Q2 2024 Earnings Summary
- Strong progress in LNG strategy, securing additional long-term agreements, increasing total LNG placement to 6 million tons per annum from previous 4.5 MTPA, with a target of 10-15 MTPA in the coming years.
- Robust production growth in key areas: Eagle Ford production increased to 238,000 boe/d in Q2 from 197,000 boe/d in Q1 due to reinstating a frac crew and strong well performance; Montney production averaged 43,000 boe/d, more than double compared to the same quarter last year, continuing to modestly grow production throughout 2024.
- Significant shareholder returns, with commitment to distribute at least $9 billion to shareholders in 2024, increasing annualized buyback run rate by $2 billion upon closing the Marathon transaction, leading to total annualized distributions above $11 billion; confident in achieving $500 million synergy run rate within a year of closing the acquisition.
- Increased operating costs and higher capital expenditures: ConocoPhillips has raised its full-year operating cost guidance to $9.2 billion to $9.3 billion, primarily due to higher transportation and processing costs, increased utilities, and additional workover activity. The company also moved its capital expenditure guidance to the upper end of the range at $11.5 billion, driven by higher spending on the Willow project and increased partner-operated activities.
- Regulatory delays impacting LNG projects: The company's Saguaro LNG project (MPL) is experiencing delays due to regulatory hurdles, including a pause in LNG permitting, which is impacting the project's final investment decision (FID) timing.
- Lower gas price realizations in the Permian due to infrastructure constraints: In the second quarter, ConocoPhillips' Lower 48 gas realizations were under 20% of Henry Hub, impacted by negative Waha pricing due to constrained takeaway capacity in the Permian Basin. The company expects this trend to continue into the third quarter until new pipeline capacity becomes available.
-
Share Repurchase Strategy
Q: What's the outlook on share buybacks and capital returns?
A: Management is confident in distributing at least $9 billion to shareholders this year. Due to restrictions from the Marathon transaction, buybacks were paused since May but will resume after the shareholder vote on August 29. They plan to lean into buybacks in the second half, expecting at least $3 billion in Q3 and Q4, aiming to retire about 5% of shares annually. -
Dividend Increase and Marathon Synergies
Q: How will the Marathon acquisition's tax benefits and synergies impact value?
A: The Marathon deal brings $2.8 billion in net operating losses (NOLs) with a tax-affected value of about $600 million, which ConocoPhillips expects to utilize within three years. While NOLs are not counted as synergies, they provide real value. Management is confident in achieving a $500 million synergy run rate within a year of closing, with upside potential. -
CapEx Guidance and Willow Project
Q: Why is CapEx moving to the upper end of guidance, and how is Willow progressing?
A: CapEx is now expected to be about $11.5 billion for the year, reaching the high end due to strong progress on the Willow project and increased non-operated activity in the Lower 48. Willow's 2024 spend is estimated at $1.5 to $1.7 billion, reflecting accelerated execution and early milestone achievements. The project remains on track for 2029 first oil. -
LNG Strategy Expansion
Q: Can you update us on LNG agreements and market outlook?
A: ConocoPhillips secured 0.75 MTPA of regas capacity at Zeebrugge, Belgium, and signed a long-term sales contract with an Asian buyer for 0.5 MTPA, increasing total LNG capacity to 6 MTPA. They remain constructive on LNG demand in Europe and Asia and aim for 10 to 15 MTPA to achieve full benefits of scale. -
Operating Cost Increase
Q: What's driving the rise in operating expenses?
A: Full-year operating cost guidance increased to $9.2 to $9.3 billion, mainly due to higher non-operated activity in the Lower 48 and increased lifting costs. Factors include higher transportation and processing costs, utilities, and additional workover activity. -
Service Cost Deflation
Q: How are service costs trending, and what does it mean for CapEx?
A: The Lower 48 is experiencing deflation, particularly in pumping services and proppant prices due to oversupply in the Permian. Company-wide, full-year deflation is expected in the low single digits. This deflation contributes to a modestly lower 2024 budget compared to 2023. -
Production Guidance Amid Turnarounds
Q: Can you elaborate on production expectations considering turnarounds?
A: Organic production is expected to grow 2% to 4% in 2024. Third-quarter production will be impacted by 90,000 barrels per day due to heavy turnarounds, mainly in Canada and the Lower 48. Excluding turnarounds, production grows about 1% each quarter. -
Permian Gas Pricing and Takeaway Capacity
Q: How are low Permian gas prices affecting operations, and will you curtail production?
A: Permian gas prices have been depressed, with realizations at just under 20% of Henry Hub in Q2. Relief is expected with the startup of the Matterhorn Pipeline later in Q3, adding significant takeaway capacity. ConocoPhillips does not plan to curtail production, as it invests primarily in oil and does not routinely flare gas. -
Eagle Ford and Montney Growth
Q: What's driving production increases in Eagle Ford and Montney?
A: Eagle Ford production increased to 238,000 boe/d from 197,000 boe/d in Q1 due to reinstating a frac crew and strong well performance. A turnaround in Q3 will temporarily reduce output. Montney production averaged 43,000 boe/d, more than doubling year-over-year, driven by new wells filling recently added capacity. -
Willow Project Execution Confidence
Q: How are you ensuring control over Willow's large-scale project execution?
A: The company is proactively managing Willow by building modules off-site and has locked up 80% of total facility spend within contracts. They have extensive experience on the North Slope, having built over 25 drill sites with similar design. The approach leverages offsite fabrication and sealifting facilities to the North Slope.