Current COP Stock Info

Sustaining capital only $3.5 billion

ConocoPhillips (ticker: COP) held its annual investor meeting earlier this month, outlining the company’s strategy in the coming years.

ConocoPhillips intends to stick with its current strategy, prioritizing returns over growth. This plan was unveiled last year, when the company retooled itself for $50 oil. While most oil and gas companies turned to higher growth, Conoco decided to avoid chasing the cycle. The company has been rewarded for this approach, as its subsequent shareholder returns have exceeded most other major companies in oil and gas.

ConocoPhillips Doubles Down on $50 Oil

Source: ConocoPhillips Investor Presentation

ConocoPhillips identified five priorities, all similar to those outlined last year.

  1. Invest capital to sustain production and pay existing dividend
  2. Annual dividend growth
  3. Reduce debt to $15 billion & target ‘A’ credit rating
  4. 20-30% of cash from operations paid to shareholders
  5. Disciplined investment for CFO expansion

The main difference between these priorities and those outlined last year is in the debt target. ConocoPhillips previously set a goal of $20 billion in debt, but has surpassed this target. The company sold some $16.6 billion in assets in multiple large transactions, and is already on track for less than $20 billion in debt by year-end.

Predicting price is useless, but scenario planning is priceless

ConocoPhillips reports its sustaining price is $40 per barrel, where that oil price allows the company to cover sustaining capital, pay a growing dividend and still have cash left over. EVP of Strategy Matt Fox addressed the potential of planning for a given oil price, and explained why the company does not do that. “We know with confidence what prices will do,” he said. “They’ll go up and they’ll go down, but not necessarily in that order. And that’s why we believe that predicting price is useless, but scenario planning is priceless.”

ConocoPhillips Doubles Down on $50 Oil

Source: ConocoPhillips Investor Presentation

ConocoPhillips expects long-term prices will be between $40/bbl and $80/bbl, depending on demand and unconventional production. The company does not expect to change its spending plan if prices continue in the $45-$55 range, like recent history has suggested. If prices spend a significant amount of time outside this range capital allocation will be adjusted, but significant changes are not expected.

Q&A from meeting

Q: You guys went in pretty much the exact opposite direction of your peers last year and were rewarded by beating the E&P stocks by around 25 percentage points, and you’re also the only large-cap E&P company to match the S&P 500. And so today, you’re clearly doubling down on the value-based growth and return of capital pledge, which should reposition the company in many different ways, especially financially. So while you covered capital allocation for organic growth and also for the balance sheet, my question is, how do acquisitions play into the mix, especially given your forthcoming balance sheet because it’s going to be a lot stronger? Two, what’s the current level of attractiveness of acquisitions? And three, what are the specific financial criteria? Or are they same as for normal investments?

COP CEO Ryan Lance: As I said at the beginning, growth and production was all the rage a year ago. We set out a plan. We’ve doubled down on that plan really going here today. As I think about the inorganic side to the equation, it is interesting. We’ve got the financial capacity and we’ve come to a place, we consider some of that stuff, but it’s got to be accretive to returns. So whatever we do is not just getting big for big’s sake, it has to improve the return focus over the long-term for the company as we think about that. And we think about the M&A and kind of the three buckets. And the very large stuff that most people kind of think about, that’s really hard. Shareholders and board members sitting in the board rooms are quite divided. The bid-ask is really very wide if you’re focused on anything you do to improve your returns. But I’d also say it’s a very high hurdle within our portfolio. Anything that’s got to be substituted in the portfolio can’t be additive to the top. We’ve described to you the portfolio. We’ve done that for a number of years. It’s about less than $50 barrel cost supply, the average of $35 we’ve got, anything we add into there has got to be competitive in the existing portfolio and that’s a very high hurdle. But we are doing some of the smaller things. You saw the Montney position that we’ve added. You saw the acreage position we’ve added in Alaska as a result of some of those opportunities. So we’re in that knife-fighting world every day, adding the smaller things to the portfolio. Because we think it’s improving the portfolio. More importantly, over time it’s going to improve the returns.

Q: Your stock has been clearly very successful with an outsized asset sale program, a lower growth rate and a higher cash return strategy. So I guess, my question is, why is 5% the right rate? I mean, why wouldn’t you grow less, buy back more and kind of sell assets that may not be optimized at your current pace and really maintain that complete differentiation versus E&P peers, which at least in some segment are very similarly unconventional?

Ryan Lance: We’re a bunch of engineers, you can rest assured, we’d study that ad infinitum. I’ll let Matt describe to you, but you’re right. I mean, we could — some of the extremes say just invest your sustaining capital, distribute everything else back. How did we hit that spot? And I mean what Matt described to you a little bit how our thinking revolves around that?

Matt Fox: Evan, I think that for everybody that asked us that question is suggesting keep your production flat and distribute everything to shareholders, somebody is saying while you guys have got a great portfolio, you should be putting more in the ground. Our view of that is that we think we found the right balance between those two things. We do have a very strong portfolio that can deliver improving returns overtime. And we know that we should invest some capital in that. But we think our company of our size in a mature industry should also be giving cash back to shareholders. So what we think we found here, and we’ve tested a whole lot of alternatives, what we think we found here is a sweet spot that balances those two things and that’s what we’ve laid out.

Q: You managed to significantly increase the resource with a cost to supply of $40 or less. Could you just give us from the top of the house just a couple of reasons, a couple of drivers of the increased resource at that really low cost of supply? And is this something that could be repeated over time? I mean, clearly, 30%, you can’t grow that 30% ad infinitum, but what’s really driving that?

Ryan Lance: Well, I’ll give you a couple of high-level remarks. I’ll let Al get into maybe some of the details. But the technology, the innovation that we’ve seen in the unconventionals, are not just happening in the unconventionals. When we look at our Alaskan business, Al described a little bit of the reductions in the cost of supply there and our conventional assets. You look at Norway, you look at the U.K., you look at what’s happening in China and what’s happening in Indonesia, other places, all that’s going on efficiency, that technology, that innovation is driving cost of supply down and that’s what we see.

Al Hirshberg: There is a bunch of great examples in the appendix, of actual examples of all these different things around the world where we’ve been doing. But I think part of why — frankly part of why the $40 and less has grown so much over the past year is, you may remember that when we introduced this corporate cost of supply curve last year at the same meeting, and we said then that in our company, everybody knew that you weren’t even invited to the capital allocation meeting if you weren’t below $50. Really what’s happened over the last year, as we’ve sort of seen the way the macroenvironment has developed and sharpened our own view of the future that Ryan was just talking about. You really don’t get into the meeting at $50 anymore; it’s really $40 now. Everybody in the company now knows that if you expect to get — unless you’ve got some really exceptional special story that if we don’t do it right now we are going to lose it kind of thing, you really got to be below $40 to get capital in the company, today, everybody knows that. And so I think that’s really driven a lot of special efforts using today’s technology, data analytics, et cetera, but also the work we’re doing with our contractors and the supply-chain side, et cetera. There are so many different micro decisions and forces pushing down that cost supply so they can get into the capital allocation meeting at ConocoPhillips.

Ryan Lance: You might get in the door but you don’t get a seat at the table.

Al Hirshberg: Standing-room only if you are in 40s.

Ryan Lance: And it really has created a competitive tension in the company. Because everybody sees, and we share that pretty widely. We just got together with the top 25 people across the company and all our regional presidents around the world. They see what other regions are doing. They see what the cost managers are doing. They go back and say if you want to fund this new development, this next platform, for example, you want to get money for this platform in Norway, we got to figure out how to make it an unmanned platform because we can’t afford to man it. That example’s in the appendix as well. Those are just some examples of how the conversation has progressed inside our company because of those competitive forces. We’ll go back, take one more look.

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