ConocoPhillips plans conservative financial and operating programs in 2017, planning for a longer-than-expected $50/b oil world by reducing its capital budget 4%, growing production up to 2% and forging technologies to squeeze out the last smidgen of resource from existing assets.
Production for full-year 2017 is pegged at 1.54 million to 1.57 million b/d of oil equivalent, compared with projected output this year of 1.54 million boe/d after asset sales, executives said during webcast remarks at the company's Analyst Day in New York.
Growth will mostly come from rampup at APLNG in Australia, Canada's Surmont 2 oil sands project, the Kebabangan offshore natural gas field in Malaysia and increasing Lower 48 shale activity. Production numbers exclude Libya.
But the key takeaway from top management is that the company is set to thrive and even grow slightly at a $50/b Brent oil price and that it has at least 18 billion boe of resource with an average cost of supply -- the price it takes to achieve a 10% after-tax return rate -- under $40/b Brent and in some cases under $35/b.
"The world has changed," ConocoPhillips CEO Ryan Lance said. "You can't count on rising commodity prices to bail out your business model."
Lance said his company takes a view that commodity prices will be "lower and more volatile" in the years to come and that its executives are "shifting our mindset to be a business managed for free cash flow."
On Thursday, ICE January Brent settled down 52 cents at $45.84/b.
EYES $7 BILLION IN DEBT REDUCTION
Other company goals are debt reduction to about $20 billion over the next few years, down by about $7 billion. This will be achieved in part with planned divestitures of $5 billion to $8 billion of chiefly North American gas assets over 2017 and 2018.
In addition, ConocoPhillips anticipates a $5 billion capital budget for 2017, down from a target of $5.2 billion this year -- a figure set last month but reduced from $6.4 billion at the start of the year. Capital expenditures for 2017 are about half the $10.1 billion spent in 2015.
Next year will see a rampup of unconventional activity in the Lower 48, said Al Hirshberg, ConocoPhillips executive vice president of production, drilling and projects. From three rigs most of this year in assorted plays, it expects to be at eight by year-end, and as many as 12 next year.
Company executives emphasized the company's transformation since it became an independent E&P company after spinning off its refining and downstream assets in 2012.
For example, not long ago, the company operated in 28 areas -- many of them vestiges of the years when it was a major, Hirshberg said. Today it operates in about half that many areas, after exiting Russia, Nigeria, Algeria and the Kashagan project in Kazakhstan.
BREAKEVEN COST REDUCED BY $25/B
In the last couple of years the company has reduced its breakeven cost -- the price needed to sustain production and pay the shareholder dividend -- to less than $50/b Brent from over $75/b, Chief Financial Officer Don Wallette said.
"No matter where you are in the price cycle, a low breakeven price wins," Wallette said.
The company can hold production flat with about $4.5 billion of capital expenditures, but has another $500 million built in for exploration, Hirshberg said.
Exploration money will largely go toward unconventional Lower 48 resource plays, appraising the Barossa discovery in the Timor Sea and winding up Gulf of Mexico and Nova Scotia drilling obligations after a company decision last year to exit offshore exploration.
Of its 18 billion boe of under-$40/b resource base -- the company has additional resources whose capital cost it is attempting to reduce -- about 28% comes from LNG and oil sands. These produce around 500,000 boe/d and will likely receive about $500 million in maintenance capital, Hirshberg said.
Another 33% of the low-cost resource base comes from conventional projects in the UK, Norway, Alaska, China, Malaysia and Indonesia, where production is around 800,000 boe/d and requires about $3 billion in maintenance capital. And unconventional assets in the US Eagle Ford Shale, Permian Basin, Niobrara Shale and western Canada hold about 7 billion boe and produce about 250,000 boe/d. These require about $1 billion in maintenance capital, he said.
As part of its push toward maximizing its existing resources, Hirshberg said ConocoPhillips has taken its time to develop specific technologies for places such as the Lower 48 shale plays, while smaller independents have zoomed past with spectacular output growth.
But Hirshberg believes taking time to understand the geoscience pays off in more exact targeting that ultimately saves money and extracts more resource from a field.
"As part of transformation of our business that lets us thrive at lower prices, we're driving Uberization of the oilfield," he said, referring to the online ride-hailing service Uber that has revolutionized transportation.
For example, in the Eagle Ford Shale in south Texas, where many oil companies have reduced capital or exited for the more glamorous Permian Basin further west, the company has fingerprinted the geology with unique oil and gas biomarkers. These determine if more wells are required in a zone and where, allowing for customized designs to extract maximum oil and gas.
The result has been an incremental 500 million boe of resource added in the play during the past year, Hirschberg said.
Failure to do the legwork results in wasted money and potentially bypassed resources, he said: "Because you just can't do it right after you do it wrong."
