ConocoPhillips remains on track to invest $25 billion of capital over the next 10 years in Alaska, said Michael Hatfield, president of Alaska, Canada and Europe in a fourth quarter conference call Feb. 4.
“These investments will increase the state’s production and mitigate the current decline through TAPS,” he said.
“In fact, in 2020 alone, our net capital and opex spend in Alaska is expected to be roughly $3.4 billion,” he said. “On a gross basis, in 2020, total industry capital and opex spend in Alaska is expected to be about $6 billion.”
Alaska will see the lion’s share of exploration spending for the company in 2020. Its exploration plan calls for its “largest Alaska exploration and appraisal winter season.”
“This year, about half of our exploration capital is going into Alaska, and half is going elsewhere,” said Matt Fox, executive VP and COO.
He said an exploration program going on in Malaysia in the shallow water shelf of Sarawak, and a program in Argentina - in the south of the country and in the Vaca Muerta - “are the primary new exploration activity outside Alaska.”
In the fourth quarter, ConocoPhillips invested $306 million of capital in the state, leading to a total spend of $1.5 billion of capital last year, company spokeswoman for Alaska Natalie Lowman told Petroleum News Feb. 5.
“So for 2019, ConocoPhillips Alaska has reinvested more than 100% of our adjusted net income of $1.44 billion (year to date) back into Alaska projects,” she said. “The estimated capital budget for 2020 is about $1.6 billion.”
Fourth quarter estimated obligations to the state of Alaska in the form of taxes and royalties totaled $263 million, she said, adding that those obligations totaled $1.073 billion for the entire year.
Adjusted fourth quarter 2019 earnings for Alaska were $364 million, up from $347 million in 4Q 2018, the company said.
Big operation, lots of drilling on tap
ConocoPhillips activities will see a large amount of activity in legacy fields, and on the frontiers.
“As far as our base operations, we’ve got a big operation that we continue to execute both at Kuparuk and at Alpine,” Hatfield said, adding that the company will execute some smaller turnarounds in 2020 as well. “We’ve also got the (extended reach drilling) rig that’s going to be starting up in the second quarter in Alpine ... we’ve got a lot of drilling that’s going on.”
Hatfield said the company is in the middle of its exploration program now.
“We’ve got four wells that we’re going to drill at Willow - four appraisal wells and one flow test that we’ll conduct,” he said. “We spudded our first well at Willow at the end of January.”
Hatfield said ConocoPhillips will spud the first three exploration wells at Harpoon toward the end of February, running two rigs between the Willow and Harpoon programs.
“Now in addition, we have our Narwhal opportunity that we spoke to you about in November where we had drilled the production well, and we had tested that well and flowed it back through our central facilities,” he said. “We produced up to 4,500 barrels a day from that production well, and then that well was shut in as we monitored the pressure buildup.” Since that time, the company drilled an injection well that reached total depth in early December.
“We flowed that well back to clean it up just recently, and we’re quite encouraged with those results; in fact, our peak flow back was around 2,500 barrels a day,” Hatfield said. “That well is now being prepared for an injection interference test with the producer that I mentioned we previously drilled, so we’re going to do an injection test and interference test to see how those two wells are talking to each other, and that information is going to help us a lot as we optimize future development planning.”
Hatfield said ConocoPhillips is quite encouraged with the results it has seen in Narwhal.
‘In short, we’ve got a big program that we’re executing across our assets in Alaska, including at the non-op asset in Prudhoe Bay,” he said.
Transformed business model, ‘world-class’ portfolio improving
CEO Ryan Lance said 2019 capped off a successful three-year period in which ConocoPhillips transformed its business model and significantly improved the underlying performance drivers across its entire business.
In 2019 the company delivered strong earnings, and generated cash from operations of $11.7 billion, delivering free cash flow of over $5 billion, he said.
“Our balance sheet got stronger,” he said. “We ended 2019 with over $8 billion of cash and short-term investments and lowered our asset retirement obligation by almost 30%, largely due to dispositions.”
“We delivered on our volume projections for the year with roughly 5% underlying growth, including 22% growth from the Big 3 unconventionals,” he said. “The rest of our portfolio delivered strong base performance, and we progressed new projects and exploration opportunities across our regions.”
Lance said ConocoPhillips’ “world-class” portfolio keeps getting better.
“As part of our high-grading efforts, we generated over $3 billion of disposition proceeds, and we have another $2 billion of announced dispositions that we expect to close in early 2020,” he said.
But, he said, the company is not just selling.
“We’re also on the lookout for opportunities to add low cost of supply resources to the portfolio, like we did last year in the Lower 48, Alaska and internationally,” he said.
When reserves closed for the year, he said, ConocoPhillips replaced 117% of its production organically.
The company reported fourth quarter 2019 earnings of $0.7 billion, or 65 cents per share, compared with 2018 earnings of $1.9 billion for the period, or $1.61 per share.
Excluding special items, fourth quarter 2019 adjusted earnings were $0.8 billion, or 76 cents per share, compared with fourth quarter 2018 adjusted earnings of $1.3 billion, or $1.13 per share. Special items for the current quarter included primarily a non-cash impairment related to a planned Lower 48 disposition, partially offset by an unrealized gain on Cenovus Energy equity.
Full-year 2019 earnings were $7.2 billion, or $6.40 per share, compared with full-year 2018 earnings of $6.3 billion, or $5.32 per share. Excluding special items, full-year 2019 adjusted earnings were $4.0 billion, or $3.59 per share, compared with full-year 2018 adjusted earnings of $5.3 billion, or $4.54 per share, the company said.
Taxing matters: Alaska’s future in the balance
Hatfield said that if there is a negative change in Alaska’s fiscal regime, ConocoPhillips’ investment plans will change, but the company is hopeful that a pending ballot initiative that would increase its tax burden will be rejected.
“We’ve been in Alaska for over 40 years; we know Alaskans understand the industry; it’s the lifeblood of the state’s economy,” he said. “We believe Alaskans will understand that short-term revenue gain is a risky and fleeting proposition if it comes at the cost of billions of dollars of investment over the coming years.”
“We’ve had ballot measure challenges over the past few years that would have negatively impacted our business and Alaska’s economy,” he said. “After understanding the issues, Alaska voters have voted ‘no’ on all of them.”
Hatfield said the company is part of an industry group that will provide information to voters about the benefits of the current fiscal regime - the benefits that it has on jobs, investment, oil production and long-term revenue to the state.
“The bottom line is we’re working hard to ensure Alaskans understand the significant benefits that investment by this industry brings to the people and the state of Alaska under the current fiscal structure,” he said.
Sell down on hold till uncertainty subsides
Don Wallette, executive VP and CFO, said a previously announced offering of a share in some the company’s North Slope fields is on hold for now.
“At this point, we only plan to sell down after the uncertainty related to the citizens’ initiative has been resolved, and after we fully interpreted the results of our exploration and appraisal program, and when we’ve progress through Willow through the concept select gate,” he said. “After we’ve satisfied those three criteria, that’s when we plan to execute this sell-down, so that pushes the sell-down most likely well into next year.”
He said the company would not execute a sell-down in a way that causes it to lose control of the investment pace.
“We’re already confident that there’s multiple quality parties that are interested in these great assets,” he said.
“We would be open to an equal-value strategic transaction or a swap rather than cash, if that makes sense,” Wallette said. “We’re going to resolve some of these uncertainties, and then we’ll approach the market.”
