Larger US Lower 48 presence positions ConocoPhillips for smoother ride: CEO

Houston — ConocoPhillips is better poised to weather volatile commodity markets thanks to sizeable cash-flow generating potential from a larger US Lower 48 presence, less debt and fewer non-core holdings, its top executive said May 4.

The company's acquisition of Concho Resources, which closed early in 2021, added more than 300,000 boe/d to its existing Lower 48 operation, which not only had included the Bakken Shale in North Dakota/Montana and the Eagle Ford Shale of South Texas, but also relatively small output in the Permian Basin of West Texas and New Mexico.

Concho, a large pure-play Permian operator, bulked up ConocoPhillips' production in that premiere basin. But other recent actions taken by the company will position it to be a formidable all-around upstream bulwark, company CEO Ryan Lance said.

"Our entire workforce is on a mission to emerge from last year's extreme sector volatility and transaction integration activities as the strongest competitor in our business," Lance said during a Q1 earnings call.

"We're viewing 2021 as a catalyst moment like we did in 2016, to improve every aspect of our business, stepping out from the pack by taking our shareholder-friendly value proposition to the next level [and] improve our underlying drivers," he said.

The resulting 715,000 boe/d of Q1 production in the Lower 48 totaled about half the company's global production of 1.488 million boe/d, excluding Libya. The quarter's output was up 16% year over year although after adjusting for asset acquisitions and sales, Q1 2021 production fell 4% from the same period a year ago.

50,000 boe/d of storm impacts

Normal field declines and production impacts of 50,000 boe/d throughout the Lower 48 from a harsh winter freeze in February also affected Q1 output. Winter storm impacts were fully restored in March, the company said.

By comparison, Lower 48 production in Q4 2020 totaled 395,000 boe/d.

The Concho Resources transaction added roughly 320,000 boe/d of production, including about 201,000 b/d of oil output, to ConocoPhillips' production base after closing January 15.

Production for second-quarter 2021, again excluding Libya, is projected at 1.50 million-1.54 million boe/d. This also includes impacts from seasonal turnarounds in Europe and Asia-Pacific.

The Lower 48 in Q1 earned more than any other geographical segment -- $704 million of adjusted earnings -- about four or more times as much as any other of its operating areas.

In addition, ConocoPhillips plans to further strengthen its finances by reducing gross debt. Long- and short-term debt totals about $20 billion. The action will reduce yearly interest expense and help lower the company's sustaining price at which all routine expenses are met.

With Concho now under the ConocoPhillips umbrella, the company is eager to communicate its go-forward plan sooner than usual, said Lance. The company has moved up its annual market update this year to June 30 from the customary November time frame.

"Compared to our plan 2 years ago, we believe every part of the business has improved," Lance said. "Our goal is to put ConocoPhillips in an even better position to deliver multiple years of free cash flow and returns to shareholders post-Concho."

Looking ahead, a "primary goal" for the combined company is maximizing its cash-generating capacity, Tim Leach, former Concho CEO and currently ConocoPhillips' executive vice president-Lower 48, said.

'Massive' free cash flow machine

"We're creating a massive free cash flow machine from our combined business that will contribute to the company's ability to deliver on its priorities through cycles," Leach said.

ConocoPhillips' cash flow from operations in Q1 was $900 million, after a $1 billion one-time payout related to the Concho transaction. Adjusted earnings for the quarter totaled $902 million (69 cents/share) compared to $486 million (45 cents/share) in Q1 2020.

Other actions will enhance shareholder returns. ConocoPhillips owns around 10% of common shares in Canadian oil sands giant Cenovus Energy, which the company's chief financial officer Bill Bullock said are valued at about $1.6 billion today.

The shares were acquired as partial consideration in the 2017 divestitures of ConocoPhillips' Foster Creek Christina Lake oil sands and also western Canada's Deep Basin natural gas assets.

Bullock said ConocoPhillips plans to sell the Cenovus shares in the open market starting in Q2 2021 and should complete the sale process by Q4 2022. Sale proceeds could support the company's existing $1.5 billion share buyback authorization, Evercore ISI analyst Stephen Richardson said in a May 4 investor note.

Lance said ConocoPhillips has a five-year track record of exceeding its target of greater than 30% of cash flow from operations, and in fact its return to shareholders since 2016 has been 43% of cumulative CFFO.

ConocoPhillips exited Q1 with 15 drilling rigs in US fields – one of the highest number even among its big E&P peers, according to Tudor Pickering Holt's Weekly Rig Roundup that uses Enverus and TPH's own estimates.

For example, EOG Resources averaged 24 US rigs in Q1; Pioneer Natural Resources had 16 rigs, a figure that has since risen to 20 in Q2.