ConocoPhillips Earnings Call INSIGHTS: Clarifying Cash Flow, Capital Program

On Wednesday, ConocoPhillips (NYSE:COP) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Clarifying Cash Flow

Faisal Khan – Citi: On Slide 5 I think you mentioned in your prepared remarks the amount of cash flow you expected to generate from operations under consensus estimate. I just want to clarify that. Was $40 billion did you say in ’12 and ’13?

A Closer Look: ConocoPhillips Earnings Cheat Sheet>>

Ryan Lance – Chairman and CEO: No. The consensus cash from operations is not the $40 billion. We think per year it’s in the $12 billion to $14 billion range. So you add the $6 billion in cash on hand plus what we expect to get from asset dispositions is what adds up to the $40 billion, Faisal.

Faisal Khan – Citi: On Peng Lai assuming you can get up to a full operatable capacity what is that potential number over the long-term as you make and get to your – all the permits in place and be able to get back to producing in all those fields?

Ryan Lance – Chairman and CEO: I think you ought to think in terms of 110,000 to 120,000 barrels a day gross.

Jeff Sheets – EVP, Finance and CFO: So, net back to us is in the 40,000 to 50,000 BOE per day level and that compares to around 60,000 before the events.

Faisal Khan – Citi: Then at APLNG given your reduced working interest now in the facility and also given the project financing that you have in place. What kind of spend or what kind of equity contributions will you have to – will you be obligated to make to APLNG over the next sort of year or two?

Ryan Lance – Chairman and CEO: So, what we find is that over the second half of 2012 that the project financing and the fact that the additional interest that Sinopec is going to acquire as part of the final investment decision on the second train we’ll fund most of our capital requirements for the balance of the year and then we’ll see lower capital requirements on APLNG is primarily related to project financing next year as well.

Session 2:

Paul Sankey – Deutsche Bank: I very much like what you – your continued clarity and I also really truly appreciate the level of disclosure that you give is admirable. On the basic question of the cash flows, just one point you didn’t say anything about growing the dividend, but I assume that is your aim.

Ryan Lance – Chairman and CEO: Certainly I think in our strategic intent, we talked about, is delivering 20% to 25% of our cash flows back to the shareholder, primarily through the dividend channel. So, as we grow our production, grow our earnings, grow our cash flows, about 20% to 25% is intended to grow as well.

Paul Sankey – Deutsche Bank: I understand. It’s actually also very interesting target, I was going to move on to that, that the idea that you would give back around a quarter of your cash flows. I guess what we’re all struggling with is you mentioned that the consensus cash flow is right now at $12 billion to $14 billion annually, which even arguably I think is on a relatively aggressive low price forecast. So that’s why it’s helpful to see the uses of cash priority. I guess what we’re struggling with is the extent to which over time, you’re going to have to cut back that capital program. Could you just talk yet more about the sensitivity of the program and how much you could potentially cut that back to balance your cash flows over the longer-term?

Jeff Sheets – EVP, Finance and CFO: So, a couple of comments there, Paul. First, as we talked about – the Company is going through some fairly significant production growth and growth that’s occurring at a fairly high margin. So, you think about us going from a production level 1.5 to 1.6 up to the 1.8 to 1.9 kind of level over several years. That adds significant cash flow. Then as we’ve talked before, that regardless of the price environment we’re in by virtue of moving the portfolio more to liquids and as well moving it more to jurisdictions which have lower taxes, we’re going to see margin improvement. So, as we look out over the next several years, the difference between what we’re generating in terms of cash and capital and dividends of course shrinks over time, what we are trying to lay out for you this morning is that in this interim time period, we may not be covered, then we have other sources of cash to balance that gap and then we think it makes sense to continue to invest in the capital that we have. Ryan, if you want to comment on where we might cut capital if we – really in lower price environment.

Ryan Lance – Chairman and CEO: Yeah, certainly – so we’ve seen some drop-off here from Brent at $120 down to arguably $100 reductions over the last – through this last quarter. We still think Brent in the $90-ish, $100 range is probably reasonable over the short-term, but if we saw some cycling down of prices and we felt like they were going to be here for two or three years, we would make adjustments to our capital program. We’re doing some of that through our disposition process and we’ve identified some high capital requiring assets that we would like to dispose off. We’ve got capability to throttle back on some of our exploitation spend across all of North America, really across the whole global portfolio, and we would look at that as well. We want to continue some of our – what we think are the high-quality, high-margin, high-return major projects, we’re not going to whipsaw some of those right now being some of our ones in the North Sea, in Norway, the U.K., Malaysia, some of those we’d like to continue going, but we’ve got some optionality in the portfolio. If we saw lower prices, we’re going to persist for a year or two.

Jeff Sheets – EVP, Finance and CFO: I think we’ve experienced over time sort of as prices come down, the activity levels come down across the industry, you’ll get the same amount of scope done for a lesser amount of money as well.

Paul Sankey – Deutsche Bank: If I think about the relationship you have between the asset sales and the share repurchases and the commitments you made essentially to buy back shares through the first half of the year, where are we sitting now on buybacks for the rest of 2012 and into the first half of 2013? Knowing what you are saying about asset sales and share repurchases because it feels like you might be in the position to actually pretty much stop the buyback now.

Ryan Lance – Chairman and CEO: Well we completed the $5 billion that we said we would fund through the first half of the year. Our priorities have kind of shifted with some of the reductions in the commodity prices that we’ve seen over the last quarter or so. As we look out ahead the asset sales and dispositions will be used to help fund our capital program. If we end up getting an increase in dispositions above kind of what we are forecasting or if commodity prices ramp back up a little bit then that would leave room for us to consider more share repurchase.

Paul Sankey – Deutsche Bank: Is that saying that basically the share repurchase is stopped now?

Ryan Lance – Chairman and CEO: Yes. They have stopped.