Houston — ConocoPhillips is performing so well financially that it raised its full-year production guidance a second time, upped 2018 capital spending 9% to $6 billion and increased the amount it will spend on non-operated wells while still largely keeping to its stated activity plan.
Operational goals were exceptional too, as the company hit its production target of 300,000 b/d of oil equivalent in May for the "Big Three" US unconventional plays six months ahead of time, Al Hirshberg, executive vice president of production, drilling and projects, said Thursday during the company's second-quarter earnings conference call.
That goal was originally supposed to be achieved by year-end, Hirshberg said.
"We'd promised to be up 22% or better" in the second quarter," he said. "But to get an extra 15% growth ... is pretty significant progress, I'd say."
The three unconventional plays include the Eagle Ford Shale in South Texas, the Bakken Shale in North Dakota and the Permian Basin, which combined averaged 292,000 boe/d in Q2, up 37% year on year.
Eagle Ford production averaged 182,000 boe/d in Q2, up 42% from the same quarter in 2017, while its Bakken production of 82,000 boe/d was up 19% and the Permian was 28,000 boe/d, up from 16,000 boe/d in the same year-ago periods.
Company-wide, Q2 production totaled 1.211 million boe/d, up 5% year on year, excluding Libya production of 38,000 boe/d and after asset dispositions. That was just above its high end of guidance and stemmed from improved Eagle Ford and Bakken wells, and also its Western North Slope acquisition in June which supplied 5,000 boe/d, Hirshberg said.
Production in Q2 included 624,000 b/d of crude oil, including 218,000 b/d in the Lower 48.
RAISES PRODUCTION GUIDANCE 2% TO 1.240 MILLION BOE/D
ConocoPhillips also raised its production guidance for 2018 to 1.225 million-1.255 million boe/d, after having also raised it in April. The total increase was 25,000 boe/d and should provide 6% production growth this year, up slightly from an earlier projected 5%.
Production has been so outpaced expectations that the company's cash flow has exceeded capex and investments by $1.2 billion. It based its original $5.5 billion capex plan for this year on $50/b WTI, but its "new reference point" is $65/b WTI, Chief Financial Officer Don Wallette said, even though the company plans to maintain its capital discipline with no net increases in its operated drilling and project scope.
ConocoPhillips' revised $6 billion capex for 2018 includes an extra $500 million that is largely based on having met its financial and operating targets in a much higher oil price environment than it had envisioned earlier this year.
The extra funding is all allocated to the Lower 48. Increases in non-operated wells Hirshberg said had "good economics," and greater drilling efficiencies that allow more well completions with the same amount of rigs in the Eagle Ford and Bakken, each account for about $200 million of the increase, while inflation accounts for $100 million or less.
"In the first half of this year, we've already spent 50% more capital than we spent all of last year on Lower 48 non-operated activity," he said.
But he stressed the company was not ramping up its original drilling plan because of higher oil prices, which started 2018 at around $60/b and are now bumping around the $70/b mark.
Inflation pressures include higher US steel tariffs recently imposed by the Trump Administration, which for ConocoPhillips "are turning out to be a fairly significant item for us," Hirshberg said.
IMPACT FROM HIGHER STEEL PRICES
The company spends about $300 million a year on pipes, valves, fittings and "all the stuff made from steel," he said. Prices on a particular type that ConocoPhillips uses are up 26% since the beginning of 2018, although the company has been insulated to some extent because of its supply chain position.
"But that will continue to grow on us going into next year," he said. "There will be inflation pressure for us in that higher-priced world."
Additionally, ConocoPhillips plans rig changes that in part stem from widening differentials for WTI oil prices in the Permian versus Gulf Coast given limited takeaway capacity in that basin. The company will shift an unconventional rig from the Permian, where it now is running three rigs, to the Eagle Ford where it now has six rigs and will soon have seven.
Also, it has dropped the lone conventional Permian rig it was running in that basin, which until about 2010 had little to no unconventional production. But in recent years a majority of drilling in the basin, which produces about 3.5 million b/d of oil, now uses unconventional technologies.
Hirshberg said the company's relatively small amount of unconventional Permian production isn't enough that tight takeaway capacity in that basin will "matter to us."
But the Eagle Ford is a different story. There, "production is growing so much faster than expected, we've had to sign up for additional export capacity," he said. "There is plenty of third-party availability [and] we are having to add extra commitments for takeaway ... given the higher production."
