Conoco earnings grow
Lance credits new strategy of managing costs, not chasing business cycles
In its results for the fourth quarter of 2018, ConocoPhillips reported significantly improved earnings from both its Alaska and its worldwide operations. Adjusted 2018 earnings for the company as a whole totaled $5.3 billion, while adjusted earnings for Alaska totaled $1.6 billion. That compares with earnings of $739 million for the company and $653 million in Alaska in 2017. Adjusted earnings in 2016 showed a loss of $3.3 billion for the company as a whole, with a gain of $232 million in Alaska.
By not including special, one-off items in the accounts, those adjusted earnings can provide more meaningful financial comparisons than gross earnings. However, the company reported unadjusted gross earnings of $6.3 billion for 2018 and a loss of $855 million in 2017. Alaska saw gross earnings of $1.8 million in 2018 and $1.4 billion in 2017.
Business strategyThe company attributes its success in improving its financial performance, despite volatile oil prices at levels well below those seen prior to the oil price crash in 2014, to a strategy of assuming relatively low oil prices in determining project economics and managing the company’s cost structure. The idea is that the company can remain resilient to low oil prices while providing an upside on its returns when oil prices move higher.
“I am proud of our organization for safely delivering exceptional results in 2018,” said Ryan Lance, ConocoPhillips chairman and CEO. “Our accomplishments reflect our clear commitment to a value proposition that is focused on returns and free cash flow generation, and that balances investments with returning cash flow to shareholders through price cycles. This is our formula for offering investors a compelling way to invest in our sector. We look forward to delivering another strong year of performance in 2019.”
During a Jan. 31 earnings call Lance said that the company’s new business strategy had begun in late 2016 and had demonstrated success through 2017 and 2018. The result has been a return on capital employed of 12.6 percent.
“That’s nearly a 20 percent improvement over our ROC when Brent was $109 per barrel just a few years ago,” Lance said.
Lance commented that as part of its strategy of adding to its low cost of supply resource base and optimizing its asset portfolio, ConocoPhillips had seen high-value asset acquisitions and significant success in its exploration efforts in Alaska in 2018. Worldwide, at the end of 2018 ConocoPhillips had a resource base of about 16 billion barrels of oil equivalent, with an average cost of supply of less than $30 per barrel, he said.
Capital projectsConocoPhillips has already announced a capital budget of $6.1 billion for 2019. The company’s planned use of its capital expenditure includes advancing construction in the Greater Mooses Tooth 2 project in the National Petroleum Reserve-Alaska, and another season of exploration and appraisal drilling on the North Slope, Lance said.
He commented that, as part of this winter’s Alaska exploration drilling program, the company had already drilled two wells in December from existing gravel pads. One of these wells is testing the Cairn prospect from a pad in the Kuparuk River unit. The other, drilled from the CD-4 pad in the Colville River unit, is testing a seismic anomaly in the Putu prospect. The Putu prospect is in what ConocoPhillips refers to as the Narwhal trend, the same trend as Pikka/Horseshoe, in which Oil Search and its partners are exploring and developing oil resources in the Nanushuk formation.
ConocoPhillips is also conducting a drilling program at Montney in Canada and continuing the development of its tight oil assets in the Lower 48. Discussions and decisions are in progress on a few major projects in Asia.
“Importantly, as we see results from these opportunities, we’ll retain flexibility on how and when we invest in most of these projects,” Lance said. “You should expect us to prioritize and phase these investments in a way that’s aligned with our value proposition.”