Opting not to significantly ramp up spending or activity at the moment, ConocoPhillips (NYSE: COP) says it is maintaining focus on discipline despite rising oil prices as it prepares to head into 2019.
No surprises are expected when it comes to the company’s strategy and spending next year as executives told analysts on an earnings conference call Oct. 25 that its capital budget for next year will be roughly in line with this year’s budget, acquisitions excluded.
“Our value proposition is all about returns. We are laser focused on discipline, free cash flow generation and strong execution,” ConocoPhillips CEO Ryan Lance said. “We are not chasing higher prices by ramping up activity. By staying disciplined we generate strong free cash flow, which we then allocate in a shareholder-friendly way.”
ConocoPhillips executives also are keeping eyes on cost-cutting initiatives, saying “we’re never done.” The company cut its Houston workforce by 10% this year, a move expected to lower the company’s G&A costs by about 30 cents per barrel next year.
Rising oil prices combined with a nearly 50% increase in production from ConocoPhillips’ so-called “Big 3” unconventional assets in the Lower 48 helped boost the company’s third-quarter earnings to $1.9 billion, more than four times the amount earned a year earlier.
Adjusted earnings rose from $200 million, or $0.16 per share, to $1.6 billion, or $1.36 per share, for the quarter. Lance pointed out the last time ConocoPhillips earned that amount was third-quarter 2014. At the time, Brent was over $100 per barrel and the company’s production was nearly 1.5 MMboe/d, he said.
“We’re as profitable today as we were then despite prices being 25% lower and volumes being 20% lower,” Lance said noting that “bigger isn’t always better.”
“That’s why we’re focused on per share growth and value, not absolute volume growth,” he continued. “Our portfolio and efficiency efforts have boosted the underlying strength of our company and driven what we believe is pure-leading sustaining price of less than $40 WTI.”
The results were in line with or beat some analysts’ expectations. Barclays forecast E&P net income of $1.635 million and a total production increase of about 3% to an estimated 1.268 MMboe/d.
“After reducing its dividend in early 2016 and successfully selling assets by first-half 2017, we believe COP has repositioned itself to become one of the lowest breakeven cost producers in the sector, and one of the lowest balance sheet risk companies in the group,” Barclays said in a note Oct. 24.
Tudor, Pickering, Holt & Co. (TPH) said the results beat its expectations.
“We’re not concerned for COP given the company’s continued delivery on its shareholder returns focus including the recent dividend increase [more than 7% in early October] and the continued progress on share repurchases [$900 million during third-quarter, bringing YTD total to $2.1 billion vs. authorization of $3 billion],” TPH analysts said in a note.
“Given that the company continues to generate free cash flow [about $600 million in third-quarter], we’d expect execution on buybacks to continue [second-quarter brought an incremental $9 billion of authorization] especially given recent equity performance across the board,” TPH said.
The Houston-headquartered independent reported Oct. 25 production from its unconventional assets in the Eagle Ford, Bakken and Delaware Basin jumped to 313,000 barrels of oil equivalent per day (Mboe/d), up 48%. The percentage gain was closer to 38% when the 15,000 boe/d impact from Hurricane Harvey in third-quarter 2017 was taken into account, Lance said.
The Eagle Ford, where production increased 61% (44% adjusted for Harvey), accounted for much of the Lower 48 production growth. The gains were the result of better than expected results from Vintage 4 completions and more wells online due to improved drilling efficiency, company executives said.
Production is expected to rise by more than 35% for the year. The added barrels contributed to the overall 22 Mboe/d production increase for ConocoPhillips, which put its third-quarter production tally at about 1.2 million barrels per day, excluding Libya.
Production highlights included the startup of Bohai Phase 3 offshore China; final drilling at Bayu-Undan, an offshore gas condensate field in the Timor Sea; and first oil at Greater Mooses Tooth-1, which is expected to peak at between 25,000 barrels per day (bbl/d) and 30,000 bbl/d, in National Petroleum Reserve-Alaska.
The company is among the first to deliver third-quarter earnings news, revealing how they have fared financially under improved market conditions. Since the downturn, oil and gas companies have become more efficient, using technology and improved drilling and completion methods, to grow production while keeping costs in check.
Improving oil prices have also helped. A barrel of WTI crude was fetching less than $50 for most of third-quarter 2017, compared to between the upper $60 to lower $70 range a year later. WTI was trading for about $67 per barrel early Oct. 25.
“Stronger prices help but we are also benefiting on a relative basis due to our Brent-weighted mix,” Lance said.
Brent was just over $76 per barrel early Oct. 25.
ConocoPhillips credited its improved adjusted earnings to higher realized prices and sales volumes. An arbitration settlement with Venezuela’s PDVSA also contributed to higher earnings.
ConocoPhillips said it will slightly increase its 2018 capital guidance, which will rise from $6 billion to $6.1 billion. ConocoPhillips said the increase reflects “higher partner-operated spend and excludes the previously announced Alaska Western North Slope bolt-on and Montney, Canada, acquisitions.
The company will announce its 2019 operations plan in December.
“You can expect our capital to be roughly in line with this year’s capital, excluding acquisitions,” Lance said. “This is a clear indication that we are not straying from our strategy, so no surprises there.”
However, Al Hirshberg, executive vice president of production, drilling and projects for ConocoPhillips, pointed out some projects will receive more capital in 2019 vs. 2018. These include GMT-2 in Alaska, the Barossa project in Australia and the Montney project, which is still in the appraisal phase but will see capex for the building of processing and water capabilities, he said, among other projects or acquisitions.
“When you add all of that up it’s about $500 million, plus or minus, of increased capex in ’19 versus ’18. But we also have some significant roll-off of projects, major projects that are finishing up,” Hirshberg said. These include the Aasta Hansteen and Clair Ridge developments in the North Sea along with the Bohai Phase 3 and Bayu-Undan projects in the Asia-Pacific region. “When you add all that up, that roll-off is also about $500 million,” roughly offsetting each other.
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