ConocoPhillips - Shareholder/Analyst Call

ConocoPhillips (COP)

March 05, 2012 4:00 pm ET


C. Reasor -

James Mulva -


Douglas Terreson - ISI Group Inc., Research Division

Paul Sankey - Deutsche Bank AG, Research Division

Blake Fernandez - Howard Weil Incorporated, Research Division

Robert A. Kessler - Simmons & Company International, Research Division

Douglas George Blyth Leggate - BofA Merrill Lynch, Research Division

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Edward Westlake - Crédit Suisse AG, Research Division

Evan Calio - Morgan Stanley, Research Division

Paul Y. Cheng - Barclays Capital, Research Division


C. Reasor

So, we'll go ahead and get started if everybody's ready and is -- can find a seat. I'd like to say good afternoon, and welcome to those of you in the room, as well as those listening on the web to ConocoPhillips Investor Update. We plan to take the next hour to go over our plans for enhancing returns and growing earnings, as well as shareholder distributions. I'm here today with Jim Mulva, ConocoPhillips Chairman and CEO. And the material that you'll see presented today can be found on ConocoPhillips' website, along with a transcript of the presentation and the question-and-answer session.

The Safe Harbor language that you see on this slide is a reminder that we will be making forward-looking comments, as part of the presentation and a part of the Q&A, and actual results may differ materially from the expectations we shared today. Sources of these differences can be found on the slide, as well on our -- as well as our filings with the SEC.

So now it's my honor and pleasure to introduce Jim Mulva.

James Mulva

Okay, Clayton. Thank you very much. I appreciate seeing everyone here in -- for the ConocoPhillips Investor Update Meeting here in New York City. And I also welcome all those who are participating or listening in to our webcast that's made available to everyone around the world.

For myself, I've been making financial presentations for more than 2 decades, and I've always enjoyed close association working with the financial community. It's actually my last presentation on ConocoPhillips, because as you'll see in the update that I'm going to go through in the slides, we're right on schedule with respect to repositioning and completing our spin transaction in about 2 months' time. And so I'd like to dedicate most of my presentation primarily to ConocoPhillips as the integrated company that you know and provide an update with respect to the strategies and plans, and then as well as update on the spin transaction.

So -- and 2 things that I'm really going to spend most of my time covering on has to do with update on the company. Irrespective of moving from the integrated company that you know into the splitting or the spin transaction of the Upstream and the Downstream part of the company, essentially, the strategies remain the same for both Upstream and Downstream. We've had pretty strong operating and financial performance as we went through 2011, and we're -- although results, certainly, are not available for the first quarter, we're off to a good start, January and February.

In terms of the update on repositioning, as you know, we believe we're creating 2 of very competitive, large energy companies, Upstream and Downstream: the Upstream company you know so well as Conoco Phillips is going to be led by Chairman and CEO, Ryan Lance; the Downstream company known as Phillips 66, led by Chairman designated and CEO, Greg Garland. We believe that the spin transaction and splitting the 2 very different businesses, Upstream and Downstream is going to enhance us to follow the strategies of both Upstream and Downstream even better and continue to create value for our shareholders.

So what I'd like to do now is I've got about 40 slides, and I'm going to through the 40 slides rather quickly, and then leave some time within this hour to address some questions or observations you may have. I'm going to talk about the ConocoPhillips that you know today and see today, and I'll start off with a pie chart, the upper right-hand side of the slide. And it just shows where do we get our cash from operations. And the company, essentially, has been structured over many decades, continues with a strong emphasis on OECD. And we like that because of -- from a perspective of realizations, both Upstream and Downstream, as well as, we believe, the political risk is somewhat different than non-OECD countries.

The bottom right part of that slide shows that for our company today, we have about $90 billion of invested capital, with the -- primarily, most of it directed towards exploration and production. We continue on -- if we were to continue on as an integrated company, it will become more and more E&P and less Downstream.

So the bullet points that you see on the right-hand side of the slide, the OECD-centric invested portfolio, a lot of emphasis over the last several years. And we'll talk quite a bit more about this, in terms of improving our returns, how we invest capital, how we monetize some of the more mature assets but then improve the returns on the portfolio and all the metrics associated with production Upstream or Downstream and metrics per share. And you'll also hear that we feel we're quite well positioned to grow both Upstream and Downstream from the position that we're at, particularly when we complete our 3-year repositioning at the end of this year, 2012.

I'd like to do is just talk a few moments about the rationale for the repositioning, as well as the splitting of the company, the spin transaction between Upstream and Downstream. As a result of the deep financial crisis in the latter part of 2008, we assessed our company, ConocoPhillips, and we had a number of alternatives. You could say irrespective of the financial and economic situation continue to just pretty aggressively spend capital just to grow the company. Or we go to the other way, where we can put a lot more emphasis on returns and more and more focus on capital discipline, maybe about the same size, a little bit smaller company, emphasis on returns or -- and we felt that a balanced approach was the right way: continue to spend money, emphasize returns and capital discipline.

And so that first bullet point you see at the top of that slide, we really assessed the company, and we looked at the company, and we said given, I think, our production early 2009 x-LUKOIL ownership, was about 1.8 million BOE a day. And we said, "Do we believe we have the legacy assets and the new opportunities to continue at 1.8 million BOE a day or higher?" And we said, "No, we don't think that's the right size for a E&P company." We thought that emphasis on looking at our legacy assets and improving returns, somewhat lower production volume, would better fit both the legacy assets and the growth opportunities going forward. I'm going to talk more about this in a few moments in a few slides.

And then because of the deep financial crisis, the middle part of that slide, we felt, we didn't know -- I mean, as you recall, even some were looking at not only the deep recession but the possibility of a depression. So we felt we needed to adjust pretty quickly our portfolio and our company to adapt to whatever we thought the financial business environment was, and we did not like our share price. So we felt it made a lot of sense for us to really push hard on improving returns, distributions to our shareholders, stronger balance sheet, less debt, more liquidity. And then we start -- we looked at the market price and we said natural gas prices probably are going to be under a great deal of pressure, because of the economic situation, as well as the development of technology in North America for unconventional gas, and then ultimately, oil. And then we thought there'd be continued pressure on refining margins.

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