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    Conocophillips (COP)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$124.34Last close (May 1, 2024)
    Post-Earnings Price$124.72Open (May 2, 2024)
    Price Change
    $0.38(+0.31%)

    What went well

    • ConocoPhillips is strategically expanding its LNG portfolio, securing approximately 7.4 million tonnes per annum (MTPA) of offtake capacity, pending FID at Saguaro LNG, and increasing regasification capacity in Europe to 4.5 MTPA, positioning itself to benefit from global LNG market growth.
    • Significant capital efficiency improvements in the Permian Basin are being achieved through drilling longer laterals, leading to 30% to 40% reductions in cost of supply, and the implementation of advanced technologies is enhancing operational performance.
    • Successful progress on the Willow project in Alaska, with the completion of the first major winter construction season and module fabrication on schedule, keeps the project on track, supporting future production growth and long-term plans.

    What went wrong

    • ConocoPhillips expects particularly low natural gas realizations in the Permian Basin in the second quarter of 2024 due to ongoing pressures on Waha gas prices, which could negatively impact near-term cash flows.
    • The company is not making any capital allocation changes in response to low natural gas prices, potentially resulting in continued exposure to depressed gas markets and affecting profitability.
    • There are timing delays in capital projects, such as shifting of Willow capital expenditures from the first quarter into April, and significant planned maintenance in the third quarter (90,000 barrels per day of turnarounds), which could impact production and financial results.

    Q&A Summary

    1. Return of Capital Strategy
      Q: How do you view return of capital amid volatility?
      A: Despite volatile oil and gas prices, ConocoPhillips plans to return at least $9 billion to shareholders this year, reflecting confidence in their balance sheet and cash flow generation. They are monitoring the market but expect to return well above 30% of cash flow, consistent with previous years.

    2. Global LNG Market Outlook
      Q: What's your view on the global LNG market?
      A: ConocoPhillips is expanding its LNG business, with 7.4 MTPA of offtake capacity in North America, including interests in Port Arthur LNG and Saguaro LNG. They aim for 10-15 MTPA of LNG offtake capacity to leverage scale and benefit from favorable pricing arbitrage. They remain interested in further opportunities, including potential expansions in Qatar.

    3. Impact of Low Gas Prices on Capital Program
      Q: Are low gas prices affecting your capital plans?
      A: Low gas prices are not causing ConocoPhillips to alter their capital allocation decisions. Their activities are driven by liquids production, and they are maintaining their current capital program despite gas price volatility.

    4. Portfolio Optimization and Potential Citgo Bid
      Q: Are you considering acquiring Citgo assets or selling LNG equity?
      A: ConocoPhillips is monitoring the Citgo process as a creditor but doesn't intend to become an integrated refiner. Regarding LNG, they are open to adjusting their equity in projects like Port Arthur LNG if opportunities arise.

    5. Permian Gas Strategy and Differentials
      Q: How are you managing Permian gas and differentials?
      A: ConocoPhillips proactively secures transport capacity to multiple markets, including the Gulf and West Coast. They expect Permian gas realizations to be low in the second quarter due to market volatility but anticipate normalization as new takeaway capacity comes online later in the year.

    6. Lower 48 Activity Outlook
      Q: What's the outlook for Lower 48 activity?
      A: The first quarter was affected by weather, but excluding that, there was about 3% year-over-year growth. Production is expected to progressively increase throughout the year, with larger pad projects and longer laterals coming online in the second half.

    7. Permian Efficiency Gains and Longer Laterals
      Q: How are efficiency gains in the Permian affecting you?
      A: ConocoPhillips is focusing on longer laterals, with 80% of laterals being 1.5 miles or greater and 20% being 3-mile laterals in 2024. Longer laterals improve cost of supply by 30-40%. Operational efficiencies in drilling and completions are enhancing capital efficiency.

    8. Willow Project Progress
      Q: What's the progress on the Willow project in Alaska?
      A: They successfully completed the first winter construction season, building 7 miles of gravel road and 30 acres of gravel pads. Module fabrication is progressing well, and they remain on schedule and budget, expecting to keep total capital to first production in the $7 to $7.5 billion range.

    9. Use of AI in Operations
      Q: How is AI impacting your operations?
      A: ConocoPhillips believes AI will revolutionize the industry by accelerating learning curves and improving efficiency across technical, operational, and back-office functions. They are focused on integrating AI and digital technologies to enhance their business.

    10. Surmont Pad 267 Performance
      Q: How is Pad 267 at Surmont performing?
      A: Pad 267 achieved first oil in December and is ramping up steadily. Production in the first quarter was up 3 MBOE per day, offsetting decline. The pad is performing well, and they plan to add a new pad every 12 to 18 months.

    11. First Quarter Capex Under-spend and Outlook
      Q: Why was first quarter capex lower than expected?
      A: Capital expenditure in the first quarter was $2.9 billion, slightly below guidance due to timing shifts in Willow project spending into April. Second quarter capital is expected to be slightly higher due to Port Arthur LNG and Willow timing, but overall capital spending will be lower in the second half.

    12. Eagle Ford Production Outlook
      Q: What is the outlook for Eagle Ford production?
      A: Following a frac holiday in the second half of 2023, ConocoPhillips expects higher production in the second quarter as wells come online. They anticipate low single-digit growth of 2-4% for the year, consistent with their guidance.

    13. Permian Differentials and Marketing
      Q: Can you improve Permian differentials through marketing?
      A: While differentials are currently pressured due to transitory issues, ConocoPhillips expects improvement with new takeaway capacity like the Matterhorn pipeline. Their sophisticated marketing operations and flow assurance capabilities help optimize realizations.

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