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ConocoPhillips forges 10-year plan for 'new normal' future

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ConocoPhillips forges 10-year plan for 'new normal' future

Highlights

Builds on changes made in recent years

Permian Basin to be a rising company star in 2020s

Expects continued price volatility in next decade

Houston — ConocoPhillips set out a 10-year companywide business plan Tuesday that allows the world's largest independent upstream company to increase production 3%/year on an average annual $7 billion capital budget based on $50/b oil, its top executives said.

The plan also projects $50 billion of free cash flow during the 2020-2029 period and a cost of supply that, for the assets that will contribute to the company's growth over the coming years, averages around $35/b, company CEO Ryan Lance said at the company's 2019 Analyst Day in Houston. And some of those assets have a supply cost of under $30/b.

The long-term plan is a more refined and forward-looking version of the company's so-called "value proposition" forged in 2016, based on the premise that the E&P business had entered what Lance called "a new normal" of lower, more volatile commodity prices, and that the changed landscape would persist for years.

"We understood that to win in a volatile business, it's critical to deliver consistent performance through the cycles ... to be resilient in a variety of low prices and retain full exposure to the upside," he said. "Disciplined capital investment, returns on capital, returns on capital to owners and capital execution ... were top of mind in 2016 and remain so today."

The company also set out preliminary capital and production guidance for 2020 of $6.5 billion-$6.7 billion, and 1.24 million-1.31 million b/d of oil equivalent, which represents 5% underlying output growth.

CHANGED E&P LANDSCAPE

"We believe our [capital plan] is aligned with these realities," he added. "We know these are differentiators in a commodity business."

After the industry downturn of 2015-2016, ConocoPhillips acknowledged that the industry had fundamentally changed and that it would continue given its maturity, uncertain commodity prices, and the growing capital intensity needed to produce oil and gas from increasingly difficult geology, Lance said.

In the earlier part of the current decade, oil prices had averaged $90/b to $100/b and prices wavered in roughly a 10% range. But over the past three years, crude prices have averaged in the low $50s but have cycled up and down across a much wider range.

And an average price range for WTI oil of $40/b to $70/b through the 2050s appears likely, Lance's presentation slides said.

Also over the past three years, ConocoPhillips has revamped its portfolio and sold about $20 billion in assets. It sold off UK North Sea assets this year, for example, and last month announced a pending sale of its north Australia business. It has also pared down its oil sands presence in Canada.

The result is a tight, high-return but still-diverse global portfolio that contains the best, most prospective assets that can be produced at the lowest cost, and contains upside for resource development and further cost-cutting, ConocoPhillips executives said.

For example, in the US, the Permian Basin of West Texas and New Mexico -- which until now ConocoPhillips talked about in terms of the Delaware sub-basin (western Permian) -- has been lightly developed while the company has focused on both the Eagle Ford Shale of South Texas and the Bakken of North Dakota.

But the West Texas/New Mexico basin, including the Midland sub-basin of the eastern Permian, has more prospectivity and upside now that the company has taken time over the past several years to understand its wide variety of subsurface geological zones, Dominic Macklon, president of ConocoPhillips' Lower 48 region, said.

BIGGEST OF 'BIG 3'

Over the next decade, the Permian will become the largest of the company's "Big 3" US unconventional assets, Macklon said.

ConocoPhillips' Permian sub-basin operation already produces over 50,000 boe/d, he said, and is expected to reach around 400,000 boe/d by 2029.

Macklon said free cash flow from the basin "should be positive from now on, and we expect to do even better as we approach true manufacturing mode in the coming years."

ConocoPhillips took time to study a full range of industry wells in the basin, which currently produces about 4.7 million b/d of oil, to optimize what Macklon said should be "substantial recovery potential."

By contrast, the basin produced about 1.3 million b/d industrywide in early 2014. Permian production in the basin continues to mount.

But the Eagle Ford Basin is no slouch, either. It is currently ConocoPhillips' largest unconventional US producing area at about 200,000 boe/d. That volume is expected to plateau around the middle 2020s at around 300,000 boe/d, Macklon said.

Most of the offset operators around ConocoPhillips' acreage have seen significant parent-child well interference -- that is, new wells drilled in-between older wells have cut into the productivity of the vintage wells, Macklon said.

But with better spacing and "stacking" -- well placement within subsurface zones -- ConocoPhillips has not seen parent-child degradation, he said.

As a result, the company sees upside even in older wells that it has refracked and can yield better results, he added.

"We're achieving a greater than 20% recovery factor -- more than was thought possible," Macklon said. And "we believe we can do even better."

-- Starr Spencer, starr.spencer@spglobal.com

-- Edited by Bill Montgomery, newsdesk@spglobal.com

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