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ConocoPhillips (COP) on Q1 2014 Earnings - Call Transcript

ConocoPhillips (COP) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

Ellen R. DeSanctis - VP-Investor Relations & Communications, ConocoPhillips

Jeff W. Sheets - Executive Vice President-Finance & Chief Financial Officer, ConocoPhillips

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Matthew J. Fox - Executive Vice President-Exploration & Production, ConocoPhillips

Other Participants

Paul Y. Cheng - Analyst, Barclays Capital, Inc.

James Sullivan - Analyst, Alembic Global Advisors LLC

Doug T. Terreson - Analyst, International Strategy & Investment Group LLC

Paul B. Sankey - Analyst, Wolfe Research, LLC

Ed G. Westlake - Analyst, Credit Suisse Securities (USA) LLC (Broker)

Blake M. Fernandez - Analyst, Howard Weil, Inc.

Doug Leggate - Analyst, Bank of America Merrill Lynch

Faisel H. Khan - Analyst, Citigroup Global Markets Inc. (Broker)

Roger D. Read - Analyst, Wells Fargo Securities LLC

Pavel S. Molchanov - Analyst, Raymond James & Associates, Inc.

Asit K. Sen - Analyst, Cowen & Co. LLC

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to Q1 2014 ConocoPhillips Earnings Conference Call. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to over to Ellen DeSanctis, Vice President-Investor Relations and Communications. You may begin.

Ellen R. DeSanctis, VP-Investor Relations & Communications

Thanks, Christine, and good morning to everybody. With me here today are Jeff Sheets, our EVP of Finance and our Chief Financial Officer; and Matt Fox, our EVP of Exploration and Production. Jeff will cover the quarter's financial highlights, and then Matt will take us through the quarter's operational highlights and provide some color on what to watch out for or what to pay attention to for the remainder of the year. Then we'll have Q&A, and we'll ask during Q&A, if you would, to limit your questions to two. Of course, jump back into the queue if necessary.

We will make some forward-looking statements this morning, and the risks and uncertainties in our of future performance are described on Page 2 of this morning's presentation materials, also in our periodic filings with the SEC. This information as well as our GAAP to non-GAAP reconciliations and additional supplemental information can be found on our website.

Now, I'll turn the call over to Jeff.

Jeff W. Sheets, Executive Vice President-Finance & Chief Financial Officer

Thank you, Ellen. Hello, everyone, and thank you for joining us today. As you know, we just recently held our 2014 analyst meeting in New York, where we reaffirmed our plans to deliver double-digit returns annually to our shareholders. We outlined our production and margin growth plans for the next few years and hopefully gave you increased confidence on our ability to deliver on those plans.

We have an exciting year ahead, and as we reported this morning, we're off to the strong start. So slide 4 lists our key highlights for the first quarter. Operationally, we had a very good quarter. We produced 1.53 million BOE per day from continuing operations, excluding Libya. Adjusted for dispositions and downtime, this is up about 3% compared to last year's first quarter. So we're seeing growth. We also made progress on key activities that will continue to drive organic growth. We delivered on key milestones around our major projects and continued our strong performance in the unconventionals.

Exploration and appraisal activities continued during the quarter in the North American unconventionals, the Gulf of Mexico Deepwater, Australia, and elsewhere. These activities are key to our reserve and production growth beyond 2017. Financially, this was also a very strong quarter. We achieved adjusted earnings of $2.3 billion or a $1.81 per diluted share. This was quite a bit higher than expectations, and I'll address some of the drivers of this stronger than expected performance on the next slide.

During the recent quarter, we generated $4.4 billion in cash from our operating activities alone. We also had positive working capital change of about $600 million and a distribution of $1.3 billion from FCCL, so total cash from operations was $6.3 billion. And our balance sheet remains very healthy with over $7.7 billion in cash and short-term investments on hand as of the end of the quarter.

Strategically, we delivered on both production and margin growth this quarter. We continue to expand our inventory of organic growth opportunities to support our growth goals. And importantly, we remain committed to delivering double-digit returns to our shareholders annually, including a compelling dividend. So all in all, the first quarter was very strong operationally, financially and strategically.

So now, I'm going to turn slide 5 for a discussion on earnings. First quarter adjusted earnings of $2.3 billion were up 29% compared to last year's first quarter and up 30% sequentially. Adjusted EPS of $1.81 was higher than consensus, about a dime of the difference or roughly $100 million was due to the North American natural gas price realizations that were stronger than the realizations indicated by changes in market prices. Another dime or about another $100 million was due to gains from marketing of third-party natural gas during the quarter.

As a reminder, we have a strong commercial gas marketing organization that markets both equity and third-party gas in North America. Given the high volatility in first quarter gas prices, our commercial team was able to capture some benefit by supplying both equity and third-party gas into premium markets. This benefit from our third-party activities and is not necessary repeatable but it speaks to our strong marketing capability.

First quarter segment earnings are shown in the lower right side of this chart. The financial details for each segment can be found in the supplemental data that accompanied this morning's release, but let me address a couple of items about the segments. Lower 48 earnings included the marketing gain I just talked about as well as strong realizations for natural gas.

Canada segment earnings were very strong, again reflecting stronger bitumen prices and gas realizations. Gas realizations for the quarter were $5.81, reflecting both strong ACO pricing and the placement of some volumes into premium markets during the quarter. Canada segment earnings also included approximately $60 million benefit from foreign exchange, which was offset mostly by foreign exchange losses across other parts of the portfolio. Alaska was pretty straightforward with nothing unusual to highlight in the quarter.

Europe operations performed well in the quarter with growth coming from several major projects, and if you look over the past several quarters, we're starting to see the benefit of volume growth in this segment. Our Asia Pacific and Middle East segment was impacted by lift timing differences in China and Western Australia, but otherwise was in line with expectations. And finally, our corporate segment was in line with the previous guidance.

So if you'll turn to slide 6, I'll cover our production results for the quarter. As you know, our convention for production is continuing operations less Libya. On this basis, our first quarter averaged 1.53 million BOE per day. Normalized for disposition, this compared to 1.495 million BOE per day in the first quarter of 2013. The waterfall shows that over the period, we had 6,000 BOE per day more of planned and unplanned downtime than in the first quarter of 2013 and net growth of 41,000 BOE per day. That represents a 3% increase compared to a year ago. The box on this page illustrates the composition of this 41,000 BOE per day of growth. And as we discussed at our recent analyst meeting, we are growing in the highest margin portions of our portfolio, and this growth of higher margin production is driving growth in the company's cash margins. And we'll discuss that margin growth on the next slide, which is slide 7.

This slide shows changes in our cash margins from the first quarter 2013 to the first quarter of 2014 and also on a sequential basis. On the left side of the chart are the margins on an as-reported basis which were up over 20% year-over-year on strong natural gas prices and on the right are the margins on a price-normalized basis. So on a price-normalized basis, margins increased 13% year-over-year. Of this improvement, over a third or 5% is due to our underlying liquids growth, especially in areas with more favorable fiscals. The remaining 8% margin improvement was due to the benefits related to equity and third-party gas marketing activities that we've just discussed as well as Libya being down. So we are delivering on our commitment to improve margins as we grow, not just generating growth for growth's sake.

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