ConocoPhillips is looking to boost its role in the world of natural gas and LNG with key new investments in the LNG business on the U.S. Gulf Coast and in Qatar, company officials said as they unveiled second quarter earnings.
The company also said it would raise the total distributions to investors - dividends and stock buybacks - to an eye-watering $15 billion this year, a 50-percent increase from the total envisioned just three months ago.
Impressive profits
Like its peers in the industry, ConocoPhillips posted dramatically increased earnings for the second quarter, even though production of 1,692,000 barrels of oil equivalent per day was basically flat compared with the same quarter a year earlier.
But cash flow rocketed as the company sold its oil for an average realized price of $88.57 per barrel of oil equivalent, up 77% from $50.03 a year ago. Cash flow from operations was $5.8 billion for the quarter, with earnings at $5.1 billion.
ConocoPhillips’ report on Aug. 4 came on the heels of similarly stellar numbers from its rivals. ExxonMobil reported $20 billion in operating cash flow for the quarter and beat its 2008 record with net income of $17.9 billion.
Like ConocoPhillips, ExxonMobil is sending huge amounts of cash back to stockholders in dividends and buybacks, all while noting that industry investments in future production aren’t enough to keep up with recovering demand.
The Organization of Petroleum Exporting Countries also warned at its August meeting that global oil suppliers won’t be able to keep up with demand after 2023 due to chronic underinvestment in the oil sector. So the support for high prices will likely continue for some months, at least.
Asked about whether the $15 billion in distributions depended on economic conditions, ConocoPhillips CEO and Chairman Ryan Lance said the payout was solid.
“We took a broad look at the market from the volatility perspective … and felt comfortable we could increase the distributions to $15 billion,” he said in response to a question during the conference call.
LNG moves
Executives see a solid future in LNG for the company, building on established businesses where ConocoPhillips already is among the leaders. The fact that natural gas is a relatively “green” fuel works into the equation, Lance said, as “the use of natural gas in place of coal and refined products represents and opportunity for significant reductions in greenhouse gases around the world.”
“We believe this reality is going to drive increasingly strong LNG demand and related opportunities well into the future.”
With that, ConocoPhillips entered into a preliminary agreement in July with Sempra Infrastructure, a subsidiary of Sempra Energy, to participate in the Port Arthur LNG project in Jefferson County, Texas. The outline envisions a definitive agreement for ConocoPhillips to take a 30% equity investment in Phase 1 of the project, and for ConocoPhillips to take 5 million tons of LNG annually from the facility.
In conjunction with that, ConocoPhillips would also provide feed gas through its own production or its marketing operations. ConocoPhillips would also collaborate with Sempra on supply and offtake arrangements for a planned expansion of the Sempra liquefaction facility in Baja California, Mexico.
“The potential investment is designed to leverage our company’s considerable strength as one of the largest gas producers and marketers in North America, while expanding our global LNG business,” Lance said on the call.
A second LNG investment would come through participation in Qatar’s North Field East project, where the ConocoPhillips investment would be the range of $900 million. ConocoPhillips already has some investments with Qatar.
“We think that’s some of the lowest-priced gas in the world, and it’s going to fit well globally,” Lance said. “It could be directed to both Asia and to Europe going forward.”
The move toward LNG builds on a company strength in gas marketing, Lance and CFO Bill Bullock said.
“We’re marketing 7 to 8 bcf (billion cubic feet) of gas every day in North America. So ... the opportunity to supply gas into a multiple train project at Port Arthur, Texas, is intriguing to us. Then there’s our commitment to take the 5 million tons, we’ve got a lot of experience moving it into the market. ...
“There’s a commercial team in London. We’ve got a commercial team in Singapore. We’re used to both the European and the Asian markets. We’ll figure out how best to move that 5 million tons, and there may be a spot complement to that,” Lance commented.
“We don’t know. We’ll work that out as we go through. But that very integrated nature all the way from the supply side through taking the gas and selling it to customers is what was of interest to us in looking at it in an integrated fashion.”
As Bullock pointed out, the company’s history in LNG is deep, starting more than 40 years ago marketing to Japan from the pioneering LNG plant at Nikiski in Alaska.
“We are one of the largest marketers in North America, certainly a top five marketer,” Bullock said. “I think lately, we’re pushing No. 2. So we’re very comfortable with supply, and we move orders of magnitude above our physical production.”
Winter Willow Work?
There’s still a chance that preliminary work on the company’s Willow development in Alaska could start this winter, executives said on the conference call.
The company won’t make its official investment decision until the final Supplemental Environmental Impact Statement is completed later this year, said Nick Olds, ConocoPhillips senior vice president, strategy and technology.
“Now related to FID (final investment decision), we would probably see that at the earliest later this year and most likely early next,” Olds said. “Now we are planning as far as scheduled to commence a 2022-2023 winter construction season - assuming we had a very favorable record of decision. Now that will allow us to do civil construction and start putting roads in place for the project...
“We do continue to work on detailed engineering to refine cost and schedule, as well as the final development modifications,” he said. That could include a modification suggested in the latest SEIS to reduce the surface impact on the Teshekpuk Lake Special Use Area.
“So that alternative, we think, is a good path forward,” Olds commented. “We’re committed to Willow, and it remains competitive in our portfolio.
“We continue to see strong stakeholder support, including the Alaska congressional delegation, the trades, and unions.”
