ConocoPhillips (COP) Earnings Report: Q2 2015 Conference...

CompanyName:ConocoPhillipsCompanyTicker:COPSector:BasicMaterialsIndustry:Energy

EventDescription:Q22015EarningsCallMarketCapasofEventDate:65.22BPriceasofEventDate:50.7138

©2014TheStreet,Inc.Al l R ightsReserved Page1of22

ConocoPhillips(COP)EarningsReport:Q22015ConferenceCallTranscriptThefollowingConocoPhillipsconferencecalltookplaceonJuly30,2015,12:00PMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

EllenDeSanctis;ConocoPhillips;VP-IR,CommunicationsRyanLance;ConocoPhillips;Chairman,CEOMattFox;ConocoPhillips;EVP-E&PJeffSheets;ConocoPhillips;EVP-Finance,CFO

OtherPart icipants

GuyBaber;Simmons&CompanyInternational;AnalystDougTerreson;EvercoreISI;AnalystDougLeggate;BankofAmericaMerrillLynch;AnalystPaulSankey;WolfeResearch;AnalystRyanTodd;DeutscheBank;AnalystBlakeFernandez;HowardWeil;AnalystEdWestlake;CreditSuisse;AnalystPaulCheng;BarclaysCapital;AnalystRogerRead;WellsFargoSecurities;AnalystEvanCalio;MorganStanley;AnalystAlastairSyme;Citigroup;AnalystJohnHerrlin;SocieteGenerale;AnalystJasonGammel;MacquarieResearchEquities;AnalystNeilMehta;GoldmanSachs;AnalystJamesSullivan;O lympicGlobalAdvisors;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Welcometothesecond-quarter2015ConocoPhillipsearningsconferencecall.MynameisChristineandIwillbeyouroperatorfortoday'scall.

(OperatorInstructions)

Pleasenotethatthisconferenceisbeingrecorded.

IwillnowturnthecallovertoEllenDeSanctis,VPInvestorRelationsandCommunicationsConocoPhillips.

EllenDeSanctis (VP-IR,Communications):

Thankyou,Christine.Andhellotoallofourparticipantstoday.WithmeonthecallareRyanLance,ourChairmanandCEO;JeffSheets,ourEVPofFinanceandChiefFinancialOfficer;andMattFox,ourEVPofE&P.

Ryanisgoingtoopenthecallthismorningwithsomecommentsaboutthegeneralbusinessenvironment




andthenwe'llturnthecallovertoJeffandMattfortheircustomarysecond-quartercomments.Q&Awillfollowthat.Andwearegoingtoaskthatpeoplelimittheirquestionstooneplusonefollowup.

Wewillmakesomeforward-lookingstatementsthismorningandobviouslyourfutureperformancecoulddifferfromourprojectionsduetorisksanduncertainties.Thosearedescribedonpage2ofthismorning'smaterialandinourperiodicfilingswiththeSEC.Thisinformation,aswellasourGAAPtonon-GAAPreconciliationsandothersupplementalinformationcanbefoundonourwebsite.

Nowit'smypleasuretoturnthecallovertoRyan.

RyanLance (Chairman,CEO):

Thankyou,Ellen.Andthankyouallforjoiningthecalltoday.AsEllensaid,beforewediveintothesecondquarterresults,Iwanttotaketheopportunitytoprovidesomebroadcommentsaboutourapproachtothebusinessinthecurrentpriceenvironment.

Letmegiveyouthepunchlineofthesecomments.Thedividendissafe.Letmerepeatthat.Thedividendissafe.Thebusinessisrunningwell.Wehaveincreasingflexibilityandcanachievecashflowneutralityin2017andbeyondattoday'sstripprice,aroughly$60perbarrelBrent.Andwehaveauniqueformulaforsustainableperformanceandaportfoliothatcandeliver.

Nowletmeputalittlebitofmeatonthebones.Weakpriceshavecertainlydealtusandtheindustryasignificantheadwind.Buttherealityiswedon'tcontrolprices.Thatsaid,therearemanythingswedocontrol,likehowmuchcapitalwereturntotheshareholders,howmuchandwherewespendthecapital,andthecostofrunningthebusiness.RestassuredConocoPhillipsislaserfocusedonthethingswecancontrol.

Wecutourcapitalearlyinthecycle,notjustforthisyearbutforthreeyears.Wetooka$1billioncost-cuttingchallenge.Andwerecentlyreducedspendingfornewdeepwateropportunities.Wedidthiswhilecontinuingtomeetouroperationaltargets,raisingourdividendmodestlytocontinuetomeetourcommitmenttoourshareholders.Ourabilitytomakethesedecisionsisnotaccidental.Overthepastfewyears,we'vebuiltasizableportfolioandresourcebase,flexibility,options,andchoices.It'sahugeadvantageattimeslikethese.Justasimportantly,we'renavigatingthissharpdownturnwithafocusnotjustontheshort-termmeasuresbutalsoafocusonthemediumandthelong-termhorizons.Thisisreallyimportant,frankly,it'shardtodo.

IfyouturntoSlide4,letmeprovidesomeperspectiveonhowwe'resimultaneouslymanagingacrossthesethreetimehorizons.First,theshort-termisallaboutsafelyexecutingthebusiness.Thatmeansdeliveringonourcurrentperformancetargets.AsJeffandMattwillcover,we'remeetingorexceedingourshort-termgoals.

Andasyousawinthismorning'sannouncement,we'reloweringourguidanceonoperatingcostsandreducingourcapitalguidancefor2015.Thatrepresentsasignificantbenefittonetcashflowfortheyear.Wealsorecentlyincreasedourquarterlydividend.Theincreasewasverymodest,representingabout$25millionimpactin2015.Whileeverydollarmatters,webelievethiswasanimportantmessageforourshareholders.

Atthesametimewe'realsopayingcloseattentiontothemediumterm.Andthemediumtermforusisallaboutmanagingthepathtocashflowneutralityin2017.Inadditiontotheshort-termitemsIjustmentioned,wecontinuetofocusonwaystoincreaseourcapitalflexibility.Ifthecurrentpriceenvironmentpersists,wehavetheflexibilitytoreduceournear-termcapitalspendbelow$11.5billionandstillachievemodestgrowth.Staytunedformoreonthisasweseewherethecommoditypricesheadlaterintheyear.




Alsowe'refocusedonmaintainingourbalancesheetstrength.Wehaveadditionalcapacityandampleaccesstoliquidity.Andaswe'vecontinuouslysaid,weexpectaCompanyofoursizewouldgenerateabout$1billionofassetsalesannuallyfrompruningtheportfolio.That'sanadditionalsourceofcashandgoodbusiness.Finally,weannounceda$1billionoperatingcostreductionchallengefor2016.We'reontracktomeetorexceedthattarget.Theseactionswillhelpourmedium-termperformancebutalsodrivesustainableimprovementsbeyond2017.

Thatbringsmetothelong-term.Theactionswearetakingtoassurelong-termsuccessincludemaintainingourcapitalflexibility,loweringthecostofsupplyacrosstheportfolio,andshorteningthecycletimeofourinvestments.Thesearecriteriathatareguidingourdecisions.Andthesewerethedriversbehindtherecentdecisiontoreduceourdeepwaterspending,whichMattwilldiscussinmoredetail.

Sothat'showwe'remanagingthebusinessthroughthisperiod,bysimultaneouslyfocusingontheshort-,medium-andlong-termhorizons.Andwe'redoingitinawayIbelievemeetsourcommitmentstoourshareholdersandhonorsourprioritiesofagrowingdividend,astrongbalancesheetandgrowthwecanafford.

UltimatelyourgoalistopositiontheCompanyforsustainableperformanceandthispointisdemonstratedonthenextslide.Weknowwhat'soneverybody'smind.Whatifpricesstaylowerforlonger?Well,theleftsideofthischartlaysoutouranswer.Webelievewecanachievecashflowneutralityin2017andbeyondthroughexercisingcapitalflexibilityevenat$60barrelBrent.

Wecanexerciseadditionalcapitalflexibilityfromvarioussources,deflationcapture,deficiencyimprovements,discretionindevelopmentprograms,uncommittedmajorprojects,deepwaterreductionsandadditionalefficiencies.Andwebelievewecanachieveour2017productiontargetgivingtherampfromourmajorprojectsbetweennowandthen,themajorityofwhichisfromcapitalwe'vealreadyinvested.Andthisisallbeforetacticalassetsales.

Finally,therightsideofthechartshowsagraphicfromourAprilanalystmeeting.Atthatmeetingwediscussedthequalityandcostofsupplyofourcapturedresourcebase.Todaywehaveover44billionbarrelsofidentifiedresource,overhalfofwhichisaveryattractivecostofsupply.16billionbarrelsiseitherprovenreservesorhasacostofsupplythat'slessthan$60perbarrel.That'salmost30yearsofresourceatcurrentproductionrates.

Sowehavetheopportunitiestoinvestcapitalincapturedeconomicprogramswithlittleresourcerisk.Thisshouldacceleratevalueforshareholderswhileincreasingthepredictabilityofourbusiness.That'showwecansustainoursuccessforthelong-term.

Ihopethesecommentsprovidedsomeperspectiveonourapproachtothebusinessinthisenvironment.Thebottomline,we'reverysolid--it'saverysolidanddisciplinedplan.I'mgoingtocomebackwithsomeclosingcomments,butletmeturnitnowovertoJeff.

Jef f Sheets (EVP-Finance,CFO):

Thanks,Ryan.SoI'llwalkthroughourresultsforthequarterandthenprovidesomeupdatesonour2015guidance.I'llstartwithoursecondquarterfinancialperformance.That'sonslide7.

AsRyanmentioned,weoperatedwellthisquarterwithproductionhittingthehighendofguidance.Wereportedadjustedearningsof$81million,or$0.07ashare.Theseresultsincluded4%volumegrowthand14%loweroperatingcostscomparedtothisquarterlastyearafteradjustingforspecialitems.ThestoryfortheCompanyandthesectorthisyearcontinuestobelowcommodityprices.




Wedidseeaslightincreaseintotalrealizedpricesinthesecondquartercomparedtothefirstquarterwhichimprovedoursequentialearnings,butyear-over-yearourrealizedpriceisdownnearly45%.Secondquarteradjustedearningsbysegmentareshownonthelowerrightsideofthischart.Segmentadjustedearningsareroughlyinlinewithoursensitivitiesandthefinancialdetailsforeachsegmentcanbefoundinthesupplementaldataonourwebsite.

Ifyou'llturntoslide8,I'llreviewourproductionresults.Oursecondquarterproductionaveragednearly1.6millionBOEperdaycomparedto1.56millionBOEperdayinthesecondquarterof2014.That'sgrowthof4%or69,000BOEperday,whichcameprimarilyfromliquidsandfromdomesticgassalesatAPLNG,whichwillturntoLNGovertime.

Thewaterfallalsoshowsthedifferencebetweendowntimeanddispositionsinthesecondquarterofthisyearversusthesameperiodlastyear,whichwas30,000barrelsperday.ThatreflectsmostlydowntimeinCanadafromforestfiresnearFosterCreekandinMalaysiaasaresultofthe[comusive]turnaround.

Nowifyou'llturntothenextslide,I'llcoverourcashflowwaterfallforthefirsthalfoftheyear.Thischartprovidesasummaryofoursourcesandusesofcashthroughthefirsthalfoftheyear.Westartedtheyearwith$5.1billionincash.ThroughtheendofJunewegenerated$4.4billionfromoperatingactivitiesexcludingworkingcapital.Totalworkingcapitalinthefirsthalfoftheyearwasa$1.1billionuseofcashwiththelargestimpactrelatedtolowerpayablesassociatedwithreductionsinourcapitalspending.

Wedonotexpecttoseesignificantadditionalworkingcapitalchangesassociatedwithinvestingactivitiesthroughtheremainderof2015.Inthefirsthalfoftheyear,wereceived$600millionfromdispositionproceeds.Aswepreviouslysaid,withaportfolioofoursizeyoucouldseeabouta$1billionofassetsaleseveryyearaswecontinuallyhigh-gradetheportfolio.Weincreaseddebtby$2.4billion.Thedebtincludedfixedandfloatingratebondtrancheswithanaveragematurityof5.6yearsandanaverageinterestrateof1.9%.

Forthefirsthalfoftheyear,wespent$5.7billionincapitalandthatwascomprisedof$3.3billioninthefirstquarter,reducingdownto$2.4billioninthesecondquarter.Aswe'llpointoutonthenextslide,we'reloweringourcapitalguidancefor2015from$11.5billionto$11billion.Thatputsusat$5.3billionincapitalforthesecondhalfoftheyear.Afterpayingourdividend,weendedthequarterwith$3.8billionincashonthebalancesheet.Soweremaininastrongbalancesheetpositionwithcashonhand,accesstoampleliquidity,aswellasthepotentialforincrementalcashfromtacticalassetsales.

I'llwrapupmycommentsonslide10withsomeguidancefortherestoftheyear.Weareontracktoachievethehighendofour2%to3%productiongrowthfortheyear.Ourthirdquarterproductionguidanceis1.51to1.55millionBOEperday,whichreflectssignificantturnaroundactivityinthequarter.

We'realsoprovidinganupdateonseveralofourfinancialguidanceitemswhich,intheaggregate,willprovideapproximately$900millioninbenefittonetcashflowin2015.Wenowexpectfullyear2015capitalexpendituresofaround$11billion,comparedtoourpreviousguidanceof$11.5billion.Thisreflectslowercapitalthat'sroughlyequalpartsprogramefficiencies,deflationinFX,andsomeactivitydeferral.

We'realsomakinggoodprogressonouroperatingcosttargetswhicharemostlycomingfromchangestothewaywerunourbusiness.Westillexpectouroperatingcoststoincreaseinthesecondhalfoftheyearaswecontinueourturnaroundworkandbringprojectsonline.Butgivenourrunratethroughthefirsthalfoftheyear,weareloweringouroperatingcostguidancefortheyearfrom$9.2billionto$8.9billion.Thatputsusaheadofscheduleasweworktowardsour$1billioncostreductiontargetin2016.

OurcorporatesegmentbenefitedfromL&Glicensingrevenuesduringthesecondquarterandwe'rechangingourfull-yearguidancetoanetexpenseof$900millionfrom$1billion.Andthere'snochange




toourDD&Aorexpirationdryholeandimpairmentguidance.

Thatconcludesthereviewofthefinancialperformanceandguidance.I'mgoingtoturnitovertoMattforanupdateonouroperations.

MattFox(EVP-E&P):

Thanks,Jeff.AsJeffandRyanmentioned,we'vehadanotherstrongquarteroperationallyandthebusinessisperformingwell.I'llquicklyrunthroughoursegmentresultsandthenturnitbacktoRyanforsomeclosingthoughts.

Inthelower48,second-quarterproductionaveraged556,000BOEperday.That'sa3%increasefromthesameperiodlastyearandrepresentsa9%increaseincrudeoilproductionoverthesameperiod.We'renowrunning13rigs,with6intheEagleFord,4ontheBakkenand3inthePermian.That'sdownfrom32rigsattheendofthe2014.

Webelievethisistherightpaceofactivityinthisenvironment.We'llre-assesstheselevelslaterintheyear,takingintoconsiderationmarketconditions,pilottestinformation,andthepriceoutlook.Withthereducedcapitalprogram,ourgrowthinthisregionhasstartedtoslow,andweexpectproductiontoseemodestdeclinesthroughtherestoftheyearconsistentwiththepriorguidance.

LookingattheGulfofMexico,ourappraisalworkiscontinuingwithactivityinthequarteratGila,ShenandoahandTiber.NextIwanttoprovideaquickupdateontherestofourGulfofMexicoprogramfollowingourdeepwaterannouncementearlierthismonth.AsRyanmentionedwerecentlyannouncedtheplantoreducespendingindeepwater,notablyintheGulfofMexico.

We'vetakenthestepofterminatingouragreementforadrillshipandweexpecttotakeachargeofupto$400millionasaspecialiteminthethirdquarter.Thedrillshipwasn'tscheduledfordeliverytotheGulfuntillaterthisyear,sonotalothaschangedforour2015drillingprogram.TwoexplorationwellsareexpectedtospudinthethirdquarteratMelmarandVernaccia.

AfterMelmar,wewillhavetworemainingslotsontheMaerskValiantdrillship.WeexpecttodrilltheSocorroprospectwithoneoftheseslotsandwe'recurrentlyevaluatingandhigh-gradingourdrillingprospectstofillthefinaloperatedslot.We'regoingthroughourbudgetingprocessfornextyearandwillprovidemoredetailonexpectedcapitalandoperatingcostsavingsfor2016whenweannounceourcapitalbudgetlaterintheyear.

NextI'llcoverourCanadaandAlaskasegmentsonslide13.Weproduced306,000BOEperdayintheCanadasegment,an8%year-over-yearincrease.ThegrowthcamefromournewwellsinWesternCanadaaswellasstrongperformancefromouroilsandsassets.

InMayweachievedamajormilestonewith[freshsteam]at[StarmontTwo].We'reontracktostartproducinginthethirdquarterandexpectproductiontorampupthrough2017.Ourotheroilsandsassetscontinuetoperformwellandwe'reseeingongoingramp-upacrossthecreekphaseF.Despitethe11-day(technicaldifficulty)duetoforestfires.Alaska'saverageproductionwas174,000BOEperday.

We'recontinuingtomakeprojectonourCD5anddrillsite2Sprojects,wherethefirstwellswerespuddedatbothprojectsduringthequarterandbothareontrackforfirstoilduringthefourthquarter.Aswementionedinthefirstquartercall,weresumedexportsfromKenaiLNGinApril.Sofarwe'vedeliveredtwocargoesandexpecttodeliverfourmorebytheendoftheyear.OurseasonalturnaroundactivitystartedatPrudhoeandKuparukinJuneandwillcontinueintothethirdquarter.

Let'sreviewourEuropeandAsiaPacificandMiddleEastsegmentsonslide14.InEurope,secondquarterproductionaveraged206,000BOEperday.WeachievedstartupofourEnochdhuproject,slightlyahead




ofschedule.We'realsomakingprogressonourAlderprojectwhichisexpectedtocomeonlineinlate2016.EkofiskTwoandEkofiskSouthproductioniscontinuingtorampupaswebringadditionalwellsonline.Andwe'vesafelycompletedourturnaroundactivityintheJ-AreaandtheEkofiskareaaheadofschedule.

However,westillhaveasignificantamountofturnaroundactivityplannedintheregionduringthethirdquarter.IntheAPMEsegment,weproduced349,000BOEperdayinthesecondquarter.That'san8%increasecomparedtothesecondquarteroflastyear,primarilyasaresultofnewproductionfrommajorprojectstart-upsinMalaysia.APLNGTrainOneisnearingcompletion.

WeachievedanothermilestonelastweekwhenwestartedloadingrefrigerantstotheLNGfacilityandweremainontrackforfirstcargointhefourthquarter.InChinawecompletedourBohaiappraisalprogramwithencouragingresults.InMalaysia,GomusutbeganamajorturnaroundinJunewhichwasjustcompletedinthepastfewdays.

Sotowrapupmycomments,thebusinessiscontinuingtoperformwell.We'rehittingourproductiontargets,loweringourcostsandmaintainingourfocusonsafety.Wehaveafewmoremajorprojectsandturnaroundstocompletethisyear,butwe'reontracktodeliveronourcommitments.

NowI'llturnthecallbacktoRyanforhisclosingremarks.


Thanks,Matt.Thatwrapsupoursecondquarterreview.Sohere'sthesummary.Thedividendissafe.Thebusinessisrunningextremelywell.Wecanachievecashflowneutralityin2017andbeyondattoday'sstripofroughly$60perbarrelBrentandwehaveauniqueformulaforsustainableperformanceandaportfoliothatcandeliver.

Clearlytheenvironmenttodayischallengingfortheindustry.Butwebelievewe'reenteringanewrealityforthebusiness.Thewinnerswillbethosecompanieswitharationalvision,highqualityassetbase,andastrongworkforceandacommitmenttoshareholders.Thewinnerswillbethosecompanieswhocanmanageshort-,medium-,andlong-termgoalssimultaneouslyandwe'resettingplansanddeliveringonthethingswecancontrolintheshort-term,payingcloseattentiontothedriversofmediumandlong-termperformance.WebelievethisbroadperspectivewillserveuswellandmakeusanevenstrongerCompanyinthefuture.

Sothankyouforlisteningtotheopeningremarks,andI'dbehappytoturnitbackovertotheoperatorforyourquestionsandouranswers.

QUESTIONS&ANSWERS

Operator :

Thankyou.(Operatorinstructions)

GuyBaber,Simmons&Company.

GuyBaber (Analyst-Simmons&CompanyInternational):

Thanksverymuchfortakingmyquestion.Ihadacouple.First,Iwasjusthopingtodiscussthedecision-makingprogressarounddeterminingwhethertoincreaseordecreaseunconventionalactivitylevelslaterthisyearandinto2016.Youmentionedthedevelopmentprogramdiscretion.Sojustwantedtodiveabitdeeperintothat.

Ithinkthepriorviewwastobeginincreasingtherigcountthebackhalfofthisyear,butoilpriceshave




obviouslyweakenedandyouobviouslyhavealotofflexibilitynextyearwith$2billioninmajorprojectsrollingoff.Socouldyouhelpusunderstandtheframeworkfordeterminingunconventionalactivityspendinglevelsaswegointonextyear?


Yes,Guy,thanks.AswerelayedoutinApril,wesawsomemodestincreasesinthepricesoverthenextcoupleofyearsinourpathtoworkingthemediumtermin2017.Inthatplanwehadsomerampingupofourunconventionalactivityassumedinthatplan.AsourcapitalflexibilityincreasedandourprojectcapitalwasrollingoffSurmontandAPLNG,we'regoingtodirectthattotheunconventionals,whichareshortercycletime,higherreturns,andbetteropportunitiesfortheCompany.

Iwouldsayifpricesthatwe'reseeingtoday,sub$60Brent,high$40sandlow$50s,wedon'thaveplanstoincreasethecapitalandrampupintheunconventionalsifthesekindofpricespersist.We'rewatchingthisspaceprettyquickly.AsMattsaid,we'llannounceourcapitallaterthisyear.That'sgoingtobeinformedbywherewethinkthecommoditypricesareandwherewethinkthey'llbein2016andthat'sgoingtothendictatehowmuchwerampupintheunconventionales.

GuyBaber (Analyst-Simmons&CompanyInternational):

Thanks,Ryan.Andthenmyfollowupwas,couldyoudiscussalittlebitmoresomeoftheassumptionsimplicitinthecommentyoucouldachievecashflowneutralityby2017,at$60abarrelBrent.Somorespecifically,couldyouperhapselaborateonwhatdeflationcapturewouldbeimplicitinthoseassumptions?AndanymoredetailyoucouldgivethereIthinkwouldbehelpfulasIthinkthat'saprettyimportantassertion.


Ithinkwhatwe'resayingrightnowisthat--whenwecameoutinApril,wetalkedaboutthecapitalrequiredtogenerateaflatproductionprofileforalongperiodoftimefortheCompany.Wethoughtthatwasabout$9billion.Ithinkthedeflationwe'veseentodateandtheadditionalinflationthatwouldhappeninalowerpriceworldthatyou'redescribing,ourflatcapitalgoesdownsomethingcloserto$8billion.

Ifthispriceweretopersistforanyperiodoftimewe'dexpectadditionaldeflationandmoreefficienciesgoingforward.Wehaven'tfactoredthatintotheanalysisnecessarily,butitisarecognitionwecanachieveflatproductionforalongperiodoftimeatan$8billioncapitallevel.

Operator :

DougTerreson,Evercore.

DougT erreson (Analyst-EvercoreISI):

Goodmorning,everybody.


Goodmorning.


Ryan,IwantedtocontinueonGuy'squestionaboutthedownwardrevisionstooperatingandcapitalcostsandspecificallyyouhighlightedonslide5fourdifferentcategoriesandyoujusttouchedondeflationcapture.Alsowantedtoseeifyoucouldcommentonorgivealittlebitmoreinsightonwhat




youmeanbydiscretionanddevelopmentprograms,deepwaterreductions,programefficiencies,justafewmorespecificsthereifyouhaveany.


Yes,Doug,I'dbehappyto.Wedescribedthedeflationcaptureandefficiencywe'reseeingintheportfoliotolowerthecapitalrequiredtokeepflatproductionovertimeandthat'sclearlysomethingwe'ddialinifwesawthesekindsofpricespersist.Somethingwedon'ttalkaboutisassetsales.Wethinkintheportfolioofoursizewehaveanongoingrationalizationprogramthatkeepseliminatingthebottomendoftheportfolioandthat'scertainlythere.

We'vegotalotofflexibility.Theunconventionalsareshortercycletimeandwecanrampthoseupatdifferentspeeds,respondingtothecommoditypriceenvironmentwefindourselvesin.Aswetrytodescribetheactions,thelevers,andthetools,thosearesomeofthem.

Youmentionedthedeepwaterexploration.We'reworkingthroughthataswell.Wouldexpectthattobeincrementalintermsofcapitalsavingsandoperatingcostsavingsaswelookforwardatthiskindofpricelevel.


Okay.Andthenfinallyoncashflow,whenusingconsensusestimates,divestituresandborrowingsinthequarter,itseemslikeyourdividendiscoveredfor2015.Onthispoint,Iwantedtoseewhereyourafter-taxborrowingcostswereontherecentborrowingsintheperiod.Andthenalsothestatusofanyotherfundingsourcessuchasarevolver,commercialpaperorwhateveryoudeemrelevant.SomaybeaquestionforJeff.


Sure,Doug.Aswementionedinourbriefremarksthere,wewereoutinthedebtmarketsinthesecondquarterandweissued$2.5billion[worthof]debt.Thatwasamixoffixedimplodingand,onaverage,thata1.8%,1.9%interestrateonapre-taxbasis.

Soyoucouldtax-affectthat.Soweendedthesecondquarterat$3.8billionincashonthebalancesheet.Probablytakes$800millionto$1billiontooperateourbusiness.Inadditiontothatwehaveabouta$6billionliquiditylinethat'sundrawncurrently.


Okay,great.Thanksalot.


Thanks,Doug.

Operator :

DougLeggate,BankofAmericaMerrillLynch.

DougLeggate (Analyst-BankofAmericaMerrillLynch):

Goodafternoon,everybody.Iguess,Ryan,firstofall,thankyouforyourremarksatthebeginningofthecallwiththedividend.Ithinkthat'sprettyclear.ButI'vegotacouplequestionsaroundthestrategyhowthatchangesinthelowoilpriceenvironment.Firstonereallyisonexploration.Soyou'vecutarig.Obviouslythisyearyouhadafairlylargecommitment.




Whatdoesitsayabouttheexplorationstrategygoingforwardgiventheresourcedepththatyouhaveandgiventhatthat'sakeyareaofdiscretionaryspending?Areyoubackingawayfromexplorationpost2014?AndthenI'vegotafollowup,please.

MattFox(EVP-E&P):

Doug,I'lltakethat.Sothespecificannouncementwemadeearlierthismonthisonlyrelatedtocancelingthe[Enscro]drillship.Thatbyitselfisgoingtoresultinadecreaseinourdeepwaterexplorationcapitalby$300millionto$500millionforthenextthreeyearsasafunctionofwhatthespreadrateandtheequitypositionwouldbe.

We'restillgoingtobeconductingdeepwaterexploration,though,through2015andinto2016.WehavebeenappraisingourexistingdiscoveriesintheGulfofMexico,andWestAfrica,andhigh-gradingtheportfoliotofulfilltheremainingrigcommitmentswehave.Butmoretothestrategicquestionyou'reasking,wearelookingmorebroadlyatourdeepwaterportfolioandconsider(inaudible)forthatportfolio,butanythingthatwedoisgoingtohavetopreservevaluefromthediscoverieswe'vemadeintheportfoliowe'vebuiltupoverthelastfewyears.

Sothere'sstillastrategicquestiononthelong-termpositionofdeepwater.Wehaveaverystrongpositionintheunconventionals.Andasyoumentioned,averystrongpositionacrosstheresourcebaseasawhole.Sothestrategicemphasiswouldbemovingmoretowardsdevelopingtheexistingresourcebasebutthere'sstillasignificantroleforexplorationtoplayinbringingnewresourcesintotheportfolio.Sotherewillbemoretocomeinthisovertime,Doug,aswefirmupthoselonger-termstrategicimplicationsofthedeepwaterdecision.

DougLeggate (Analyst-BankofAmericaMerrillLynch):

Idon'tknowif(inaudible).Iguessthefollowupisprobablyforyouaswell,I'mguessingbecausetherehasbeen--IthinkwhenyouandIhadsometimetogetheroverthisyear,therewassometalkabout80,000barrelsadayofpotentialnoncoreproduction.Withyourcommentsabout--onehastoimaginethatthereisdisposalpotentialinsomeofyourexistingundevelopeddiscoveries.

Howshouldwethinkaboutthescaleofwhatyou'veenvisagedtobeyourdisposal(inaudible)thequestion,andhowwouldthatcapitalberedeployed?Woulditbuybackstock?Woulditshoreupthebalancesheet?Howwouldyouusethespending?I'llleaveitthere.Thankyou.

MattFox(EVP-E&P):

JeffandRyanbothmentioned,weexpecttobesomeformofdispositionsgoingoncontinuouslyintheportfoliojusttotrimupanditisnonstrategic.So,forexample,youmayhaveseenyesterdayorthedaybeforethatwe'regoingtomarketour[Kukenley]positioninAlaska.Ithinkit'squitewellknownthatwe'vehadapackageoutthereinCanadafornonstrategicassetsandgasassets.Wehavesomeassetsinthelower48thatfitthesamecriteria.

Sowedohavesometacticaldispositionsthatwe'recurrentlymarketingatthemoment.Sotheuseofthatcashwouldbetofundadividendandongoingcapitalprograms.


I'djumpintherealittlebit.Theprioritiesarethedividendtotheshareholder,thebalancesheet,thenagrowthwecanafford.

Operator :




PaulSankey,Wolfe.

PaulSankey(Analyst-WolfeResearch):

Hi,everyone.You'vetalkedaboutthe2017cashflowneutrality,andan$8billionholdforthatnumber.Areyouimplyingthatyou'reactuallygoingtooutspendcashflowbetweennowandthen?Wereyouessentiallygoingasfastasyoucantogetthecashflowneutrality?


Ithinklargely,Paul,dependsonouroutlookonthecommoditypriceswhichwe'rewatchingprettycloselyrightnow.Wewouldhavesomeslightoutspendin2016ifwecontinuetorampupandholdthecapitalat$11.5billion,butthat'ssomethingwe'relookingatitdroppingdownatthecurrentpriceandcontinuingtoexercisetheflexibility.

Whatpeopletendtoforgetabout,though,startingin2016andgoinginto2017iswehaveprettysignificantrampinproductionfromSurmontPhase2andfromAPLNGandthat'scapitalandcostwespentthelastfourtofiveyears.Sowe'vegotproductioncomingonin2016and2017thatpeopletendtoforgetaboutthat'srightinfrontofus.Surmont2just--firststeamearlierthisyear,we'llhavefirstoilhereimminentlyandfirstcargoescomingoutofAPLNG.

SotheintentionistogettocashflowneutralityasquickaswecanWe'rejusttryingtodemonstratewe'vegotalotofflexibility,evenatthecurrentlowerpriceswe'reseeingtoday.


Iunderstand.Iprobablyshouldhaveprefaceditbysayingifwehaveseemthestripwhichissomethingaroundwhatyou'retalkingabouthere,a$60outlookiswhatweseeonthefuturesmarket.


That'swhywetriedtoputthatintoourslideatthatkindofapriceleveltogiveyousomesenseofhowwewouldmanagethebusinessatthatkindofadeck.


Ithinkyou'vebeenaskedthisandyou'vetriedtoanswerit,forgivemeifIslightlymissedwhatwasbeingsaid,butcanyourunoveragainthedeflationelementhere?Thelowerservicecosts.Iknowyou'vedonesomeexcellentworkinyourpresentationsshowinghowcostsarechanging.

WhenIwaswithMr.Hirschberg,hesaidthisisactuallylagging.Thisislastyear'sdata.Wouldyoumindgoingbackoverhowwegetfrom$11.5billion,$11billionrunratethisyearallthewaydownaslowas$8billion,seeminglysimplyifoilstaysat$60?


Yes.InAprilwetalkedaboutdeflationof$700millionthatweweretryingtocapture.Wenowseethatprobablycloserto$900million.Andobviouslyifthekindofstrippricesyou'retalkingaboutpersist,we'dexpectthattocontinuedownaswell,soaswelookoutofthat,the$8billionisreallytostayflat.The$9or$10or$11.5billiongrowsourproductionbasedontheamountswelaidoutinApril.

Sowe'vegotalotofflexibilitybetweenthe$11.5billionwelaidouttothemarketplaceinAprilversuswhatwe'recalling$8billiontostayflatproduction.Whatwe'retryingtodescribetofolksiswiththecapitalflexibility,thedeflationandtheefficienciesthatwe'recreatinginthebusinessisjustaddingtotheflexibilityonthecapitalsideoftheprogramandgivesusalotofchoiceaswegointothebackhalfof




thisyearindecidingwhatkindofprogramwewanttoexecutein2016and2017onourpathwaytogettocashflowneutralityasquicklyaswecan.


That'sgreat,Ryan.Thanks.AndifIcouldaddin,we'vehadtheideathatyou'dIPOtheexplorationbusinessandhaveitasastandalonebusiness.Iassumeyou'dwanttoretainsomeaccesstothatbusinessasopposedto,forexample,disposingitaltogether.Atthemoment,itfeelslikethepotentialforyoutospendinthatbusinessisgoingtobeundervaluingitessentially.


Yes,Ithinkthat'sright,butwe'relookingatallthealternativesrightnow,Paul,aboutthatbusiness.We'llhavemoretocomeonthatasweprogresslaterintheyearandintonextyear.

Operator :

RyanTodd,DeutscheBank.

RyanT odd (Analyst-DeutscheBank):

Great.Thanks.Maybeonemorefollowuponthecostissues.Theincremental$300millioncuttoOpExwesawonthis,isthat--wereyousaying--wasthatjustincrementalcapitaldeflation?Isthismoreofanissueofpace,ortobeclear,areyoutrendingtowardmuchlargerlevelsofcostreductionsonatwo-yearbasisthanyouwouldhaveexpectedearlier?


Icantakethatone,Ryan.We'redefinitelyrunningaheadofscheduleonwherewethoughtweweregoingtobeonreducingcosts.Aswementioned,it'sacombinationofdeflationinthebusiness,someminoramountofFXbenefits,butit'sreallymostlyrelatedtousfiguringoutwayswecandrivecostsoutofourbusiness.Wetalkedintermsofhavingthis$1billioncostreductiontarget;we'refeelingreallygoodaboutourabilitytoachievethatorgobeyondthat.


Great.Thanks.Thenmaybeonthe--atAPLNGyoutalkedabouthopefullyacargoduringthefourthquarter.CanyoumaybetalkaboutwhataretheremainingstepsyouhavetoachievethereatAPLNGbetweennowandthefourthquartertogetthatfirstcargo?

MattFox(EVP-E&P):

We'reatthestagewherewe'rebeginningtoloadrefrigerants.Wehavetoprocess--that'scalledgoingthroughthemechanicalruns,gettingalltheir[crinks],sothecompressorsarerunningandeverythingisrunningwell.Andthatwholeprocessofthatintegratedcompletionandthenhookup,thecommissioningoftheplantisallinhandandthegasisthereintheupstreamsitetofeedtheplant.We'refeelinggoodabouttheabilitytogetthatinitialcargosometimeinthefourthquarter.


Great.Thanksalot.


Thanks,Ryan.




Operator :

BlakeFernandez,HowardWeil.

BlakeFernandez (Analyst-HowardWeil):

Folks,goodmorning.Thanksfortakingthequestion.I'msorry,I'mgoingtogobackoncoststructureaswell.Justcuriousaboutmaybethesustainabilityofsomeofthecostdeflationyou'rewitnessing.Obviouslyindustryingeneralseescostscomingdown,butI'mcuriouswhatstepsarebeingtakentoensurethesearemorestructuralsotheydon'tsimplyreinflateoncethecommodityfinallydoesrecover?


Blake,we'retakingaprettyhardlookkindoftoptobottomintermsofhowweruntheCompanyandwe'reconsidering--wherewecamefromasanintegratedCompanyandthesizescaleandcapabilitywehaveasthatCompany.LookingattakingtheopportunitynowtoabitrightsizerelativetohowanindependentcompanylikeConocoPhillipsfindsitselftoday.Sothere'sthingsthatwedoinourCompanythatwe'resortofaremnantoftheintegratedCompanyintermsofhowmuchfunctionalexpertisetohaveinthecenter,howmuchoversightversusthataccountabilitythatgoesouttotheBU.

We'vedoneaprettygoodjobbuildingthatmodel,ourlower48unconventionalbusiness.We'regoingtoextendthatacrossthewholeCompanywithlessofaonesizefitsall,andmoreofafitforpurposedesign,recognizingthatanassetinthelower48isdifferentthananassetintheNorthSeaorupinAlaskaoroffshoreAustralia.Soreallyouremployeesgetit.Theyunderstandit.Theyunderstandwherewe'reseeingandwe'realreadyseeingthebenefitsofthatshift.

We'vebeenworkingonthatoverthelasttwotothreeyearsaswe'vetriedtobuildthecultureofanindependentCompany.Nowcertainlywiththedownturn,itputsmoreofalaserfocusontheneedtoacceleratethatandmakeitmoreprominentthroughoutthewholeorganizationandthewholeCompany,andthenIthinkthatwillmakeitmuchmoresustainable.

BlakeFernandez (Analyst-HowardWeil):

Thanks,Ryan.ThefollowULisonthestrategicshifttowardshortercycletypeofprojects.IguesswhenIthinkofdeepwater,definitelylongerterm,highlycapitalintensivebuttheydocontributewelltoearnings.

WhenIlookatthelower48contributionforearnings,itseemstobeoneoftheareasthat'stheweakest.Asyoukindofshiftmoretowardtheshortercycleprojects,doyouanticipatethattohaveanegativeimpactonyouractualearningsprofileoristhataconcern?


IthinkI'lltakethatone.Whenyoulookatlower48earnings,currentlyadrivingfactorthereisreallythelevelofdepreciationthat'sbeingchargedcurrentlyaswedeveloptheunconventionals.Weareprobablyhavingdepreciationchargeswhichareone-thirdlargerthanthey'llbelongertermbecauseofthereserve-bookingscheduleandrelativeconservatismthat'sforceduponusaswebookaccordingtotherulesthatareoutthere.

Soaswegothroughtimeyou'regoingtoseedepreciationratescomedowninthelower48.That'sgoingtohaveasignificantimprovementintheearningsfromthatsegment.

Theotherthing,ofcourse,asyou'veheardustalkaboutandyou'veheardtheindustrytalkaboutisjustthecostlevelsthatit'stakingtodevelopreservesandtheunconventionalshavecomedown




dramaticallyandthatwillreflectitselfinlowerdepreciationratesgoingforwardovertime.Soyes,wherewedohavefairlyweakearningscomingoutofourlower48segmentovertime,currentlyyouwillseethoseimproveaswegoforward.

Operator :

EdWestlake,CreditSuisse.

EdWestlake (Analyst-CreditSuisse):

Twoveryquickquestionsonthe$60breakevenagain.Sorry.Thatwouldbewhat2017production?Thesamethatyou'velaidoutinthepastoryou'rechangingthatproductiongrowth?


No,it'sthesame,Ed.


Imentionedalotoftheproductiongrowthiscomingfromthingsthatwe'vealreadyinvestedin.


Okay.Andthenpresumably,evenonthatstayflat,therewouldstillbesomepositivecashmarginshiftsasyoustillbackoutsomeoftheoldergasproductionthatisstillinthatmixasyougetoutto2017evenonflatCapEx?


Absolutely,whenyoulookattheSurmontTwoadditionandtheAPLNGthat'scomingonatahighermarginthanalargepartofourportfoliowiththeNorthAmericangaspiecethatyoudescribed,Ed.


(Multiplespeakers)talkaboutmarginsintermsofflatpricecashmargins,oneofthethingswe'reseeingaswe'vetalkedaboutitaswell,ascostsarecomingoutofthebusinessaswellwhichimprovesmarginsacrosstheboard.


Soit'skindofdividendplusalittlebit.AndthenonAPLNG,obviouslyeveryonehasobservedtheAsianLNGmarkethascertainlyfacedasortofdramaticdropindemandandthereisobviouslyalotofcargoescomingontocompeteforthatgasdemand.ClearlyfirstcargoisanimportantmilestoneandtheCapExwillfallfortheproject,andthereforethecashcontributionfromtheAPLNGassociateswillimprovewhichwe'llseenextyear.Canyoutalkalittlebithowyou'replacingthatproductintothemarketforTrainOneandTrainTwo,givenweakdemand?


Rightnowwe'reworkingthroughthat,Ed,andIknowthere'sbeenalotofspeculationinthemarketplacearoundthecontractandtheSPAwehavewiththebuyers.Wehavetwobuyers.WehaveaJapanesebuyerforTrainTwoandTrainOneisgoingtoChinatoSinopec.WehaveanSPA.Wehaveacontractwiththem.They'vegotdiversionaryrightswithinChina.

Withourapprovalwhichwe'veprovided,they'vegotdiversionaryrightsoutsideofChinaaswell.




We'reworkingwiththemtounderstandthevolumetheycantakeintothecountryin2016andaswegoforwardin2017,andIjustremindpeopleourcontractisatake-or-paycontract.Weexpectthey'regoingtolivetothetermsofthatcontract.

Operator :

PaulCheng,Barclays.

PaulCheng (Analyst-BarclaysCapital):

Hey,guys.Severalquickquestions.FirstoneisprobablyforJeff.Jeff,onthesecondquarter,whatisyourcostsavingrunrateandwhatdoyouexpectthoserunratesgoingtolooklikeinthethirdandthefourthquarter?


Notsurehowtointerpretyourquestion,Paul.Whenyousaycostsavings--


YouhaveaprogramthatreducecostsandI'mtryingtounderstandhowmuchofthatcostsavingisalreadyreflectedinyoursecondquarterresultandwhatistheincrementalimprovementwecouldexpectintheremainderoftheyearintonextyear?


I'lltakeyoubacktotheanalystpresentation.Wetalkedabout2014costlevelsof$9.7billion.Weweregoingtotakethatdownto$8.7billion.Thatwasthe$1billionweweretakingout.Wesaidwethoughtwe'dgethalfwaytherein2015.Sowegavecostguidanceof$9.2billion.

We'rewellalongthatpathiswhatwe'repointingouttodayandwe'veactuallyrevisedthat$9.2billiondownto$8.9billion.Sowe'regoingtocontinuetoseethataswegothroughtheyear.Youcanseewe'vehadsomereallyprettylowcostlevelsinthefirstpartoftheyear.

ThedifficultyIhavewithyourquestionisthereisvariabilityfromquartertoquarteraswegothroughtheyear.Butifyoulookatthewholeyear,we'rerunningwellaheadofwherewethoughtweweregoingtobefortheyear.


Doyouhaveanumberyoucanshareinthesecondquarter,whatisthecashoperatingcost?


Youcanlookatour(multiplespeakers)balancesheetis$2.1billionessentiallyinwhatwecallcashoperatingcost,whichisproductioncost,D&Acosts,andtheG&Aassociatedwithexplorationwas$2.1billion.


$2.1billion.Soannualizeditis$8.4billion,butyoutalkforthewholeyearis[$8.9billion].


Again,that'swhyIpointoutwehaveseasonalityinourcostsrelatedtoturnaroundactivitiesandwe'llhavesomecoststhatwillincreaseaswegothroughtheyearandasproductionrampsupinsomeofthe




newprojects.


AndmaybethesecondquestionisforRyan.Ryan,IpresumethatnowyouhaveresetthisyeartheCapExat$11billion,sothenextseveralyearsthebasecaseat$11millionalso?Underwhatcommodityprice--let'sassumeifthecommoditypricestaywhereweare,whatistheCapExgoingtolooklike?Isitgoingtostickat$11billionorendupthatyou'regoingtoreduceit?

Tryingtounderstandthatwhat'sthecriteriayou'regoingtogofor?Becauseclearlyyou'renotgoingtoreachthecashflowneutralitythisyear.Sowhatcriteriaweshouldbelookingatthat[reset]yourCapExprogram?


AsIsaid,Paul,we'llsetacapitalbudgetlaterintheyearaswelookatwhatthecommoditypriceandwhatwecanafford.Whenwelaidoutaplanat$11.5billion,thatassumessomeslightmodestrecoveryinprices.Ifweseepricesaren'trecoveringandtheyremainattoday'slevelgoingforwardinto2016,youshouldn'texpectustobespendingthe$11million,$11.5million,[sic]$11.5millionwelaidoutinAprilorthe$11billionwe'retalkingabouttoday.

We'regoingtomanagethewholesystemtomakesurewereachcashflowneutrality.We'redoingtherightthingstogrowthebusinessandfundthemaintenancecapitalbutyoushouldexpectittobecomelowerandwe'llprovidemoreclarityaroundthataswegothroughthecourseoftheyearandwewatchwherecommoditypricesendup.

Operator :

RogerRead,WellsFargo.

RogerRead (Analyst-WellsFargoSecurities):

Thankyou.Goodmorning.


Goodmorning,Roger.


IguessmaybetogetbacktosomeoftheinternalcostcuttingandthecommentaryaboutstructuringtheCompanymorelikeanE&Pasopposedtoalargeintegrated.Givenwhereyouareontheoperatingcostsavings,whatmoreshouldweexpecttoseefromastreamliningortheheadcountreductions,thatsortofstructure?


AsJeffsaid,we'rewellonourwaytothe$1billioncostchallenge.Wethinkwe'recertainlygoingtohitthat,probablyexceedthat.Theexplorationdecisionwemadeandannouncedearlier,asIsaid,that'sgoingtobeincremental,bothonacapitalandoperatingcostside.We'llhavesomeimpactontheorganizationaswethinkaboutthatgoingforward.Wethinkthere'srunningroombeyondwherewe'reat,butit'ssomethingwe'respendingalotoftimelookingat.

Withrespecttore-lookingathowweruntheCompany,that'sgoingtodeliversustainablereductionsforthelongerterm.Soit'snotjustabouttaking$1billionormoreoutofthecostsystemintheshort




(technicaldifficulty)deflation.Itisaboutmakingthatasustainablecutovertime.Andthat'swhereourfocusisatrightnow.


Okay,great.Thanks.AndforJeff,lookingatthecashflowstatementorthecashflowwaterfall,workingcapitalwasanegativetothispoint.Asyouthinkaboutlatterpartofthisyear,or2016,isthereanopportunitytopulloutofworkingcapitalaswellascashflowfromthebusinessaswellaspotentiallymoredebt?WhataresomeofthethingsweshouldthinkaboutmaybeassomeoftheselargeprojectsstarttocomeonlineastowhethertheyconsumeorfreeupcapitalinadditiontotheCapExchanges?


Ithinkfromaworkingcapitalperspectivewhatwe'veseeninthefirsthalfoftheyearisreallyjusttheeffectofacouplethings.Accountspayablecomingdownbecauseoftheloweractivitiesonthecapitalside.Thiswasreally--aswemovedourcapitalprogramdownfromthe[16,17]levellastyeartothis[11]thisyear.You'vegotthislageffectonworkingcapital.

Nowthatwe'redownatthelevelwe'regoingtobeatoncapital,wewouldn'texpectthateffecttocontinueinsubsequentquarters.Aspricescomedown,you'veseechangesinourtaxespayableaswellcomeoffandbeauseofcashforworkingcapital.That'sprettywelloutofthesystemnowalso.Sowewouldn'tanticipatethatbeingasignificantchangeinuseofcashgoingforwardforus.

AsImentionedonthecall,westillhavereallysolidaccesstothecapitalmarketstotheextentthatit'snecessarytogobeyondourcashbalancestofundourcapitalandourdividendintheperiodbefore2016whenwegettocashflowneutrality.Wecertainlyhavetheabilitytodothatinaveryeffectiveway.

Operator :

EvanCalio,MorganStanley.

EvanCalio (Analyst-MorganStanley):

Goodafternoon,guys.


Hey,Evan.


MaybemyquestionisrelatedtotheUSearningspowercommentandoffshoreexplorationreduction,maybeforMatt.IknowyoulookatresourceupstreamgloballyandthesavingsandefficienciesonshoreUSonconventionalhavebeenmostnotabletodate.DoyouseethescopeforinternationaltosignificantlymovedownthecostcurvetocompeteforgreenfieldcapitalorinthisstripenvironmentdoyouseetheUSinyourUSunconventionalpositionaseconomicallysuperiorandeffectivelytakingmarketshare?

MattFox(EVP-E&P):

Ithinkcomingfromadeflationperspective,morethanhalfofthedeflationwe'veseenhasbeeninNorthAmericasofar.Historicallytheinternationalbusinesshasbeenslowertorespondfromadeflationperspective,sowestillexpecttoseemoreofthatcomeinoverthenextmonthsandinto2016intheinternationalside.




AsweseethatinEMEAthenwecanunderstandwhatimplicationsithasforcapitalcostandthathasimplicationsfortheviabilityofprojectsacrosstheportfolioasawhole.Soifwhatwe'reseeinginEMEAfromadeflationperspectivewillinfluencehowwethinkaboutcapitalallocationintheyearsahead.


Right.Andefficiencieshereaswell.Atcurrentstrippricing,what'sthebreakevenperiodononeofyour$8millionto$9millionEagleFordwells?Arewealittleoverayear?What's--

MattFox(EVP-E&P):

Ithinkwe'restillinthe12-to18-monthsortoflevelforbreakevenonanindividualwell.


That'sprettypowerful.IfIcouldslipinoneother,justaquestiononifyoucandiscussthechangestoworkingcapitalassociatedwithinvestingactivitiesinthequarter,thatwassequentiallyhigher.Whatdrovethatreclassification,theworkingcapitalchangefrominvestingactivity?


Yes,Ithinkyou'renoticingthatonthecashflowstatement.Thistimewebrokeworkingcapitaloutrelatedtooperatingactivitiesandinvestingactivities.Wedidthattoprovidemoreclarityonwhatwasreallydrivingthechangesinworkingcapital.Again,asI'vementionedacoupletimesnow,therealdriverhasbeentheslowdownandthecapitalinvestingactivities.

Operator :

AlastairSyme,Citi.

AlastairSyme (Analyst-Citigroup):

Hi,everyone.Jeff,Ithinkyounotedafewtimesaboutthebondofferingsinthequarter.ButIthinkI'mrightinsayingyou'restillonnegativecreditwatch.IwaswonderingwherethosediscussionssitinthecurrentenvironmentwiththevariousratingagenciesandhowvociferouslyyouwouldfeelyouneedtodefendaSingle-Arating.


We'recurrentlyratedisA-1withMoody'swhichisthehighestSingle-A.We'reatamiddleSingle-AwithStandard&PoorsandFitch.Allofthem,asyoumentioned,haveusonanegativeoutlook.Allthreeoftheagenciesconfirmedourratinginconjunctionwiththe$2.5billionbondofferingwedidinthesecondquarter.

Ithinkthepositionthey'reinisthey'rewaitingtoseehowcommoditypricesplayoutandwhatlevelsofincrementalborrowingwemightdobeforewegettocashflowneutralityin2017.Butaswe'vesaidbefore,aswelookatdifferentscenariosofwhatborrowingswemightdoandbeforewegettoneutralityin2017,we'restillverycomfortablethatthatlevelofborrowingisnotgoingtotakeusoutoftheSingle-Arange.Itcouldknockusdownanotchwithinthatrange,butwouldn'ttakeusoutofthatrange.

AlastairSyme (Analyst-Citigroup):

AnddefendingSingle-Awouldbeparamount,wouldit?





Wethinkthat'stherightplaceforaCompanylikeourstobe.Justfitsstrategicallywiththedirectionwe'reheadingasaCompanytobeonethathasapriorityonshareholderdistributions,likewe'vetalkedaboutwiththedividendthatispursuingmodestgrowthandwantstohavethecapabilitytodothatthroughallkindsofdifferentcommoditypricecycles.Wedofeellikethat'stheappropriatecreditspaceforustobein.

Operator :

JohnHerrlin,SociateGenerale.

JohnHerrlin (Analyst-SocieteGenerale):

Thankyou.WiththeCookInletsale,doesthatincludetheKenaiplant?

MattFox(EVP-E&P):

Noitdoesn't.


Okay.Thanks,Matt.Nextone.You'vetalkedalot,obviously,aboutefficienciesandcostsavingsandoptimizations,anddeflation,andallthat.You'reabigCompany,asRyantalkedaboutearlier,youhavetheabilitytechnicallytorunyourfieldsdifferentlythan,say,smallercompanies.Sohowmuchofyouroverallperformanceisrelatedtothattypeofself-helpfrom,say,fieldautomizationsoyoucanminimizeunplanneddowntimeandenhancerecoveries?

MattFox(EVP-E&P):

It'spartofourcostreductionprocess.We'relookingatouroperatingcosts,ourliftingcostsacrosstheCompanyasawhole.Wehavehad--foryearsI'vehadtheverystrongoperationsexcellenceprogramwe'veappliedacrosstheorganization.Frankly,forthepastfewyearswe'vebeenfocusingthatonincreasingproduction.

That'swhatyoudowhenoilpricesare$100abarrel.Butthesame--thetoolsexistwithinthatcapabilitytofocusthatmoreoncostreduction,sowe'rerefocusingouroperationsexcellenceonmakingsurethatwe'regettingtherightbalanceoftherightoperatingefficiencyandtherightcostsinthispriceenvironment.Sohavingthatcapability,that'sourintegratedviewacrossthewholeorganizationisreallygood.


AndIwouldadd,John,tothat,aswetalkabouttheindependent,someofthecapabilitywehaveasaCompany,ourfunctionalexcellencearoundintegratedoperationcentersandtheopsexcellenceplansthatMatttalkedabout,thereservoirunderstandingandcharacterization,theEUR,thestimulatedrockvolumeworkthatwe'redoing,weneedto--we'regoingtomaintainthatandexpandthatcapabilitybecausewethinkit'sdifferentialinleveragingintheindependentworld.


Thankyou.


Thanks,John.

Operator :




JasonGammel,Jefferies.

JasonGammel(Analyst-MacquarieResearchEquities):

Thanksverymuch.Ihadanotherquestiononlongcycletimeversusshortcycletimeinvestments.You'reclearlyatapointwhereyou'rehittinganinflectionpointandcapitalisdroppingawayandproductionrampiscomingin.ButIsupposelongcycletime,bydefinition,meansifyou'renotinvestingtoday,thenyoudon'thavethosebigstepchangesinproductionin,let'ssaythe2019,2020timeframe.

Myquestionistwofold.Firstofall,doyouexpecttomovetowardsFIDonanymajorcapitalprojectsthisyearandnextyear,giventhecapitalconstrainedenvironment?Andthesecondpartofthequestionis,overthecycle,howmuchCapExabovethe$8billionmaintenanceCapExwouldyouwanttobeputtingintotheselongercycletimeprojectsrelativetoyourshortcycletimeinvestmentopportunities?

MattFox(EVP-E&P):

OntheFIDquestion,wewillbemakingfinalinvestmentdecisionsonafewrelativelysmallprojectsaswegothroughthisyearandintonextyear.We'reinthefortunatepositionthatmostofourmajorprojectsthatareintheportfolionowarenotmegaprojectsandthey'retheprojectswe'veexecutedbefore,likeaddingdrillsitesinAlaskaoraddingplatformsintheNorthSeaorinChina.Sothey'reallrelativelysmallscalethings.Sowedohavethescopewithinthecapitalprogramtocontinuetoinvestinthoselongercyclebutsmallerscaleprojectsandwewilldothat.

Oneofthestrategicquestions,whichIthinkiswhatyou'regettingat,Jason,isforthelong-term,what'stherightbalanceforaCompanylikeusbetweenthemoreflexibleshortcycleinvestmentopportunitiesofwhichwehavealotwithinourdevelopmentprograms,andinparticularinunconventionalbusiness,andthentheselongercycleprojectsofthecharacteristicswejustspokeabout.Andwehaveflexibilitytodecideexactlywhatthatratioshouldbeandthat'soneofthelensesthatwelookatourstrategythrough.

JasonGammel(Analyst-MacquarieResearchEquities):

Okay,thanks,Matt.Appreciatethethoughts.

Operator :

NeilMehta,GoldmanSachs.

NeilMehta(Analyst-GoldmanSachs):

Goodafternoon.


Hi,Neil.


Appreciatethatincrementaldisclosureoncashflowneutralityin2017.Definitelybeentopofmindforinvestors.Twomoreindustry-focusedquestions.Iguessthefirstone,Ryan,SpeakerBoehneryesterdaycameoutinfavorofcrudeexports.Ithinkaswespeakhe'satleastdiscussingit.Flipsideiswe'regoingintoanelectionyear.Justwanttogetyourthoughtsonthelatesttemperatureonthisissueasyou'vereallybeenleadingthechargeonbehalfoftheindustry.





Thanks,Neil.We'regladtosee--we'vebeenworkingwiththeSpeaker'sofficetogetthemtosupporttherepealofthebanandgetitupforavotelaterthisyearandIthinkwemadesomesignificantprogressbothintheHouseandtheSenate.AndofcoursetheSpeaker'scommentsyesterdaywerewell-receivedbytheindustryandeverybody.It'sstillgoingtobealittlebitofatoughuphillclimb.We'regettingbipartisansupportbothintheHouseandSenate.WecouldusealittlebitmoreoftheDemocraticsupportforit.Sowe'reworkingonthat.

ButwhatchancesdoIgiveitofpassingthisyear?Ihaven'tclimbedto50%butit'sencouragingtoseewemaygetavote,atleastanup-downvote,atleastinoneofthechamberstogoforward.Ithinkthequestioneverybodyisaskingisisthereenoughbipartisansupport,particularlyinbothHousesandthentocleartheAdministration?That'swhatwe'respendingmostofourtimeonrightnow.


Thanks,Ryan.ThesecondquestionisviewsonindustryconsolidationThisislessaConoco-specificpoint,butmoreanindustrypoint.Ifyouexpectanaccelerationinactivitywiththedoubledipinthecommodityandthecapitalmarketstightening,lesssoasyouguyspointedoutforyourselves,butforcompanieslessattractivelypositionedfromacapitalstructurethanyou,yourthoughtsonM&Agoingforwardfortheindustry?


Ifwesawsomemodestincreasinginthecommoditypricesmaybethatwewouldhaveenvisionedalittlebitmoreearlierintheyear,IwouldhavetoldyouthatIthinkthestocksareprettyfullyvaluedandexpectingpricestocomebacktothat$70,mid$70,$80level.Certainlywiththisrecorrectionoverthelastfewmonths,it'sputtingalotofthespotlightonsomeofthecompanies,asyousay,thatmaynothavethefinancialcapacitythatConocoPhillipsdoes.

Iftheselowerpricespersistforalongerperiodoftime,that'scertainlyanareathatprobablywouldstarttorampup.Istilldon'tpersonallybelievethefloodgatesareopeningonthat,butIthinkit'ssomethingthatindustrywillbewatchingprettycloselyifthesekindsofpricespersistforalongerperiodoftime.


Thankyou.

Operator :

JamesSullivan,O lympicGlobalAdvisors.

JamesSullivan (Analyst-O lympicGlobalAdvisors):

Hey,guys.Thanksforfittingmein.Justwantedtobeverycrystalclearononepoint.Obviouslyyouguyshadhighlighteda$14billionto$16billionoperatingcosttogobacktothatissue,reductionofa$1billion,ofwhichIthinkyouhadsaidroughly70%wassupposedtobestructuralsavings.

AmIrightinthinkingthatthatwasreallybeforeyouguyshadenvisionedastrategicreviewofthekindthathasbeentalkedaboutacoupletimesregardingstreamliningsomeofyour--let'scallthemmajor-likeexecutioncapacitieswhichwould--isitrighttothinkofthoseasincremental--potentialincrementalstructurecostsavingsoutsideofthatoriginalfirst$1billion?





No,James,whenwelaidoutthe$1billion,wehadavisionthatweweregoingtogothroughthisprocessandmakesomestructuralchangestotheCompany,soIwouldsaythatsome,notall,butmanyofthosestructuralchangesarebuiltintothe$1billiontrajectorythatwe'reonis--asJeffdescribed,Ithinkwe'reaheadofplanandourexpectationisthatwe'llgeneratemoresavingsbeyondthe$1billion.

Andthentheexplorationdecisionwemadenottocontinuepursuingsomeofthedeepwater,thatisincrementaltothe$1billiondecision.Andwe'reworkingthroughwhattheimplicationsofthat--giventhatwehavesomeportfolioanddiscoveredportfoliothatwe'regoingtocontinuetoinvestinormonetizeinotherways.


Okay,thatmakessense.Sodownshiftinginthatwaywouldbetheincrementalpiece.Okay.Justaseparatething,followinguponthequarterlydiscussionregardinglongcycle,shortcycle,andcorrectmeifthere'sbeenachangeinthis.ButlookingatAKLNG,asIunderstoodit,therewasthepotentialforthattoprecedeintopre-FEEDin2016oratleastgraduatetothenextstepinthedevelopmentprocess,whichwouldprobablyrequireamaterialcapitalcontributionfromstakeholders.

Itmaybethatthat'sgettingpushedtotherightbutcouldyoudescribeyourthinkingonthatproject,yourparticipationinitandthenhowitfitsintoyourportfoliogiventhatobviouslywe'retryingtoskewtowardshortercycleprojectsatthemoment?


Ithinkwearemakingsomeprogressonthatwiththepartnersinalliancewiththestate.There'sstillalotofworktogodotogetanalignedviewaroundthefiscalsandthestate'sparticipationandwhatthat'sgoingtolooklike.There'salotofworktodoevenbeforewetakethatnextstepthatyoudescribedinthepre-FEED.Ithinkthecompaniesarelookingatkindoftheendofthisyearinto2016tomakethatdecision,butalotofthatisdependentonhowweseethealignmentworkingwiththestateofAlaskaandtheirparticipationintheproject.It'savery,verylongproject.Noresourceriskforus.

KindofgoesbacktoMatt'scomment,howmuchofthislongercycletimeisveryflatproductionwithverylowresourcerisksdoyouwantintheportfolio?Andwe'regoingthroughthosethoughtsinanalysisrightnow.Itdoesn'tmeanthatthere'szeroofthatintheportfolio.Ithinkahealthyportfoliohassomeofthat.We'vegotsomeLNGproperties.We'vegotourCutterproperty.We'vegotAPLNGcomingonline.Wehavealargeresourcepotentialintheoilsands.We'retryingtofigureouthowtobreakthoseprojectsintoshortercycletimeprojects.

Stilltherearelong-datedresourcebarrelsthatareattractiveandshouldbeapartoftheportfolio.That'sgoingtobethechallengeforusaswethinkaboutAKLNGgoingforward.


Great.That'sallIhad.Thanks,guys.


Thanks,James.

Operator :

Thankyou.IwillnowturnthecallbackovertoEllenDeSanctis,VPInvestorRelationsandCommunicationsConocoPhillips.





Thanks,Christine,andthankstoallourparticipants.Obviouslyfeelfreetocallusbackforanyfollowupquestions.Wereallyappreciateyourtimeandinterest.Thankyou.

Operator :

Thankyou.Andthankyou,ladiesandgentlemen.Thisconcludestoday'sconference.

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ConocoPhillips (COP) Earnings Report: Q2 2015 Conference...

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