The key takeaways for Alaska from the ConocoPhillips’ third quarter investor presentation Oct. 29 were Hilcorp will likely be the new operator of the Prudhoe Bay unit after its acquisition of BP’s Alaska assets closes in 2020, and that this coming winter will be ConocoPhillips’ busiest winter season ever on the North Slope.
When asked whether there will be any operating changes or upsides in Alaska with BP exiting and a new partner coming in, particularly in light of the fact the company had already spent almost all of its full year Alaska budget, Michael Hatfield said the transition from BP to Hilcorp was still in “early stages” pending the close of the transaction, but that Hilcorp has a “track record” in Alaska of rejuvenating mature fields, reducing lifting costs, and increasing development activity and production.
“So, we expect to see a reduction in operating costs and a renewed focus on investment,” said Hatfield, ConocoPhillips’ president for Alaska, Canada and Europe, noting any capital expenditures for Prudhoe Bay would require the approval of Hilcorp, ExxonMobil and ConocoPhillips.
“While we work very closely today with BP as the operator, we’ll continue to work closely with Hilcorp as they come in … to maximize the value of this legacy asset,” Hatfield said.
“We’re excited about this transaction; we see opportunity to unlock more value at Prudhoe Bay” with Hilcorp.
Currently, the major working interest owners in the Prudhoe Bay unit are ConocoPhillips with a 36% interest, ExxonMobil with a 36% interest and BP with a 26% interest.
Regarding the other key takeaway, Hatfield said the upcoming winter season on the North Slope will be “our largest ever. We’ll drill wells at Willow, at Narwhal and Harpoon (prospect southwest of Willow),” referring those listening to the investor and analyst meeting planned for Nov. 19 in Houston for additional details.
Matt Fox, ConocoPhillips executive vice president and chief operating officer, said the company would unveil a 10-year “disciplined plan that delivers free cash flow and strong returns” at the November meeting. “And, of course, we’ll provide a deep dive into the assets across our diverse portfolio.”
Operational highlights
In presenting year-to-date operational highlights in Alaska and answering questions, Fox echoed Hatfield’s sentiments about the upcoming North Slope winter season.
“Starting in Alaska,” he said, “we safely completed our third quarter turnarounds at Prudhoe, the Western North Slope and Kuparuk, and closed the Nuna discovered resource acquisition. We also continue to progress appraisal of our Willow and Narwhal discoveries. Earlier this month we spud another horizontal well from an existing Alpine drill site into the Narwhal trend (Nanushuk formation). The well was designed to provide offset injection to the horizontal producer we drilled earlier in the year and help us optimize future development planning. We’re also gearing up for the winter exploration, appraisal and project execution season,” Fox said, later describing it as the largest ever.
Production, earnings, spending
ConocoPhillips’ global oil and gas output rose 7% year over year in third quarter. Driving growth was a 21% surge in production from Alaska’s biggest competitor for investment - the company’s “big three” unconventional plays in the Lower 48: the Eagle Ford, Bakken and Permian basin.
That high-end production growth enabled ConocoPhillips to deliver strong earnings even though commodity prices fell 18% from the same period a year ago, Moody’s reported.
It also helped the company generate $2.3 billion in cash flow from operating activities, which was more than enough to cover its $1.7 billion in capital spending and boost its dividend by 38% to $340 million.
That said, ConocoPhillips more than reloaded its cash position by closing $2.2 billion in asset sales during the quarter, enabling it to end third quarter with $8.4 billion in cash.
Overall, the company produced $1 billion in free cash flow, while returning 41% of its total cash flow from operations to shareholders.
ConocoPhillips’ capital spending and investment in Alaska in third quarter was $427 million and $1.2 billion year to date, as compared with the Lower 48, where the company’s capex and investment was $843 million and $2.6 billion in the same periods.
However, adjusted earnings in Alaska were higher than the Lower 48, with third quarter being $312 and year-to-date almost $1.1 billion, whereas in the Lower 48 year-to date earnings were just $707 million, mainly due to a drop in earnings from $331 million in second quarter to $136 million in third quarter. (In the full year ending 2018, Lower 48 earnings were almost $1.7 billion.)
Third quarter tax rates in Alaska were 26.6% (excluding royalties) as compared to 27.7% in the Lower 48, 16.1% in Canada, and 14.6% in Europe and North Africa.
Hatfield said that at this point in time Alaska production after the turnarounds was 210,000 to 220,000 barrels of oil per day.
As of as of Sept. 30, ConocoPhillips has operations and activities in 17 countries, $70 billion in total assets, and approximately 10,400 employees. Production excluding Libya averaged 1,310 million barrels of oil equivalent per day for the nine months ending Sept. 30, and proved reserves were 5.3 billion barrels of oil equivalent as of Dec. 31, 2018.
Battle ahead
In the Q&A session Hatfield was asked to talk about the fair share act ballot initiative; specifically, to put it in the context of the longer-term ebb and flow of tax policy for the North Slope.
“It’s a situation that we are monitoring very closely,” Hatfield said.
“I’d say this initiative is not in the best long-term interest of Alaska citizens. We believe the Alaskan citizens will see the benefit that the North Slope exploration renaissance has already brought to the state and to its citizens,” he said.
“If you look at the positive changes that have occurred since SB 21 went into effect in 2013, ConocoPhillips and others have announced several additional discoveries and projects that could add significant incremental production and revenue to the state. So, we believe that continuing those investments is good for employment, it’s good for the Alaskan economy and it’s good for the Alaskan citizens. … We feel like it’s also worth noting that this sort of initiative has come up in the past and we’ve successfully informed voters of the negative consequences on jobs, production and long-term revenue - the impact those sort of initiatives have,” Hatfield said, adding that ConocoPhillips has “a long history of engagement with the public. We feel that there is a mutually beneficial relationship with the stakeholders.”
In short, Hatfield said, the ballot initiative “is very much on our radar and something we’re monitoring quite closely, and we do expect, in fact, we’re gearing up now to make our case to the citizens about the benefits of continuing under the fiscal regime that we currently have.”
