ConocoPhillips - Q2 2023

Transcript

Operator (participant)

Welcome to the second quarter 2023 ConocoPhillips earnings conference Call. My name is Liz, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star one one on your touchtone telephone. I will now turn the call over to Phil Gresh, Vice President, Investor Relations. Sir, you may begin.

Phil Gresh (VP of Investor Relations)

Thank you, Liz, welcome to everyone to our second quarter 2023 earnings conference call. On the call today are several members of the ConocoPhillips leadership team, including Ryan Lance, Chairman and CEO, Tim Leach, Advisor to the CEO, Bill Bullock, Executive Vice President and Chief Financial Officer, Dominic Macklon, Executive Vice President of Strategy, Sustainability, and Technology, Nick Olds, Executive Vice President of Lower 48, Andy O'Brien, Senior Vice President of Global Operations, Kirk Johnson, Senior Vice President, Lower 48 Assets and Operations, and Will Giraud, Senior Vice President, Corporate Planning, Planning and Development. Ryan and Bill will kick off the call with opening remarks, after which the team will be available for your questions. A few quick reminders. First, along with today's release, we publish supplemental financial materials and a slide presentation, which you can find on the investor relations website.

Second, during this call, we will be making forward-looking statements based on current expectations. Actual results may differ due to factors noted in today's release and in our periodic SEC filings. We will make reference to some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release and on our website. With that, I will turn the call over to Ryan.

Ryan Lance (Chairman and CEO)

Thank you, Phil, thank you to everyone joining our second quarter 2023 earnings conference call. It was certainly another busy quarter for ConocoPhillips. In April, we hosted our Analyst and Investor Meeting in New York City, where we laid out our 10-year strategic and financial plan, and we committed to you that we would keep working to make the plan even better, and we've done that again this quarter. We executed an agreement to purchase the remaining 50% of Surmont, which we expect to close in the fourth quarter. Surmont is a long-life, low-decline, and low capital intensity asset that we know very well. In the current $80 per barrel WTI price environment, we expect incremental free cash flow from the additional 50% interest to approach $1 billion in 2024.

We expect first production in early 2024 from Pad 267, our first new pad since 2016. We see debottlenecking potential at the facility to further improve our cash flows. We also continued to progress our global LNG strategy. In the quarter, we finalized the acquisition of our interest in the Qatar North Field South Joint Venture. In North America, we executed agreements for 2.2 million tons per annum of offtake at the Saguaro LNG project on the West Coast of Mexico. In Germany, we can confirm we have secured a total of 2.8 million tons per annum of regasification capacity at German LNG. While it's only been a few months since FID at Port Arthur, we are further progressing our offtake placement opportunities in both Europe and Asia.

Now, shifting to the quarter, while commodity prices were volatile, ConocoPhillips continued to deliver strong underlying performance. Once again, we had record global and Lower 48 production, we raised our full-year production guidance for the second straight quarter. This was achieved through continued capital efficiency improvements as the midpoint of our full-year capital guidance remains unchanged. We continue to deliver on our returns-focused value proposition. We have distributed $5.8 billion through dividends and buybacks year to date, putting us well on track to achieve our planned $11 billion return of capital for 2023. We did this while funding the shorter and longer-term organic growth opportunities that we see across the entire portfolio.

In conclusion, our deep and our durable and diversified asset base continues to get better and better, and we are well positioned to generate competitive returns and cash flow for decades to come. Now let me turn the call over to Bill to cover our second quarter performance in more detail.

Bill Bullock (EVP and CFO)

Thanks, Ryan. Diving into second quarter performance, we generated $1.84 per share in adjusted earnings. We recognize that this result was below consensus, which we primarily attribute to transitory price capture headwinds in Lower 48 natural gas and Alaska crude. Based on strip pricing for the second half, we expect price capture to normalize and be consistent with our previous full-year guidance of $22 billion in CFO at $80 WTI and our published full-year sensitivities. Moving to production, we set another record in the second quarter, producing 1,805,000 barrels of oil equivalent per day, representing 6% underlying year-over-year growth, with solid execution across the entire portfolio.

Planned turnarounds were successfully completed in Norway and Qatar. Lower 48 production was also a record, averaging 1,063,000 barrels of oil equivalent per day, including 709,000 from the Permian, 235,000 from the Eagle Ford, 104,000 from the Bakken. Lower 48 underlying production grew 8% year-on-year, with new wells online and strong well performance relative to our expectations across our asset base. Moving to cash flows. Second quarter CFO was $4.7 billion at an average WTI price of $74 per barrel. This includes APLNG distributions of $405 million. In the second quarter, we also received $200 million in proceeds, primarily related to a prior year disposition.

Second quarter capital expenditures were $2.9 billion, which included $624 million for long cycle projects. Now, through the first half, we have now funded $700 million for Port Arthur LNG of the planned $1.1 billion for the year, which we expect to lead to a step down in overall capital in the second half. We also expect to see a step down in Lower 48 capital in the second half of the year. As a result, we have narrowed our full-year capital guidance range to $10.8 billion-$11.2 billion, with no change to the midpoint. Regarding returns of capital, we returned $2.7 billion to shareholders in the second quarter. This was via $1.3 billion in share buybacks and $1.4 billion in ordinary dividends and VROC payments.

We announced a fourth quarter VROC of $0.60 per share, which has us on track to deliver our $11 billion target for total return of capital in 2023. Turning to guidance, we forecast third quarter production to be in a range of 1.78 million-1.82 million barrels of oil equivalent per day, which includes 20,000 barrels a day of planned seasonal turnarounds, primarily in Alaska and Europe. We have also increased the midpoint of our full-year production guidance. Our new full-year range is 1.8 million-1.81 million barrels of oil equivalent per day, up 15,000 barrels per day from the prior midpoint of 1.78 million-1.8 million previously.

For APLNG, we expect distributions of $400 million in the third quarter and $1.9 billion for the full year. Consistent with our higher production guidance for the year, we have raised our full-year adjusted operating cost and our DD&A guidance by $100 million each to $8.3 billion and $8.2 billion, respectively. We have also lowered our corporate cost guidance by $100 million to $800 million due to higher interest income. Finally, as a reminder, all guidance excludes any impact from announced, but not closed acquisitions such as Surmont and APLNG. To wrap up, we had another solid operational quarter. We're confident in our outlook, leading to our increase in full-year production guidance.

We continue to progress our strategic initiatives across the portfolio, and we expect to return $11 billion to shareholders this year. That concludes our prepared remarks. I'll turn it back over to the operator to start the Q&A.

Operator (participant)

Thank you. We will now begin the question-and-answer session. In the interest of time, we ask that you limit yourself to one question and one follow-up. If you have a question, please press star one, one on your touch-tone phone. If you wish to be removed from the queue, please press star one, one again. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star one, one on your touch-tone phone. Our first question comes from Neil Mehta with Goldman Sachs.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Want to build on slide 7 here on price realizations. As you mentioned, a little weaker in Lower 48 gas and Alaska. You had mentioned some of the stuff is transitory and it's moving in your direction in Q3. Can you provide a little more color there?

Bill Bullock (EVP and CFO)

Yeah, absolutely, Neil. Obviously, second quarter was a bit challenging on our capture rates, and as you noted, it's particularly Lower 48 gas and Alaska crude. I'll give you some details on each. The punchline here is that we're already seeing Lower 48 gas differentials and Alaska crude pricing returning to more normal levels in the third quarter. As I mentioned, based on strip and differentials for the rest of the year, we remain comfortable with our framework reference of $22 billion in CFO at $80 WTI and $3 Henry Hub that we provided at the beginning of the year, along with our published full-year price sensitivities. Let me, let me start with Lower 48 gas. You know, our slides show that our second quarter capture rate was 68% of Henry Hub.

That's down from 85% in the first quarter, which compares to our expectation of roughly 80% capture for the full year that we laid out 2 quarters ago. As you probably recall, I said that we expected Lower 48 capture to be volatile quarter to quarter this year, and we are certainly seeing that. The 68% rate in the second quarter was mostly driven by what we're seeing in still wide Permian differentials relative to Henry Hub for the 1st half of the year, as well as the absence of some strength in SoCal and Bakken that we saw in the first quarter, which really explains the quarter-to-quarter change. Looking at third quarter, Permian differentials have narrowed back to more normal...

ranges, that's with some pipeline takeaway improvements and additional debottlenecking ahead. SoCal is looking a bit better as well. Clearly, the story here is Permian disk. That's what matters most. On Alaska crude, this one's a bit more unique to ConocoPhillips. Capture rates slipped to 97% in the second quarter from 101% in the first quarter. That's largely timing related. With some of our second quarter cargoes, they were priced when ANS was trading at a discount to Brent. As you can see on the screen right now, ANS is back to premium to Brent, more towards historic levels.

I'd say when we look at this and pull it all together, we, we remain encouraged by our recent capture rates, and we're confident in our full year estimates and sensitivities, and we're pretty constructive on the second half of the year, Neil.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Thanks, Bill. Really appreciate that. The follow-up is a small bump here in production guide. It's been two quarters in a row where Lower 48 crude oils come in strong, above 560,000 barrels. Just curious on the driver of the bump. Was it in the Lower 48, or was it throughout the portfolio? Just your thoughts on production momentum over the course of the year.

Dominic Macklon (EVP of Strategy, Sustainability, and Technology)

Yeah, thanks, Neil. It's Dominic here. Yeah, we're, we're, we're pretty pleased with production performance. I, I think it's really across the board. We're seeing everything perform well, but certainly, it, it is a Lower 48 that, that is standing out a little bit more, and, even Nick will talk to that in a minute. You're right. Yeah, that's the second quarter that we've, we've increased in a row our, our production guidance. We're up 25,000 BOE equivalent since the beginning of the year. What's interesting, about 80% of that increase is actually oil. Our full year underlying growth is expected to be 3%-4% this year, and, and that would be 7%-8% in the Lower 48.

There is a lot of focus on product mix right now in the, in the sector, you know. Let me just say that, you know, we expect our product mix to be consistent over the year also. Those growth numbers really work on both a BOE and a barrel of oil basis. You know, we can get some noise on mix from quarter to quarter in the Lower 48, depending which particular pads are brought online across our basins, but that will average out over the year to a consistent product mix. You know, for example, if you look at our, our second half 2022, compared to first half this year, we've had very consistent product mix in Lower 48, around 54% oil. Yeah, we're pretty pleased with the production progress.

Like I said, really, the Permian and the Lower 48 is driving that. Nick, do you want to talk a little bit about that?

Nick Olds (EVP of Lower 48 and Global HSE)

Yeah. Thanks, Dominic. Good morning, Neil. Yeah, the probably two main reasons for that driver for the top end of the range on Lower 48. First, we had modest accelerations of activity, kind of late Q1 and 2Q, therefore, therefore accelerating some wells online, and then strong well performance. Now, the accelerations that I mentioned was resultant of improved drilling and completion efficiency. As I mentioned at the Analyst and Investor Meeting, we continue to realize improved efficiencies in 2023, therefore accelerating some of the wells. That's point number one. If you look at the overall strong well performance, we're seeing that across the board. We're either at the 2022 performance or exceeding our type curves in certain areas as well. That's as Dominic mentioned, very encouraging.

I will point out a couple points on the drilling and completion efficiency that's making a large difference. We continue to realize efficiency improvements, for example, in our Permian real-time drilling intelligence group, where Neil, we have 24/7 real-time monitoring, where we can optimize the rig program, we can troubleshoot across the entire Permian rig fleet, then share best practices across the rigs as well. That's resulting in 10% improvement in ROP. We continue to high-grade rigs across the Lower 48 to drive and improve operational efficiency. On the fracking side, you know, simul-frac, remote frac, and we're testing out some new technology down in Eagle Ford, continue to drive efficiency. Very encouraging.

Neil Mehta (Head of Americas Natural Resources Equity Research)

Yeah, well done. Thanks, Nick. Thanks, Dominic.

Operator (participant)

Our next question comes from the line of Stephen Richardson with Evercore ISI.

Stephen Richardson (Senior Managing Director)

Hello. Thank you. I was wondering if you could talk a little bit about the Mexico Pacific offtake agreement. Conceivably, you have a lot of looking at these types of deals, so why was this the right project for you? Also, you know, what, what do you see the path to sort of FID and timing there? Would love to hear a little bit more about that and how it fits in the broader strategy.

Ryan Lance (Chairman and CEO)

Well, maybe, Steve, I'll take some of the broader strategy, and then I'll turn it specifically over to Bill for the Saguaro project itself. As we tried to lay out a AIM, kind of looking at a high level, we think from a energy transition perspective and just a competency in what, what we're really good at on the LNG side, we wanted to expand that piece of our business. We set out a couple of years ago to go do that. I think it's consistent with the Qatari volumes, of course, getting Port Arthur to FID, and then, and now this Saguaro opportunity, specifically on the West Coast.

It's all in service to trying to build up more, a bigger LNG business inside the company and taking opportunities as they come available, both on the equity side at Port Arthur, but more importantly, on the offtake side, in trying to service some of the growing demand that we see coming out of Europe and Asia. I can have Bill can talk more specifically about the Saguaro project.

Bill Bullock (EVP and CFO)

Yeah, sure. You know, as we talked at AIM, we're, we're really focused on building up both our market and our originating highly competitive supply on a pretty stairstep basis. We're making excellent progress on, on both those fronts, Steve. As Ryan mentioned, we've secured 2.8 million tons of regas at Germany, that, that supports our 2 million ton offtake from our LNG SPAs with Qatar. That leaves 0.8 for our commercial LNG business, and putting that in perspective, that's 16% of Port Arthur LNG right there. We are continuing to make excellent progress advancing offtake into Europe, and we've been progressing discussions with several Asian buyers. I'm really happy and pleased with how we're moving forward with, with developing market.

Against that backdrop, we are pretty thrilled to be adding 2.2 million tons of offtake on the West Coast of Mexico. That's obviously pending successful FID by Mexico Pacific. You'll recall at AIM, we mentioned that we're really interested in adding West Coast LNG into our portfolio. This particular facility adds diversity to our offtake options. It avoids the Panama Canal, it, it's supportive of volumes into Asia, and from a supply pers- perspective, it really does complement our offtake from Port Arthur very nicely. It creates some excellent optimization opportunities. You probably noticed it's got strong backing from very credible counterparties in addition to ConocoPhillips, and it supports a dedicated pipeline from the Permian. That, that's always appreciated, provides further off-- takeaway optionality from the basin, which I think is helpful for Waha pricing.

It also is using ConocoPhillips optimized cascade technology. There's quite a few reasons why we like having capacity at Saguaro. Now, note that it is an offtake agreement. There is not an equity component to this one. It is simply offtake. I think the most important point that Ryan's already mentioned is we continue to see really strong demand for LNG, and so this fits quite nicely as we're kind of laddering our, our build-out of market and supply.

Stephen Richardson (Senior Managing Director)

That's great color, Bill and Ryan, thank you. Bill, I was wondering if we could just follow up quickly on Surmont. You know, it's been a little while since you exercised, but wondering if you could give us your latest thoughts on funding of that transaction and, and how you're thinking about it.

Bill Bullock (EVP and CFO)

Yeah, I'm happy to. Let me just start with some overall context of how we're thinking about our cash balances and the acquisition of the additional 50% interest. You know, we ended the second quarter with a little over $7 billion of cash and short-term investments. As we talked at AIM, that really provides strategic flexibility, and it supports our investments in these mid and longer cycle projects and our shareholder distribution commitments. When we look forward at the current strip, we expect that our organic sources and uses for the remainder of the year are gonna be pretty balanced, Steve, and that our ending cash, absent Surmont, would be flattish with what we're seeing right now. As Ryan mentioned, Surmont is a long-life asset.

It's got a really great resource base, and it's one of these ideal assets to think about funding with debt. Because of its long dated cash flows, you can match your assets and your liabilities pretty well with something like this. For the Surmont transaction specifically, and it's a bit tactical, but it's likely that we will use debt for a majority of the funding for Surmont. Then I just wrap up by pointing out, you know, Ryan said in his remarks that the pricing that we're seeing right now, we see strong incremental CFO from that 50% increase in working interest of Surmont. That's starting to approach $1 billion of incremental CFO next year at $80. We're quite happy with the Surmont acquisition and quite comfortable with our funding plans.

Stephen Richardson (Senior Managing Director)

That's great. Thanks very much.

Operator (participant)

Our next question comes from the line of Doug Leggate with Bank of America.

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

Before for getting me on. Dom, I, I wonder if this is probably for you. I want to follow up on the question about well performance, productivity, the terrific, you know, production performance, the raise that you've introduced today. I want to ask it a slightly different way. Your partner in the Permian, specific to the Permian, I should say, has been talking about, I don't want to call it some magic, you know, magic formula or sauce or whatever, but their well productivity is off the charts, and you obviously are a big beneficiary of that.

I'm wondering if you can comment as to whether there's any osmosis towards Conoco's operated production, and if you could maybe contrast and compare any differences you see between your 60% ownership position in the JV and your legacy position in the operated area around the contour assets?

Nick Olds (EVP of Lower 48 and Global HSE)

Yeah, Doug, this is Nick. I'll, I'll take a stab. I think you're, you're looking at the non-operated versus operated split. Is that where you're going with-?

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

Basically, yeah. Yeah, that-- exactly right.

Nick Olds (EVP of Lower 48 and Global HSE)

Yeah. If you just take a look at that second quarter, top end of the range performance from Lower 48, as I mentioned, we had strong performance both on accelerating the wells, but also strong well performance. That's roughly split between operated and non-operated. Obviously, when you look out in the Delaware, OXY has a large component, but we have a number of other JV partners that are contributing to that as well. OXY has a big component.

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

Nick, would you say there's notable difference between the productivity in the JV and your legacy assets, or no?

Nick Olds (EVP of Lower 48 and Global HSE)

You know, we, we constantly, Doug, look at all benchmarking. We, we receive the, the ballots from our, on our non-operated positions. We evaluate, it has to meet our cost of supply framework. I'd say in general, we're fairly aligned. There's always a little bit of difference in spacing and stacking and completion design, but we're roughly in, in, in line. Obviously, the positions that we have in the operated position, is really in the core, you know, less than 12 billion barrels, of, of resource, less than 40, averaging 32. We got great legacy positions out in the Delaware.

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

Great. Thank you for that. Ryan, my follow-up is probably for, for you. You're adding $1 billion of cash flow from Surmont, you know, fantastic deal for you guys. Again, congratulations on that. You've evolved the LNG portfolio even since the Analyst Day, yet we still have one of the lowest ordinary dividend yields in the sector that you can clearly cover at very, very low oil prices. I'm just wondering if I could ask you again to share your thoughts on whether some of that, you know, increase in free cash power of the portfolio translates to a more ratable or a higher ordinary dividend, which frankly, we think you get better recognition for.

Ryan Lance (Chairman and CEO)

No, thanks, Doug. You've been, you've been a consistent messenger on this particular point.

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

Sorry. Predictable.

Ryan Lance (Chairman and CEO)

I give, give you, give you credit for your tenacity, that's for sure. Look, yeah, we recognize that we're, we're acquiring some assets that got significant free cash flow potential at, you know, $60-$80, even, even at our mid-cycle price. I guess the thing I'd say first and foremost, Doug, is, you know, you shouldn't question ConocoPhillips's commitment to giving a significant amount of our cash flow back to our shareholders. You know, the last 6, 7 years, we've averaged, you know, 45%. This year, depending on your outlook for prices, we're probably closer to 50%. First and foremost, we're gonna be competitive on giving a significant amount of our cash back to our shareholders. Again, that's CFO, not free cash flow.

Now, to your point, even at a constant price, you know, we're gonna be generating more, more free cash flow as we come out of the APLNG and Surmont activity. Our framework really hasn't changed. Look, what we want on the base dividend is something that is, that we said we see a lot of value in being able to grow that at a top quartile rate over time, over the long term, and we intend to go do that. We set our framework around a mid-cycle price, and you may differ or argue with our mid-cycle price, but we try to set a framework around a mid-cycle price.

We wanna buy some of our shares back through the cycles, so we don't get caught pro-cyclically, and then we introduce that third tier of VROC to address when prices are well above mid-cycle, and you'd argue $80 is well above mid-cycle. you know, I think our cash yield is competitive. I think your point is, you know, we may get more credit if we put a lot more into the base dividend. We just think that growing the base dividend at a top-tier amount annually gives us a lot of credit as well and doesn't obviously raise the fixed cost of the company. The improvements are, we, we can afford a bit more, but we're focused on sort of the framework that we outlined and watching pretty volatile commodity prices.

You know, I just remind people, just one month ago, WTI was back in the 1960s. you know, we're trying to set a framework that we know works through the mid-cycle, and we set a framework that rewards the shareholders and recognizes the torque that the company has to the upside when prices are much higher. We like the three-tiered framework. We'll look at it again as we finish this year and go into 2024. We'll look at where our shares are trading. We'll look at where the commodity prices are at, and we'll try to set the channels appropriately. you can count on us delivering a significant amount of our cash flow back to our shareholders, as we've done over the last, you know, six, seven years.

Doug Leggate (ManagingDirector and Head of U.S. Oil and Gas)

I appreciate your patience with my question again. Thanks, Ryan.

Ryan Lance (Chairman and CEO)

Yeah, thanks, Doug.

Operator (participant)

Our next question comes from the line of Sam Margolin with Wolfe Research. Sam, your line is now open.

Sam Margolin (Managing Director and Senior Equity Research Analyst)

Hi, thanks so much. First, apologies if this is a little early, but I wanna ask about 2024 capital, if I can, and, and maybe focus on Willow. There, there should be a natural tailwind in capital because the, the step up in Willow is less than the Port Arthur payment. But I just wanted to see if there's anything we should know about project life cycle at Willow that, that creates a different shape of spend over, over the development for 2024. Thank you.

Dominic Macklon (EVP of Strategy, Sustainability, and Technology)

Yeah, thanks, Sam. It's Dominic here. You know, it's, it is, it is a bit early for us to be talking about 2024, but, you know, there, there hasn't really been any change since to the long-term framework we've had and what we talked about at AIM back in April. You know, we, we showed there an expected capital range, depending on how oil prices and inflation was trending. You know, given that the WTI is back to around $80, and the forward curve is about there, as we have been anticipating, frankly, we'd expect to be at the higher end of that range that we talked about back in, back in April. A similar capital level for next year to this year. You know, I think one other dimension I'll talk about is.

You know, how, how much growth in the Lower 48? What amount of growth do we need as a company? Do we want? Well, that's always an outcome of a plan. We're always focused on returns, of course, returns on and off capital. One of the things we're looking at next year is, you know, do we keep Lower 48 relatively flat? It's performing very well this year, or do we add a little bit of activity? That's one of the things we're thinking about. In terms of the longer, the longer cycle capital, yes, you know, LNG spend is, will be rolling off from this year over the next few years, just as Willow picks up. We expect our longer cycle capital to average around $2 billion, pretty flat for the next few years here.

So, you know, that would probably give you the pointers, in terms of the general direction for next year. It's, like I say, it's, it's pretty early, but that, that gives you a, a good sense of where we, where, where our heads are at on that, so.

Sam Margolin (Managing Director and Senior Equity Research Analyst)

Understood. Thanks. This is a, a follow-up on your point on Lower 48, and particularly sort of the phasing of your development. Because now with Mexico Pacific and Port Arthur, you've got quite a bit of evacuation from, from North America for gas. You know, it integrates with your marketing team and, and through the supply agreement, which you talked about at the AIM. I wonder if, if, you know, thinking about those projects and their impact on, you know, maybe even NPV of some of your Permian positions, with respect to realizations, is, is a factor or if, or if these are evaluated for you totally separately? Thanks.

Dominic Macklon (EVP of Strategy, Sustainability, and Technology)

Yeah, I mean, we, you know, we don't really relate those investments specifically, indirectly, but it's obviously all helpful in terms of demand for North American gas. That's in our minds, certainly as we think about the overall value equation of LNG in North America.

Sam Margolin (Managing Director and Senior Equity Research Analyst)

Got it. Thank you.

Operator (participant)

Our next question comes from the line of Devin McDermott with Morgan Stanley.

Devin McDermott (Managing Director of Research)

Hey, thanks for taking my question. I wanted to, to build on, on what Sam was asking about, and some of the comments you made just on inflation or deflation trends. You had some benchmarks baked into the multiyear guidance at the investor meeting earlier this year. We've seen some signs of, of deflation in U.S. shale and, and some still rising costs in other pockets internationally. On a net basis across your portfolio, I was wondering if you could talk a little bit about the trends you're seeing here in the back half of 2023, and then how that plays into the 2024 outlook, to the extent you can comment.

Dominic Macklon (EVP of Strategy, Sustainability, and Technology)

Yeah, thanks, Devin. Dominic again here. Yeah, obviously something we're watching incredibly closely with everybody else in the industry. I think, we are seeing some areas of deflation in the Lower 48 going in the second half. I, I would say, however, we still expect our overall company capital inflation to average out in the mid-single digits this year versus last year on an annual basis. Just to talk a little bit about what we're seeing, I mean, certainly, I think as we've said before, tubulars, we've seen some significant price relief on any oil price-related commodities, fuel and chemicals and things. We've seen some material reductions in sand and proppant. Rig rates have softened a bit, and that's obviously driven by the gas basin. You're starting to see some high-performance rigs come in and compete with the, the oil, the oilier basin.

That, that is, we are seeing some day rates come, come down there. I would say, I think, we are beginning to see some examples of frac spread rates coming down in some basins. That's all, that's all looking positive. Activity internationally and offshore is picking up. It's probably as high as it's been for many years. We are seeing some, some pressure on labor rates there, so we're watching that. Overall, certainly seeing some deflation going into the second half. You know, and that's a big part of the reason we see a lower capital run rate for the second half, for the, for the first half. That-that's an important part of it.

That's all reflected in our annual capital guidance that we have narrowed to $10.8 billion-$11.2 billion, $11 billion still our midpoint. Certainly we're seeing turning the corner here with inflation and moving into deflation again.

Devin McDermott (Managing Director of Research)

Great. Thanks. Then I wanted to separately come back to the LNG strategy. One of the other opportunities that you had talked about at the investor meeting was brownfield expansion at Port Arthur, and we've seen with some other U.S. Gulf Coast projects, very compelling economics on the additional trains that can get added. Can you just talk a little bit about how you're thinking about the commercialization process there and Conoco's appetite for taking further offtake off of further expansion at that facility?

Bill Bullock (EVP and CFO)

Yeah, this is Bill. We talked about this a bit at AIM. As we think about Port Arthur LNG, we're pretty happy with the level of equity that we have right now in the project. You know, when we took equity, that, that had some pretty unique reasons for taking it, for the options that we secured there. As we look forward, it, it would have to make... there'd have to be some pretty unique reasons why we take additional equity. Now, as I, as we have mentioned, that our agreements are structured for future phases, continue to benefit our investment in the first phase. So we're pretty, pretty positive on that. As you know, we've got some predefined options on that. We're certainly evaluating options.

I, I think that you, you should kind of have in your mind that we're not expecting to spend additional capital there at this point in time.

Devin McDermott (Managing Director of Research)

Great. Thank you.

Operator (participant)

Our next question comes from the line of John Royall with JP Morgan.

John Royall (Executive Director of Equity Research)

Yep. Well, thanks for taking my question. Can you hear me?

Ryan Lance (Chairman and CEO)

Yes, we can.

John Royall (Executive Director of Equity Research)

Okay, sorry. Yeah, it looks like the tax rate on your corporate segment earnings took a big step up in Q2. I was just hoping you could speak to the tax rate on corporate, and then I think it impacted just the overall blended rate, you know, stepped down a bit in Q2. Just maybe a little bit of color on that as well will be helpful, and just what we should expect moving forward with the tax rate.

Bill Bullock (EVP and CFO)

Yeah, this is Bill. This is really just a pre-tax income mix story. You know, our estimated annualized effective tax rate has moved down to 35% for the year. That compares to last time I provided guidance to you all of mid- to upper 30s when we talked sometime last year on our effective tax rates. This reflects a shift in the mix of our forecast annual pre-tax income from some higher tax jurisdictions to lower tax jurisdictions. It's really largely driven by Norway, given the reduction that we've seen recently in EU gas prices relative to last year. Obviously, these tax rate changes, they create some quarterly noise as they flow through, as a non-cash catch-up adjustment when they happen.

That's why you see our second quarter tax rate was 33.6% versus first quarter of 36%. That puts our year to date right at this 35% level, matching our current expectation of full year. Now, that non-cash adjustment, that's gonna flow through the corporate and other segments. You can see that on our supplementary disclosures. You can see it's a $200 million positive swing quarter on quarter in that corporate segment. Now, so that's pretty straightforward. It's really just a mixed story. Now, when you think about deferred tax, the positive tailwind that you saw on the cash flow statements quarter on quarter was a bit lower. That was because of the income statement adjustment I just talked about.

The bottom line is, for the second half of the year, 35% annualized effective tax rate is a reasonable run rate for book tax at our current commodity prices. The deferred tax tailwind of about $200 million for the second quarter, that's also a good run rate for the remainder of the year. Now, obviously, that can move around a lot if there's some discrete items that come up, and as you know, they often do, but it's a pretty good run rate at this point in time.

John Royall (Executive Director of Equity Research)

Great. That's, that's really helpful. Thanks, Bill. My next question is on Bakken production. You were up well over 100 kbd in Q2. What was the driver of the strength there, and should we be thinking about Bakken as plateauing, you know, somewhere above that kind of mid to high 90s that we used to think about, or is there any stickiness to the strength in Q2?

Nick Olds (EVP of Lower 48 and Global HSE)

Yeah, John, this is Nick. You look at our operational performance from the rigs and frac crew that we have in Bakken, just performing extremely strong. Like other assets in the portfolio, you're gonna see a little bit of lumpiness, you know, from quarter to quarter. You can think of Bakken at plateau. You know, 100,000 barrels a day for several years is a good number. I would refer you to the AIM presentation, where we talked about Eagle Ford and Bakken, you know, essentially sustaining production for 330,000 through the decade. That'll give you a good long-term view. We like the asset, it's competitive, low cost of supply, and we continue to find opportunities and looking to increase the overall inventory in that asset.

John Royall (Executive Director of Equity Research)

Thank you.

Operator (participant)

Our next question comes from the line of Roger Read with Wells Fargo.

Roger Read (Managing Director and Senior Energy Analyst)

It broke off, but I'll assume I'm the only Roger on the call. Good morning, guys.

Ryan Lance (Chairman and CEO)

Morning, Roger.

Roger Read (Managing Director and Senior Energy Analyst)

Anyway, I just wanted to come back around. You know, you've had some opportunities here on the investment and the acquisition front with Surmont and the deal here in Mexico. I was just sort of curious, as you look at, let's call it the M&A opportunity versus the organic opportunity, what, how are you comparing those two? How are the, the opportunities looking on those? Thinking returns, right, where, where to put your incremental dollar.

Ryan Lance (Chairman and CEO)

Yeah. Right now, I think, we're, we're pretty focused on the organic side, Roger. You know, the just because the resource base right now and the stuff that we're executing has got pretty compelling opportunity for the company to focus most of their opport... You know, most of our capital and our allocation towards our organic side of, of the business. When it's performing as well as it is, we're delivering the efficiencies that Nick talked about in the Lower 48, and what Andy's delivering around the rest of the world. You know, that just looks to be compelling opportunities for the company.

You know, with that said, you gotta, you, you hang around the hoop, you know, and you, you catch these rebounds a little bit because, you know, we never know when our partners in some of these assets make different strategic decisions, which is clearly what our partner in APLNG has done or is doing, and what's clearly what our partner at Surmont has done and is doing. We know these assets really well, and we've tried to we're consistent in the framework around cost of supply that we described to you a number of years ago, of how we kind of match up inorganic opportunities with organic opportunities.

That's why we wanna have the financial strength that we do with cash on the balance sheet and the ability to fund these projects when they, when they come available. You just never know when your partner makes the kind of decisions that they have made. When we know the assets well, and we can get it for a deal that's very competitive, as you, as you talked about in, vis-a-vis Surmont.

and APLNG, for that matter, you know, we're gonna be all over those when, when those opportunities present themselves. We never quite know when they do, but so we're mostly focused on the organic side of the portfolio, but we want to have the firepower and be there, and we watch everything. We, we pay attention to everything that's going on in the market. We know what we like, and we know what we can afford to pay, more importantly. When, when we can, we can bring those two together, we want to be able to execute those when, when those opportunities present themselves. It was really opportunistic with both APLNG and Surmont.

We, we had partners that made strategic decisions to go in a different direction, and that was to our advantage, so we want to take advantage of that.

Roger Read (Managing Director and Senior Energy Analyst)

Absolutely. Thanks for that. Then just as a follow-up question on the agreement to go the LNG route on the West Coast of Mexico, what is the situation with takeaway capacity to get there, presumably from the Permian? Just, you know, what pipelines or what pipelines might need to be constructed in order to make this project or bring it to fruition?

Bill Bullock (EVP and CFO)

Yeah, Roger, this is Bill. So two points. First up, the 2.2 million tons from Saguaro is an offtake agreement. It's not an equity investment. I just think it's important to make sure that's clear. For the specific question about the pipelines, I really direct you to the operator, Mexico Pacific, for a detailed answer. They've had several press releases out, including one in July, that announced a 20-year agreement with CFE. That's the Federal Electricity Commission, in Mexico, to supply Mexico Pacific with natural gas delivered from the Permian Basin, via CFE's pipelines in Mexico. The best source of information for you on that. You know, that takeaway from the Permian is helpful for Waha differentials and pricing overall.

Roger Read (Managing Director and Senior Energy Analyst)

Okay, thank you.

Operator (participant)

Our next question comes from the line of Ryan Todd with Piper Sandler. Ryan, your line is now open.

Ryan Todd (Managing Director and Senior Research Analyst)

Oh, sorry, I cut out there for a second and missed it. Maybe 1, 1 follow-up question on, on the Saguaro LNG offtake, or at least a, a broader question on offtake agreements. You know, you, you've, you've got that offtake agreement now, you've got the 5 million tons from Port Arthur. Is there when you look at your interest in offtake agreements in LNG, is there a relative size in terms of how much feels appropriate in the portfolio relative to equity gas production, either on a global basis or, in the U.S., relative to kind of U.S. gas versus offtake agreements? How are you thinking about, you know, partially, which is, should we expect to see you look at additional offtake agreements, or do you feel like you've got a pretty good balance at this point in the portfolio?

Bill Bullock (EVP and CFO)

Yeah, that's a really interesting question. As we, we've laid out, we, we think about this as building up in kind of a ladder fashion. You have to have the market placement with the LNG offtake that, that you secure. We feel very comfortable with where we're at in that progress, even just since AIM in April. That's why you're seeing us being pretty confident with our West Coast volumes here. You should expect that to kind of develop as a ladder, so you don't get out ahead of your skis. We do see pretty strong demand on that. I think, you know, we're, we're getting pretty close to critical mass here over time. I think we're pretty comfortable with where we're at right now.

We're continuing to look for, capacity on the, the West Coast, but a lot of those things are more longer dated out in time right now.

Ryan Todd (Managing Director and Senior Research Analyst)

Great. Thank you. Then maybe, I, and I apologize, I'm not sure if you said something, I missed or I missed the first minute of the prepared comments. Any, any comments on like, the latest update on Alaska, particularly regarding any outstanding legal or permitting issues that would dictate time in there at Willow?

Andrew O'Brien (SVP of Global Operations)

Yeah. Hi, this is Andy. Yeah, so for Alaska, you know, on the, on the, on the legal front, you know, as you recall, we had the two lawsuits that were challenging the federal government's approval for the project. Probably the, the, the main update since we last spoke is we're pleased that a schedule's been agreed now, and we expect to see a ruling on that in November. As we previously communicated that, you know, given the prior rulings on this, the scope of what's being challenged is narrow, and we believe that the, you know, the BLM, the cooperating agencies, conducted a thorough process, and, you know, satisfied all the legal requirements. We're kind of very much now looking forward for the court's ruling in November as we start to plan for our 2024 winter season.

Ryan Todd (Managing Director and Senior Research Analyst)

Okay, thank you.

Operator (participant)

Our next question comes from the line of Lloyd Byrne with Jefferies.

Lloyd Byrne (Managing Director)

Hey, thanks for squeezing me in. I just have a couple quick questions on long cycle development and then deflation comments and whether maybe you could take that to Willow. You FID-ed what seemed like peak inflation and then some important costs have come down. Wondering whether you have a cost update there, or I guess, whether you expect costs to come down. I understand it's a 6-year project, but...

Andrew O'Brien (SVP of Global Operations)

Hey, Lloyd, this is Andy again. you know, Willow, Willow is a longer-term project. It is a little hard to comment on sort of deflation and inflation, you know, through 2029. I guess it is important just to frame, you know, Willow is not a turnkey contract. As we are entering into individual contracts, those contracts do have terms linked to agreed indices that can move up and down with inflation. Probably just a couple of other things I'd mention is that we haven't seen the same kind of inflation in Alaska as we've seen in the Lower 48 over the last couple of years. As we said in AIM, you know, and I think in terms of the capital range, that still holds.

We expect the capital range to be in the $7 billion-$7.5 billion. That, that really hasn't changed, you know, from the CapEx to first production. It's probably just also worth emphasizing, you know, like all of our projects, Willow has got some inflation factored into those estimates. You know, we understand the project really well. This kind of activity is the, is sort of. A lot of this is sort of typical activity we do in Alaska, and we haven't seen, you know, the same kind of inflation that we have in the Lower 48. I think the $7 billion-$7.5 billion that we provided at AIM is still a good, a good estimate of what our thinking is in terms of the CapEx to first production.

Lloyd Byrne (Managing Director)

Okay, great. Let me just go back to Surmont. I know you've answered a few questions on it, but it, it kind of fell into your laps. Whether the exercise of the offer changes any strategic capital decisions elsewhere in the portfolio, it feels like it gives you a lot of flexibility going forward, but I was just wondering if it changes the timing on any other projects? I was thinking Montney or anything like that.

Andrew O'Brien (SVP of Global Operations)

You know, you know, as you said, Surmont, one of the things that we really like about Surmont is it's a low, it's a low capital intensity asset. You know, it really doesn't change that much in terms of allocating capital to other projects. You know, it's just providing us, you know, a lot more, cash flow. I think, you know, the plan we outlined at AIM, I know it doesn't really change how we, how we consider the other projects. You know, we have the, we have the benefit of, another long cycle asset with low capital intensity.

Lloyd Byrne (Managing Director)

Great. Thank you, guys.

Operator (participant)

Our next question comes from the line of Alastair Syme with Citi.

Alastair Syme (Managing Director)

Thanks very much. I, I wonder if... Sorry, back on LNG again. I, I just wonder if you could talk about, you know, the, the three opportunities you've taken on in the last 12, 18 months, about how they compare on a cost of supply basis, you know, once you've put together costs and fiscal, how it all comes together? Thank you.

Bill Bullock (EVP and CFO)

Yeah, sure.

Andrew O'Brien (SVP of Global Operations)

Go ahead, Bill.

Bill Bullock (EVP and CFO)

Yeah, sure. If you, if you look at the projects that we've picked up, so in Qatar, those are really nice projects that we've pursued for a long period of time. Those compete very well on our cost of supply. We're quite happy with those. Port Arthur, we've talked about pretty extensively. We've talked about how Port Arthur on an integrated basis, that we'd expect low to mid-teens returns overall, but with really steady cash flow and low-risk returns on that equity component. Then Saguaro is not an equity investment.

Alastair Syme (Managing Director)

Although there's still an inherent cost of supply associated with it, isn't it, in terms of how you're thinking about the market position?

Bill Bullock (EVP and CFO)

Yeah, sure. You know, that, that, that comes down to what your cost is applying to your portfolio. We think that Saguaro is quite competitive because it's on the West Coast, particularly when you compare that to Gulf Coast LNG, because you're on the other side of the Panama Canal. It's, it's a quite, quite competitive supply location for deliveries, particularly into Asia, and fits very nice in terms of if you think of, of an acquisition cost for LNG. It's very competitive.

Alastair Syme (Managing Director)

Okay. Thank you.

Ryan Lance (Chairman and CEO)

Yeah, we look at the liquefaction fee, and our reason for choosing Port Arthur and, and obviously, MPL is what we believe is a, you know, very, very competitive liquefaction fee. Avoiding some of the costs through the Panama Canal then places it in a, in a premium to Asian buyers.

Alastair Syme (Managing Director)

Okay. Thank you. My follow-up, but probably, to Dominic, I, I think you hinted the question on 2024 CapEx, that you're sort of evaluating Lower 48 activity levels. I, I was just sort of wondering what is sitting behind that. Is, is it something about taking advantage of the deflation you're seeing, or is it related to what you're seeing on well productivity?

Dominic Macklon (EVP of Strategy, Sustainability, and Technology)

Yeah, I mean, it's really, you know, looking at the performance of Lower 48 this year, I mean, it's doing very well. We've got a very efficient machine running. As we think about returns, we think about the growth that we are likely to see from the Lower 48, even at relatively flat levels. You know, we, we, we will see growth, we anticipate even at, even at maintaining flat activity levels. We're just looking overall and saying, looking at the macro and so on, and just saying, how much growth do we think is appropriate? That's just something that we're considering. We haven't made any decisions on that yet. Yeah, it's just a case of fine-tuning that as we think about 2024.

Alastair Syme (Managing Director)

Brilliant. Thanks for the answers, everyone.

Operator (participant)

Operator, we have time for one more question. This question comes from the line of Josh Silverstein with UBS.

Josh Silverstein (Managing Director)

Hey, morning, guys. In Mexico as well, you guys have the option and, and offtake and, I think, potential equity agreement at Costa Azul as well. What are the key differences between the two projects and why, you know, the first one with Mexico Pacific versus the Costa Azul project?

Bill Bullock (EVP and CFO)

Yeah, I think the, the key difference is a timing issue right now. The Mexico Pacific is available right now. It's, it's getting ready to take FID. It's in a good location, with a very competitive tariff. Even as we're marking today, that, that would be accretive, but in the money based on, on the tariff rates that we're looking at. We do have options for ECA, Energía Costa Azul, on the West Coast through, through our interest in Port Arthur Phase One, but that, that, that's more longer dated. That, that project is not yet ready to consider taking FID, and there's a bit of time to go on it. It's a timing issue, when they'd start up.

Josh Silverstein (Managing Director)

Got it.

Bill Bullock (EVP and CFO)

We continue to hold that option for, for West Coast.

Josh Silverstein (Managing Director)

Got it. Then as, as you guys are putting together your, your portfolio, are you trying to optimize the exposure you have to both the Atlantic and Pacific basins? Maybe, you know, discuss some of, like, the, the key differences you see or, or risks you see between both sides. Thanks.

Bill Bullock (EVP and CFO)

Certainly as we put the portfolio together, we're looking at a diversified portfolio of offtake. You know, we, we are actively developing placement into Europe. We're developing long-term delivered opportunities into Asia, and we're considering some sales FOB at the facilities that are in the money right now. We also are thinking about these in a time horizon basis with a mix of shorter and longer term dates as a portfolio, and we'll be using our commercial organization to optimize across that value chain. Yes, we, we are looking at actively building out both European and Asian market and doing that through a variety of formats and time horizons.

Josh Silverstein (Managing Director)

Great. Thanks.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.