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ConocoPhillips budget flat in 2021
3rd quarter earnings down; Alaska one of firm’s 3 growth areas in world; if ballot measure passes Willow timing could change Kay Cashman Petroleum News
As reported in the Oct. 29 Petroleum News bulletin, in its third quarter earnings report and conference call ConocoPhillips listed the North Slope as one of its three growth areas in the world along with Norway and Malaysia.
In Alaska ConocoPhillips reported a net loss of $16 million in third quarter, with the company incurring an estimated $136 million payable to the State of Alaska in the form of production taxes, royalties, property taxes and state income tax.
Year to date ConocoPhillips had an unadjusted net loss of $76 million in Alaska. Its estimated obligations to the State of Alaska (in the form of taxes and royalties) in third quarter totaled $442 million, plus the company invested $882 million in North Slope capital projects; hence the net loss for Alaska operations.
If Ballot Measure 1 passes, it will impose a 150-300% tax increase on North Slope oil production (difference based on the price of oil), reducing the competitiveness of Alaska.
“We have years of development opportunities left in Alaska, but a shift of capital from Alaska elsewhere is going to be rational, if taxes increase,” Matt Fox, ConocoPhillips executive vice president and COO, said during the third quarter conference call. “I mean this is a production tax. And what you tax more, you get less of.”
ConocoPhillips is moving forward with the Willow project, but that “assumes taxes will not increase,” Fox said. “If it passes, we might want to reconsider the timing.”
He also said that the Willow project recently “passed a milestone. We got a Record of Decision from the BLM after more than two years of process. So that’s keeping us on track with the project timeline,” Fox said, noting “it’s important to understand that the permit was received under the 2013 activity plan for the National Petroleum Reserve - those are rules that were set under the Obama administration so they should stand up well to scrutiny if a change in the administration occurs.”
Fox also addressed the impact on federal land and permitting in Alaska should a change in D.C. occur: “If there’s a change in administration, we would expect that to have a relatively limited impact on us (in Alaska). I mean … federal land only represents about 5% of our production. Now some coming production, GMT 2, in particular, is on federal land, but it’s still underway. First production will be at the end of next year. So, we don’t expect that it will be affected at all. Willow’s on federal land, of course … but neither Willow or GMT 1 or GMT 2, the federal land drill sites, is anything other than conventional for stimulation techniques. So, if this is about fracking there, they shouldn’t be influenced by that.”
Sell down postponed During the Q&A portion of the Oct. 29 conference call, Jeanine Wai of Barclays asked whether ConocoPhillips’ 25% sell down of its Alaska position was still in the works and whether the company’s final investment decision on Willow development was reliant on the sell down.
“We didn’t explicitly tie a Willow decision to a sell down,” Fox replied. “We have postponed the timing of that until some of these uncertainties are resolved,” he said, referring to oil price and demand, as well as Ballot Measure 1, but whatever happens “the timing of the project isn’t contingent on a sell down.”
2021 CapEx flat In Chairman and CEO Ryan Lance’s prepared remarks at the beginning of the conference call he said ConocoPhillips’ 2021 capital budget will probably be similar to that of 2020, with little to no production growth.
“But is the right way generally to think about it … (with a) mid-$40s threshold … for production growth?” Wai asked Ryan. “(Is it) a hard and fast criteria that needs to be met? Or are there just a bunch of other considerations that we would need to factor into the decision-making process?”
“Yes … we basically use cost of supply(in) … thinking about our plans for 2021,” Lance replied.
“But it’s not just cost of supply … it’s also what kind of cash flow are we projecting to make. And we have the benefit of a very strong balance sheet, so we can use some of that, should we need to. But, certainly, we’d be also trying to balance the cash we’re making with the CapEx that we’re spending on the dividend that today satisfies 30% of our return criteria and more, given the kinds of prices that we’re seeing,” he added.
“So, certainly, (there are) some headwinds in the commodity price outlook right now, some with COVID resurgence … demand certainly hasn’t started to recover. And depending on what NOPEC or OPEC does on the supply side and what the U.S. response is, we’re watching all of that really closely to make sure that whatever program we put in place for 2021, we can balance with the cash flows that we expect and make sure that we’re investing only in the lowest cost of supply things that we have in the portfolio,” Lance said.
Biden’s tax plan Doug Leggate with Bank of America asked for additional details on Lance’s comments around the potential election outcomes: “And I’m thinking specifically about tax. … The thing that strikes me as a little bit disturbing is the potential for a minimum 15% P&L tax that puts NOLs (net operating loss) under a bit of a spotlight. So, I’m just wondering if you guys have thought about … any scenarios that you’ve run outcomes on that you might expect?”
“Yes. Sure,” Lance replied. “We’ve certainly taken a look at the various tax proposals out there, including Biden’s tax proposal. There are two primary elements of it that would impact us. Doug, the first one is, obviously, the change in the corporate tax rate from 21% to 28%.
“And the second one that would be fairly significant would be removal of IDCs (intangible drilling costs), particularly in our capital program and needing to depreciate those over time,” Lance said. “Those are the two main aspects as we look through it that really would have an impact on us.”
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