ConocoPhillips (COP) Q3 2013 Earnings Conference Call October 31, 2013 1:00 PM ET
Ellen DeSanctis – Vice President, Investor Relations and Communications
Jeff Sheets – Executive Vice President, Finance, and Chief Financial Officer
Matt Fox – Executive Vice President, Exploration and Production
Ed Westlake – Credit Suisse
Doug Terreson – ISI Group
Paul Sankey – Deutsche Bank
Paul Cheng – Barclays Capital
Scott Hanold – RBC Capital Markets
Doug Leggate – Bank of America Merrill Lynch
Faisel Khan – Citigroup Inc.
John Herrlin – Societe Generale
Roger Reid – Wells Fargo
Katherine L. Minyard – JPMorgan
Brandon Mei – Tudor Pickering Holt
Blake Fernandez – Howard Weil, Inc.
Welcome to Q3 2013 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, the Vice President, Investor Relations and Communications. You may being.
Thanks Christine. Thanks to all of our participants and a big welcome to our third quarter earnings call. Joining me today in the room are Jeff Sheets, our EVP of Finance and Chief Financial Officer and Matt Fox, our EVP of Exploration and Production. We will begin our prepared remarks in a moment.
But I wanted to make sure that all of you saw the announcements this morning that we completed the sale of our Kashagan business for about $5.4 billion. Just a quick mechanical point, we sent the earnings release and the Kashagan releases separately, that was because we had to queue up the earnings release last night and weren’t entirely certain about the timing of the Kashagan close. So, apologizes there for a little bit of possible confusion; but this is obviously a huge milestone for the business and wanted to get the news out to the marketplace this morning.
Also wanted to make sure that all of who saw in our release this morning that we expect to announce our 2014 capital and production budget in early December and then in 2014 we will be hosting our Analyst Meeting on the 10th of April in New York, obviously details to follow.
If you’ll turn to page two, you’ll note our Safe Harbor statement and that describes the risks and uncertainties and our future performance, these are also described in our periodic filings with the SEC.
With those details out of the way, I am going to turn the call over to Jeff. Jeff?
Thanks, Ellen. Hello, everyone. And thank you for joining us today. I am going to jump right into material beginning on the slide three, this slide shows some of the key highlights for the quarter.
Once again the theme of today’s call is pretty simple, we are successfully executing on our business plan. Operationally, we delivered our expected volumes. We produced 1.514 million BOE per day which is in line with guidance despite the curtailment of Libyan production for most of the quarter.
From continuing operations, we produced 1.47 million BOE per day. Without the disruptions in Libya, we would exceeded the high end of our production guidance. As we’ve stated for quite some time, we expected this quarter to be the low point of volumes and we are positioned to grow from here. The third quarter was an active period of seasonal planned maintenance. We executed this key turnarounds on schedule and most of that work is complete for the year.
Our major growth projects are progressing Christina Lake Phase E and Ekofisk South are now producing and others are nearing first oil. We have several near-term milestones that Matt will discuss in a minute so operationally we executed our plan.
Moving to the financial results reported earnings were $2.5 billion or $2 per diluted share. Adjusted earnings were $1.8 billion or $1.47 per share. This is 7% increase year-over-year. We were also up 4% sequentially despite this being the low point for volumes. And excluding working capital, we generated $3.8 billion in cash from continuing operations and we ended the quarter with $3.9 billion in cash.
Cash margins grew 13% compared to last year’s third quarter reflecting the impact of higher prices, production mix and location. Normalized for changes in prices cash margins grew 3% year-over-year. This is an important part of growing cash flows to internally fund our investment programs and dividends over time.
In the quarter, we continued to prune our portfolio and closed on two non-strategic asset sales our Clyden undeveloped oil sands leasehold in Canada and our interest in the Phoenix Park midstream asset in Trinidad and Tobago.
And as Ellen mentioned at the start of the call, importantly, we achieved a big milestone earlier today with the closing and receipt of funds for the $5.4 billion Kashagan transaction. And we continue to make progress on closing our other announced assets sales. We are continuing to add to and test our conventional and unconventional exploration inventory globally and these programs are running at a high level of activity.
Finally, we are committed to returning capital to our shareholders. In early July we increased our dividend by 4.5% and we remain committed to increasing the dividend overtime.
In summary, we delivered our plan for the quarter. We achieve the operational performance we expected and generated the strong financial results. We are positioned for an exciting phase of growth and margin expansion, which is the essence of our strategic plan.
So please turn to slide four, and we’ll cover the financial review for the quarter. Again, this quarter’s adjusted earnings were 1.8 billion or $1.47 per share and this was slightly above consensus. The 7% year-over-year increase in adjusted earnings was primarily driven by higher margins. The higher margins reflect strong liquids pricing in the quarter and a continued shift to higher value liquids in the portfolio.
Average realizations were up 6% year-over-year and 4% sequentially. Production from continuing operations was in line with expectations, but down sequentially and flat compared to the third quarter of 2012, largely reflecting the curtailments in Libya.
We have shown a table of segment earnings for the quarter in the lower right corner of the slide, our usual segment charts can be found in the appendix of this deck and we don’t plan to review these on the call but wanted to make a few key points there. Alaska income was down sequentially due to planned maintenance but in line with our expectations. Lower 48 adjusted earnings were up sequentially, reflecting strong liquids prices and the mix shift.
Canada generated significantly higher adjusted earnings sequentially as well. Although natural gas prices were weaker than last quarter, bitumen prices were particularly strong, reflecting higher WTI prices, favorable diluent prices, lower crude differentials and lower seasonal blending requirements, sort of a perfect set of conditions for the oil sands.
At this point, we would not expect fourth quarter realizations for bitumen to be as strong. Europe and the Asia Pacific and Middle East segments were also in line with expectations.
Our Corporate segment adjusted losses were about $40 million higher than in the second quarter of 2013 due to the absence of licensing revenues in the third quarter. This was about the same level we would expect for the fourth quarter as well. So, there is no change to our full year guidance of $750 million for this segment.
Next I’ll step through our production performance for the quarter on Slide 5. Total company production in the second quarter was 1.514 million BOE per day and this includes 44,000 BOE per day from discontinued operations. This chart shows continuing operations compared to the third quarter of 2012; and in the third quarter 2012 production from continuing operations was 1.47 million BOE per day.
Adjusting for dispositions of 12,000 BOE per day normalized production from continuing operations was 1.548 million in last year’s third quarter and that’s the middle blue bar in the chart. And I’ll talk about growth from there. The Libya downtime accounted for 28,000 barrels per day reduction compared to last year’s third quarter, but that was partially offset by lower downtime in the rest of our operations around 11,000 per day in this year’s third quarter.
The key is the next two bars. You can see that growth of 215,000 barrels per day more than offset declines of 186,000 barrels per day, this represents net organic growth of 29,000 per day or about 2% adjusted for dispositions and downtime.
The majority of the growth came from our development projects in the Lower 48 shale plays, growth in our oil sands asset from China. And as I mentioned before this should be the low point on continuing operations volume that we’ve been predicting for a while and we are now positioned for an upward trend.
If you turn to Slide 6, I’ll make a few comments about the improving margin trend we also have underway. This slide shows how our third quarter growth and changing mix drove cash margin improvement compared to last year’s third quarter.
The chart shows the change in this quarter’s volumes by region and product compared to last year’s third quarter. The growth shown in green is all from liquids. In addition, it’s coming in areas with more favorable fiscal terms in the company average notably the Lower 48, Canada and the Asia-Pacific and the Middle East segments. Normal field declines in Alaska and Europe and lower natural gas North American natural gas production somewhat offset the growth.
Slide 7, shows the impact of our growth, mix shift and fiscals on our margin performance. This slide shows sequential and year-over-year cash margins both on a reported basis and on price normalized basis. Compared to last year’s third quarter, cash margins grew 13%, sequentially cash margins grew 6% and realized prices improved compared to both periods, but that’s not the whole story.
On the right side of the page using our public sensitivity as we price normalized margins with last year’s third quarter as the base line, as you can see cash margins improved 3% on a price normalized basis compared to last year. This metric will tend to be volatile on a quarter-by-quarter basis, but we expect the trend to continue to improve as we shift production towards higher value products and places with more favorable fiscal terms. And we will continue to track and report this metric.
I’ll wrap up my comments with our cash flow waterfall and quarter financial position on slide eight. I am going to talk you through our cash flow and this does not include the proceeds from Kashagan, which we announced this morning and virtually our fourth quarter item. Through the third quarter of 2013, we generated $11.8 billion of cash from continuing operations and our working capital was about $100 million source of cash. Through the end of September, we’ve generated $3.2 billion in asset sales proceeds from the sale of Cedar Creek Anticline asset, the Clyden asset, the Phoenix Park and some smaller asset packages.
If you include Kashagan, and this increases to $8.6 billion. So, far this year, we’ve funded $11.9 billion capital program for continuing operations and paid out $2.5 billion in dividends. Debt and other, which includes the capital, associated with discontinued operations accounts for $1.2 billion use of cash in 2013. So, we had $3.9 billion of cash on hand as of September 30, essentially flat to where we started the year.
Our balance sheet and financial situation are very strong and just got stronger today with the closing and receipt of the proceeds from the Kashagan disposition. We are in a great position to execute our investment programs and deliver value through a combination of organic growth, improving margins and a compelling dividend.
That concludes the review of the financial overview and now I’m going to turn the call over to Matt for an update on our operations which begins on Slide 9.
Thank you, Jeff. As Jeff mentioned the main theme of this quarter’s operational performance has been on plan, in fact that’s been the theme over the past several quarters. I’m going to cover the operations material by our capital categories. As a reminder those are high qualify based assets, our lower risk development drilling programs, our major projects, and our exploration program.
So I’ll begin with a quick review of our base asset performance. Most importantly this quarter’s major turnaround and tie-in activity went according to plan. And this essentially completes the majority of a major turnaround activity for this year.
I’ll run through a few of these key activities quickly. Alaska experienced high seasonal turnaround activity at Kuparuk and Prudhoe, and the Lower 48 we had planned downtime of the Lost Cabin Gas Plant. In the UK, the Britannia Area and Southern North Sea turnarounds were completed and planned maintenance was also recently completed at the Foster Creek in the oil sands. The shutdown activity that began in Norway’s Greater Ekofisk complex in June was completed early in the third quarter and included the brownfield work necessary for the new Ekofisk South and Eldfisk II projects.
As the chart on the lower left shows, most of our planned turnaround activity is complete for the year. Fourth quarter turnarounds are nearing completion at Clear and Qatargas 3. The restart of the assets after the recent turnaround should deliver strong volume momentum in the fourth quarter. So will the expected production startup in the East Irish Sea following about a year long shutdown there to replace the asset gas plant. So you can see our base assets performed well.
Now let’s move on to our development programs on Slide 10. These development programs consist of lower risk drilling led activities around the world that mitigate our base decline and generate higher margins and attractive returns and these programs remain on track to deliver about 600,000 BOE per day of production by 2017 as shown on the top left graphic.
In the Kuparuk Field in Alaska, our core chipping drilling sidetracks continued in the third quarter. Since changes are made to Alaska’s fiscal with the more Alaska production act, we added a rig in Kuparuk at the end of May. We are planning to add another rig for development drilling at Kuparuk in January and we continue to work with partners and improve to identify additional opportunities to increase activity there. A big milestone for the quarter was reaching 500,000 BOE per day in the Lower 48.
Of course, this is largely due to performance from the unconventionals in the Eagle Ford’s and the Bakken, but continuing good performance from the Permian conventional program. A couple of highlights from these place Bakken production averaged 334,000 BOE per day in the year’s third quarter, up 31% compared to the same quarter last year and up 13% sequentially. Our focus during the third quarter was in the time from drilling a layout to bringing in on production.
This continues to be a focus and will become even more important as we shift the pad drilling. At the end of the third quarter we had 11 operated rigs running in the Bakken, nine of which were pad drilling. The Eagle Ford also continued to deliver strong performance. Third quarter production averaged to 126,000 BOE per day, up 66% compared to the third quarter of last year.
Sequentially the Eagle Ford grew 4%, a bit lower than the first half of 2013’s growth because this quarter was impacted by the commissioning of further stages of the Helena and Sugarloaf stabilization facilities and maintenance of third-party facilities to increase meter sizes resulting in a slight increase in downtime versus the second quarter.
At the end of the third quarter, we had a backlog of 77 wells waiting on facilities on various stages of completion. This represents a 38% reduction in our inventory compared to year end 2012. So we are gaining on the backlog. The Eagle Ford exited the third quarter over a 130,000 BOE a day. And for the fourth quarter, we will continue to run 11 rigs in the play and expect to bring on between 50 and 60 operated wells. As we head into 2014, we are in full transition to multi-well pad drilling are more than 1,800 remaining identified well locations assuming in 80-acre well spacing.
Right now six out of the 11 rigs running in the Eagle Ford are pad drilling. And we expect to see more variability in the quarterly production levels as we move to pad drilling, but we anticipate continued growth in this asset next year. In Western Canada, we continue to see good results from margin enhancing drilling programs in the liquid-rich plays, here our development drilling activity continues to focus on the Glauconite, Montney, Lower Cretaceous and Tri Asset place. Activity levels are expected to ramp up in the fourth quarter as we prepare for and execute our winter drilling program.
Finally, our legacy field development programs are also on track through all of our operating areas. Now, let’s discuss our major projects on slide 11, we were approaching some very important milestones. Our projects that are very high levels of activity and remain on track to deliver about 400,000 BOE per day of production by 2017, as shown on the top left graph.
Virtually, all business segments are contributing to our growth from major projects. In Alaska, our CD5 project construction is progressing on schedule and preparations are underway for the winter construction season when the ice roads are in place.
We continue to pursue engineering work and additional satellite projects for sanctioning in 2014. For example work is underway at Shark Tooth and Greater Moose’s Tooth 1. We will make a decision on these projects late next year. You also probably saw a recent announcement about the site selection for a possible Alaskan LNG project which we now refer to as AKLNG. Along with our co-venturers we are performing studies now to determine the feasibility of that project.
Our oil sands project are performing as planned, the combined oil sands project averaged a 107,000 BOE per day during the quarter, up 16% year-over-year. Christina Lake Phase E started up in mid-July and this should add about 20,000 BOE net over the next several months. At our operative Surmont 2 project, we remain on plan for first team in the first half of 2015.
You may have seen the announcement that we achieved first oil at Ekofisk South last week, a couple of months ahead of schedule. This is an exciting milestone for the company. Over the next few years, we’ll ramp up volumes as we drill 35 producing wells and eight injection wells. And by early 2015, we’ll also start first production at Eldfisk 2, so we are positioning ourselves to achieve significant growth in Norway and extend field life for decades to come.
Adjustment in the UK, we’re in the final stages of our commissioning and start our preparations before initiating first oil, offshore rooftop is progressing as planned and four wells have been perforated under ready for first production. Jasmine has started of later in this quarter, which would provide good exit rate momentum going into 2014. At Curtis Island, we continue to progress our APLNG project, 311 is still on schedule for first LNG by mid-215 and critical milestones have been achieved on the project. We’ve got lot going on in Malaysia, we’re close to achieving major projects, stackups and two non-operated projects Gumusut and Siakap North-Petai.
Gumusut offshore commissioning continues the 10 and final rise that was installed in early September and flow line installations are complete, they operate rest of them is the full fuel starts-up will be in early Q1, 2014. The Siakap North-Petai development is continuing hookup from pre-commissioning. Umbilical installations are complete and Flowline installation is underway and they operate rest of them is to start Umbilical right at the end of this year.
Malaysia the Kapampangan development is also progressing, top side fabrication is running ahead of schedule and drilling commenced in August. The overall project remains on track for first production in the fourth quarter of 2014. So you can tell what are very exciting is critical time in many of our major products and they will be a key driver in our volume growth over the next few years.
So now I want to briefly recover our exploration program on slide 12. Our exploration efforts continue on several fronts, we are building an inventory of both conventional and unconventional opportunities. We are drilling several non-operative prospects currently and we are advancing our operating prospects to the drill-ready stage. We currently have three conventional prospects drilling in the Deepwater Gulf of Mexico program.
We have an interest in the Gila and Deep Nansen wildcat prospects. In addition, we have interest in the Tiber appraisal well. So we are participating in some big important lower tertiary wells. We are also currently progressing our plans for our operating drilling program in the Gulf for 2014. And the Browse Basin of Australia, we have drilled a Proteus-1 discovery during the recent quarter. This was an untested structure to the Southeast of the Poseidon discovery.
In Indonesia, we obtained government approval for the Palangkaraya farm-in agreement, onshore Kalimantan. This creates the way to begin drilling next year. In Malaysia, we completed our seismic activity in block SB-311. In the Kwanza Basin in Angola, we completed our 3D seismic program earlier in the year.
We identified and ranked several prospects and expect to be drilling nearby mid next year. And we’re just discussing several unconventional plays, especially in North America. In the Permian Basin, we’re testing prospective zones across our leaseholds in the Delaware and Midland basins.
In the Niobrara, we currently have one rig in the field executing an appraisal program. It’s too early to discuss results in the Permian and Niobrara, but we’re encouraged by the preliminary results. In Canada, we continue to drill and appraise that differently in Montney plays and we’re also gearing up for our second season of winter drilling in the Mackenzie Valley Canal play.
It sounds a pretty quick overview of our operations in exploration activity and the key takeaways of these, the operations are running well. The development programs are delivering. Stocked up of several growth projects are underway or eminent and we’ve got high level of exploration activity.
If you turn to Slide 13, I’ll quickly cover all this, all adds up to our production outlook for this year. The table in the bottom of the slide provides actual volumes for the first three quarters of the year and our expected range for the fourth quarter. The data is provided for both continuing and discontinued operations. Our overall volume guidance for the year is unchanged except in the fourth quarter, we’re now removing 50,000 BOE from Libya as a result of the ongoing disruptions there.
What’s important to know is that the fourth volumes are expected to ramp up from the third quarter due to lower turnaround activity, ramp up in our unconventional programs and the major projects startups. The range in fourth quarter volumes reflects statistical variability in major projects startup timing. We’ll announce our 2014 production target with a capital release in December. In the meantime, we’re positioned to deliver such strong activity in 2013 and now provide strong momentum towards achieving our organic growth goals next year.
Now please turn to Slide 14 for our summary comments. Operationally, we’ve arrived at very important inflection point for the Company. We have several key milestones to achieve this quarter and we should have volume growth momentum out of 2013.
So in 2014, you should expect to see increased production from our major projects at Ekofisk South, Jasmine, Britannia long-term compression, Gumusut, Siakap North-Petai, Kebabangan, Christina Lake Phase E, Foster Creek Phase F and Lower 48 unconventional programs at Eagle Ford, Bakken and Permian. All these projects have contributed to 3% to 5% production growth as we detailed in our analyst meeting earlier in the year.
And as always, we expect to deliver our operational performance safely and efficiently. We’re committing to maintaining a strong balance sheet that can provide financial flexibility. We’re seeing the early stages of cash margin expansion, which should improve as our volumes grow.
We’re focused on improving the tons and that’s a driver behind continuing to rebalance our portfolio and allocate capital prudently. We’re delivering on our value proposition. We continue to progress on our earnings asset divestitures and this will provide a financial flexibilities to fund our investment programs and our dividend, which remains a top priority; so I hope Jeff and I have given you confidence that our plans are on track for delivering key milestones this year, and positioning ConocoPhillips for an exciting 2014.
And now we’re pleased to take your questions.
Earnings Call Part 2: