown in the top left graphic.
Our legacy conventional field development programs are on track. For example, in places like the Kuparuk field in Alaska, coiled tubing drilling sidetracks continued in the second quarter. In Western Canada, we continue to see good results from margin enhancing drilling programs and the liquids rich plays we are focusing on.
Results across our Lower 48 development programs are very strong. They produce 491,000 BOE per day in the second quarter and a high level of drilling activity continues.
A couple of highlights; Bakken produced an average of 30,000 boe per day, up 15% compared to the first quarter last year and up 3% sequentially. Heavy rains and flooding in the area impacted our second quarter activity, but we are getting back on track with 11 rigs running.
The Eagle Ford exceeded our expectations in the second quarter. Production averaged 121,000 boe per day, almost double the same period last year and up 20% sequentially.
During the second quarter, we brought on 65 operated wells including catching up on some of the well backlog we have. And we continue to believe that our Eagle Ford position is truly best-in-class. The charts on the lower left of this slide shows third-party data on our well performance compared to the top competitors in the fleet.
We are one of the top producers overall and we are producing higher oil volumes per well; more than 50% higher than the competitor average, so clearly we’d identified the sweet spot when we established our position for only $300 an acre.
We are currently running 11 rigs in the fleet. We are on track to complete the drilling Phase of acreage capture this year and we are transitioning to multi-well pad drilling for our more than 1900 remaining identified locations.
Now I would like to discuss our major projects on slide 17. Our major projects remain on track to deliver about 400,000 boe per day of production by 217, as shown on the top left graph.
Our oil sands assets are performing as planned. The combined oil sands properties averaged 100,000 BOE per day during the quarter, up 14% year-over-year. Currently, we have seven major oil sands projects in execution and these projects are progressing on schedule.
Christina Lake Phase E started up in mid-July slightly ahead of schedule, and we should ramp to about 20,000 BOE per day net from Christina E within six to nine months. Our (inaudible) project is about 40% complete by the end of July and is on track to start up in the early 2015.
In Alaska, our CD5 project is on track and we are progressing engineering work and additional satellite projects for sanction in 2014. The passage of SB21 in Alaska, we believe some of our Alaska projects and (inaudible) viable and we expect to invest more capital in Alaska over time.
In Asia-Pacific and Middle East segment, our major projects are also on plan. Performance from our pioneer growth project is running ahead of expectations. We have 23 wells on line at the end of June, versus 19 planned. And these wells contributed about 7,000 BOE per day net and second quarter.
In Malaysia, key load outs and less were achieved during the quarter. The floating production system from Gumusut is now in place, Siakap North-Petai project is on track, and we expect production from both projects to begin ramping up at year-end.
At Curtis Island, module installations continue to APLNG during the second quarter. In June, we raised the width of our first tank, a big milestone for the project. We're still on schedule for first LNG in 2015.
Activity at both the UK and the region sectors of the North Sea is very high.
At Ekofisk, so we installed a new project topside facilities during the second quarter and the project is on track to achieve cost reduction by the end of 2013. Also during the quarter, we installed the jackets and bridges at Eldfisk II in preparation for first oil late next year.
At Jasmine, key installations were completed in the second quarter and offshore hook-up and commissioning market is fully underway. Cost reduction from Jasmine is expected early in the fourth quarter. The graphic on the lower left shows the expected production start-ups during the third and fourth quarter of this year and as you can see the projects we have been talking about for a while are now coming to fruition and we have more projects scheduled to startup next year including Eldfisk II in the North Sea, Kakap in Malaysia, additional phases of the oil sands, Britannia long-term compression and (inaudible) project in Indonesia. So the delivery of new production from major projects will start later this year and continue through 2014 and beyond.
Next I want to briefly cover our exploration programs starting in slide 18. Our exploration momentum continues on several fronts. We are building inventory of both conventional and unconventional opportunities. We are advancing several opportunities to the drill ready stage and we are currently drilling several operated and non-operated prospects.
There is a very high level of activity in the deepwater Gulf of Mexico program. The lower (inaudible) is currently drilling. We have 30% interest in this well. During the quarter, we acquired 20% working interest in the (inaudible)` prospect and the six plus heal at JOE. This is a very large prospect that’s also currently drilling and should reach TV this quarter and we have additional 100% ConocoPhillips leases within the healer structure, so this is an important well for us.
The Deep Nansen wildcat and Tiber appraisal wells are expected to spud this quarter and we have a 25% and 18% working interest in these wells respectively.
In the Browse Basin of Australia we are currently drilling the Proteus wildcat on an untested structure to the Southeast of the Poseidon discovery and we expect to reach TD soon. We completed our sale of partial interest in the Browse and Canning Basin in June as well. Recall, this was part of a deal to gain access to potential shale opportunities in the Sichuan Basin in China.
In Europe we were awarded one operatorship and three partnership licenses in Norway’s 22 licensing round in the Bering sea and this represents attractive future conventional inventory in a legacy area for the company and we expect to start testing our acreage in the Bering’s in 2014.
In the Kwanza Basin in Angola, we completed our 2013 3D seismic acquisition program in early April. Also, we recently acquired an additional 20% working interest in Block 36 bringing our equity to 50%. We also have 30% interest in Block 37 and we’re still planning more to begin drilling early next year. In addition, we’ve completed a fireman to three offshore blocks in Senegal. These blocks provide attractive acreage to test the West African (inaudible) play and drilling on these blocks will start next year too.
Globally we have activities under way in several unconventional plays. We expect to be drilling in Poland and Colombia by year-end. We also continue to drill on plays, the Duvernay and Montney plays in Canada and we continue to test plays in the Permian and Niobrara in the Lower 48.
That was a pretty quick overview of our operations and exploration activity. The key takeaways are less. The operations are running well, the development programs are delivering, the startups of several growth projects are eminent and we’ve got level of exploration activity.
I’ll wrap up my comments on Slide 19 with a quick review of our 2013 production outlook. As Ryan mentioned in his opening comments, we are raising our production outlook for 2013. This slide shows our actual 1Q and 2Q volumes and our forecast volumes for the rest of the year on both the continuing and discontinued operations basis.
The bottom line, we are tightening our ranges in 3Q and 4Q and we are bringing up the midpoint of a full year range by about 20,000 BOE per day just over 1%.
As you can see, we expect third quarter volumes to be lower than second quarter, driven again by significant turnaround in maintenance activities, in this case dominated by Alaska and the UK. Fourth quarter volume should ramp up from there as our planned downtime (inaudible) and our major projects ramped up and we should see a strong exit rate going into 2014.
Now please come to Slide 20 for Ryan’s summary comments.
Ryan Michael Lance
Thank you, Matt. Well, we’re at the halfway mark for 2013, but more importantly we are in [the home stretch] of a multi-year effort to transform ConocoPhillips into a unique compelling independent E&P company.
So let me also summarize the key takeaways from this call. Operationally, we are approaching a very significant inflection point for the company. We have several important milestones to achieve in the next two quarters and we should see good momentum coming out of 2013. We are building our inventory and delivering visible results from our conventional and unconventional exploration programs that will sustain our growth well into the future.
Importantly, we expect to deliver our operational performance safely and efficiently. Financially, we’re committed to maintaining a strong balance sheet and that can provide our financial flexibility. We’re seeing the early stages of cash margin improvement, which should continue as our volumes grow and as always, we’ll maintain our focus on improving returns.
Strategically we are delivering on our value proposition. We expect to complete our announced asset divestitures in 2013 and this will provide the financial flexibility to fund our investment programs, which we are on track to deliver volume and margin growth and our dividend remains a top priority.
The bottom line, we’re committed to creating long-term value by delivering 3% to 5% growth in both production and margins with a compelling dividend. So I hope Jeff, Matt and myself have given you confidence that our plans are on track for delivering key milestones in 2013 and they will certainly position the company for very strong finish to the year and an exciting 2014.
So now with that, let’s turn it back to the moderator and take your questions.
Earnings Call Part 2: