ConocoPhillips Earnings Call Nuggets: Flat Production Guidance and the Operating Cash Flow Impact

ConocoPhillips (NYSE:COP) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Flat Production Guidance

Faisel Khan – Citigroup: I was wondering if you could clarify the 2013 production guidance it looks like it is going to be relatively flat and certainly the market seems a little bit disappointed today in that number. But going back to your previous slides on last year you did show a dip in expected production in ’13 internationally and growth in the Lower 48 and North American production. So, can you just clarify what’s going on with the production and how you see it just being a bottom in the year and I have a follow-up after that?

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Jeff W. Sheets – EVP & CFO: Yeah, I mean I think the – thanks for the question, Faisel. I think the production guidance is really pretty similar to what we’ve given in the past. We knew that 2013 would be the low point in our production for the year. So, I’m not sure what additional guidance we can have other than what we’ve given on the call at this point. What we’re trying to do is just make it clear now that the asset disposition program has become a little bit more into focus than it has been in the past; just what the production levels are going to be from the assets or long-term – going to be part of our portfolio long-term and that’s what we’re trying to lay out with this production guidance this morning. I think part of the – we’ve been – we anticipate being pretty successful in our asset disposition program. So, we’re probably at the high end of what we’ve – what some people had probably add in their models for the amount of production that’s going out on dispositions as well.

Ellen R. DeSanctis – IR: Let me jump in here quickly, this is Ellen; appreciate again the question. If you look at what we had in April for ’12 and what we had in April for ’13 and you kind of average it over a couple of years, it ends up being that we were – that the timing of divestitures actually ends up slipping from ’12 a little bit to ’13. So, if you look at it on a couple year basis, it ends up being really right on guidance. I think the way to think about this is exit rate-to-exit rate. You think about 4Q this year; the number Jeff provided is sort of (1,510) that had the noise out of this quarter compared to the fourth quarter. To get to the guidance we’ve provided, it will be very significant growth in quarter-over-quarter 2013 to ’12. We’ll provide all these updates at the Analyst meeting. But I think of it as or think of it as – the divestitures stayed in the portfolio in ’12 a little bit longer, and exit rate-to-exit rate is going to be higher because of the timing start-ups – the project start-ups.

Jeff W. Sheets – EVP & CFO: Yeah. So, I mean that’s an important point is that, we are going to start seeing production growth in 2013, particularly late in the year where we have start-ups happening in the North Sea and the continued ramp-up in oil sands and continued ramp-up in the oil shales, and plus the start-up of projects in Malaysia.

Faisel Khan – Citigroup: And one other question, on the capital program, it looks like (indiscernible) fine print on Slide 15 that roughly $800 million in capital was associated with the asset divestitures in 2012. Is that roughly the same number in ’13?

Jeff W. Sheets – EVP & CFO: It’s probably a little lower than that in ’13, but it really much depends on when assets actually end up leaving the portfolio. So, we’ll be – all through the year, we’ll need to be giving updates on how we see the capital program playing out this year.

Faisel Khan – Citigroup: And last question for me, bitumen prices were extremely low in the fourth quarter. Is there any plans for you guys to try to even evacuate that production by other means and pipelines to get a higher realization?

Matt Fox – EVP, Exploration and Production: I think it’s a little bit – the long-term there will be moves to find out alternative markets for bitumen from the Canadian oil sands. I think that’s a strategic imperative of the Canadian government, not just the oil companies working on the oil sands. So, we will see that happening over time. Of course, there is short-term issue that we’re facing just now as any much associated with refining constrains like BP is (indiscernible) refinery. So don’t expect these daily rate differentials to be sustained for more than in the next few months. In the long term, other markets will be developed.

The Operating Cash Flow Impact

Doug Leggate – Bank of America Merrill Lynch: I have a couple of quick ones please. Jeff, could you – you gave us the earnings numbers associated with the discontinued ops, but I guess to Faisel’s point looks like there was over $800 million of spending associated with those assets. Can you help us with the operating cash flow impact? And if you could clarify whether or not the 15.7, 15.6, 15.7 target for this year for spending assumes the asset sales are out for the whole year, or if that number – nudges higher if you basically delay the sales for the end of the year. And I have a quick follow-up please.

Jeff W. Sheets – EVP & CFO: So the operating cash flow numbers again – so the discontinued operations are Algeria and Nigeria. And I don’t think we have – we’re not going to be disclosing particular operating cash flow numbers for each of those segments. The capital is mostly a good outcome of Kazakhstan during 2012 – the number that was in 2012, I think that was probably the half to two-thirds of the number that was in – on the $800 million. As far as what’s in for 2013, we are pursuing a lot of different capital projects with fairly heavy spend. And there is going to be several things that could impact what our capital program ultimately ends up being at the – in 2013 as we execute on those projects. And timing of dispositions is really just one of those items. So, we’ve assumed certain timings, but as I said on the answer to the last question, we’re just going to need to be kind of continually updating that as we see the year develop.

Doug Leggate – Bank of America Merrill Lynch: I guess my follow-up is I guess relates to the exploration program. Just to put some context around this. Jim had spent the last decade trying to secure resources and buildup a very large drilling inventory I guess. Obviously, there’s a lot of spending to achieve that, but now you are in a position where you are still underfunded relative to your CapEx and your dividends that you are spending $2 billion to $3 billion on exploration. Can you help us with the logic of why that’s the right thing at this point given the $1.5 billion write-off in 2012, why that’s the right strategy at this point given that you should theoretically had a lot of resource now? I’ll leave it there, thanks.

Ryan M. Lance – Chairman and CEO: Doug, this is Ryan. I think as we look out and think about the future opportunity, I think with this unconventional revolution that we’re seeing in North America right now and some of the technology advances in the deepwater arenas that are becoming pretty prospective, it’s kind of in my view turned from a bit of resource scarcity that was leading to a lot of merger synergies over the last 10 or 12 years and resource capture into a view now that the resources aren’t so scarce. There’s a bit more abundance certainly on the unconventional side in North America, what the technology is doing to improve the oil sands performance in Canada and then what innovation and technology has done on the deepwater side. We just think that growing organically there’s the opportunity set to go do that and the option value associated with growing organically is we found better in our portfolio than trying to do that through an M&A channel or some resource access that way, so we think it’s important for the long-term growth what the last 10 years did for this Company is create a 40 billion plus barrel resource base and we’re investing in that resource base right now as we look forward into the future over the next 10 years. We see the exploration and the organic growth being more a driver to our other growth and development of the Company.