ConocoPhillips Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

Key Takeaways

  • Post‐Concho integration is essentially complete, having captured $1 billion of synergies and set a stronger decade‐high baseline for the company’s performance.
  • Q3 generated $4.1 billion of cash from operations and $3 billion of free cash flow, keeping the company on track to return nearly $6 billion to shareholders by year‐end.
  • The Shell Permian acquisition is expected to close in Q4, adding high‐quality shale assets that will be integrated and optimized for further operational and cost efficiencies.
  • Inflation pressures in the Lower 48 are running mid‐single to low‐double digit, which may require modest scope adjustments to maintain capital discipline.
  • ConocoPhillips has tightened its Scope 1 and 2 emissions targets on a net‐equity basis and reaffirmed its net‐zero by 2050 ambition through ongoing capital high‐grading and low‐carbon initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
ConocoPhillips Q3 2021
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good morning, and welcome to the Q3 2021 ConocoPhillips Earnings Conference Call. My name is Anara, and I'll be the 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. I will now turn the call over to Ms.

Operator

Ellen DeSanctis. Ellen, you may begin.

Speaker 1

Thank you, Zanara, and welcome, everyone, to the Q3 earnings call. In the room with me today are Ryan Lance, our Chairman and CEO Bill Bullock, our Executive Vice President and Chief Financial Officer Tim Leach, our Executive Vice President of the Lower forty eight Dominic Macklin, our Executive Vice President of Strategy, Sustainability and Technology Nick Olds, Our Executive Vice President of Global Operations, Mark Keener, our Vice President of Investor Relations is also in the room today. The format of our call will consist of some very brief prepared remarks, and then as Anara mentioned, we'll go to Q and A. A few reminders. In conjunction with today's earnings release, we posted a deck of supplemental material addressing 3rd quarter earnings and cash flow results as well as some Q4 full year 2021 guidance updates.

Speaker 1

Today, we will make some forward looking statements based on current expectations. Actual results could differ due to the factors described in today's press release and in our periodic filings. And we'll mention some non GAAP financial measures this morning. You can find reconciliations to the nearest corresponding GAAP measure in this morning's press release and on our website. With that, I will now turn the

Speaker 2

call over to Ryan. Thank you, Ellen. As Ellen mentioned, I'll make a few opening comments, and then Bill will address a few details about this quarter's results, and then we'll begin the Q and A session. In this morning's release, I referred to the quarter's results as notable. Obviously, financial and operating results were outstanding, But the context for describing them as notable meant something different.

Speaker 2

For the past year, we've been integrating Concho, improving underlying metrics across the business and creating the most competitive E and P for the energy transition. The significance of this quarter's performance is that it represents the post Concho go forward baseline for the company. On a run rate basis, the integration is essentially complete. We've captured the announced $1,000,000,000 of synergies and savings We'll close out 2021 as a stronger company compared to any time in the past decade. Every aspect of our triple mandate is moving in the right direction.

Speaker 2

Our underlying portfolio cost to supply is improving, Our overall GHG intensity is lower. Our emissions intensity reduction targets are more stringent. Underlying margins are expanding, and our trailing 12 month return on capital employed is headed Between now year end, our top priority is closing the Shell transaction, which we expect to occur in the Q4. Once we close, we will be working diligently to integrate these properties and capture efficiencies in a similar fashion to what we've achieved through the Concho integration. In addition to layering in these properties on top of our existing high performing platform, we're continuing to high grade our portfolio And optimize the business drivers everywhere.

Speaker 2

The setup for next year is, well, notable. We're now in the process of setting our 2022 capital plans, which we expect to announce in early December. Directionally, we don't anticipate a significant on CapEx from what we included in our June update, excluding Shell. In June, we provided an outlook based on a Roughly $40 per barrel price that included a modest ramp in the Lower forty eight to reactivate our optimized plateau plans, Some incremental base Alaska investment and some longer cycle low cost supply investments in Canada, the Montney and in Norway. Since June, we see some inflation pressures, especially in the Lower forty eight.

Speaker 2

However, at this point, we'd expect to adjust scope modestly in order In response to maintain our base capital at a level that is roughly consistent with our June update. And then, of course, we'll add CapEx for the shale properties once we've brought them into the portfolio. As we finalize our 2022 plans, we're watching the macro closely, Keeping an eye on inflation and potential OBO pressures and undertaking our typical capital high grading processes. It goes without saying the market certainly appears to be more constructive, but we must always remember that this is an incredibly volatile business, But there's more to come on that in December. It's certainly been a busy year for the company, but an incredibly successful one so far, And that's thanks to our dedicated and talented ConocoPhillips workforce.

Speaker 2

We believe we're entering a very constructive time for the sector. But even so, we know that there will be relative winners. The relative winners will be companies with the lowest cost of supply investment options, Peer leading delivery of returns on and of capital and visible progress on lowering emissions intensity, that's what we offer. Our Q3 represents a glimpse and a strong jumping off point to what you can expect from ConocoPhillips going forward. So now let me turn it over to Bill, who will cover some of the key items from this quarter.

Speaker 3

Thanks, Ryan. To begin, adjusted earnings were $1.77 per share for the quarter. Relative to consensus, This performance reflects production volumes that were slightly above the midpoint of guidance, better than expected price realizations and lower than expected DD and A. As for the better realizations, we captured a higher percentage of Brent pricing in our overall realized prices. We've provided supplementary information in this morning's material to address the realization's variance.

Speaker 3

And as Ryan mentioned, we're unhedged, So we're getting full exposure to the current higher prices. As for DD and A, we're trending lower compared to the previous guidance as a result of Positive reserve revisions due to higher prices. You saw in today's release that we lowered full year 2021 DD and A guidance From $7,400,000,000 to $7,100,000,000 Excluding Libya, production for the quarter was 1,507,000 barrels of oil equivalent per day, which represents about 2% underlying growth. Lower 48 production averaged 790,000 barrels a day, including about 445,000 from the Permian, 217,000 from the Eagle Ford and 95,000 from the Bakken. At the end of the quarter, We had 15 operated drilling rigs and 7 frac crews working in the Lower forty eight.

Speaker 3

Across the rest of our operations, The business ran extremely well. In particular, our planned seasonal turnaround activity across several regions went safely and smoothly. You have noticed that we provided production guidance for the Q4 and for the full year 2021 in this morning's release. This reflects the impact of a decision we're making to convert Concho 2 stream contracted volumes to a 3 stream reporting basis As part of our ongoing efforts to create marketing optionality across the Lower forty eight, we expect to convert the majority of our contracts in the 4th quarter, Reported production is expected to increase by approximately 40,000 barrels a day and both revenue and operating costs will increase by roughly $70,000,000 In other words, this conversion is earnings neutral. Besides DD and A and production, there were no other changes to 20 Now once we've closed the Shell acquisition and can see where the ongoing U.

Speaker 3

S. Tax legislation conversation lands, We'll provide an updated earnings and cash flow sensitivities that consider such factors as projected 2022 price ranges and how those ranges might impact our cash tax paying position in various jurisdictions around the globe. Coming back to Q3 results, cash from operations was $4,100,000,000 which was reduced by about $200,000,000 for non recurring items, so a bit higher than the average of external estimates on an underlying basis. Free cash flow was almost $3,000,000,000 this quarter And on a year to date basis, this is about $6,500,000,000 Through the 1st 9 months of the year, we've returned $4,000,000,000 to shareholders And we're on track to meet our target of returning nearly $6,000,000,000 by the end of 2021. This is through a combination of our ordinary dividend And buybacks.

Speaker 3

So to summarize, as Ryan said, it was a notable quarter. The company is running exceptionally well And we've achieved a significant reset of the base business post Concho. That creates a powerful platform for entering next year. We're focused on closing the Shell Permian acquisition so that we can begin the work of getting those properties fully integrated into the business, Setting our capital plans for 202022, maintaining a leading position of returns on and of capital And lowering our emissions intensity. That's the triple mandate.

Speaker 3

That's what ConocoPhillips is all about, and we look forward to providing additional information in December. I'll now turn the call over to the operator to begin the Q and A portion of today's call.

Operator

Thank you. We will now begin the question and answer session. And our first question comes from Roger Read from Wells Fargo. Please go ahead. Your line is open.

Speaker 4

Yes. Thank you. Good morning. Hopefully, you can hear me.

Speaker 2

Good morning, Roger. Yes. Sorry,

Speaker 4

just it was Like really quiet there. Anyway, I just want

Speaker 5

to come back

Speaker 4

to the inflation question. I know you'll talk more about CapEx in December, Maybe an idea of what you have seen to date and where you think the bigger inflation headwinds may arise.

Speaker 2

Yes. Sure, Roger. As we kind of in the middle of like I said in our opening comments, in the middle of putting all our plans together, right now, the Supply chain organization tells me that globally, we're thinking about mid single digit inflation rates as we go into 2022, but it's bifurcated into 2 pieces, the U. S. Being Depending where you're at geographically in the U.

Speaker 2

S, anywhere from kind of the low double digits to the higher single digits, the And being the area probably the most influenced or the most experiencing inflation right now and as we go into 2022. And then the rest of the world though still at about 2% to 3% inflation rates kind of globally. So The categories that you can imagine are inflating right now, certainly are those that are in need here in the U. S. As we start to recover Out of the low point, things like OTCG, labor, sand, pressure pumping and the likes, I think as we think about Going forward, it's an opportunity for us to try to offset as much of that through some modest scope production and efficiencies, Which I think is where Tim is focused in the Lower 48.

Speaker 2

I can ask Tim if you want to add anything to that relative to the Lower 48 in the Permian.

Speaker 6

No, I think that covered most of it, but I would say that where we are seeing inflation on those items, we have size and scale Advantages of our combined organizations and the operations continue to improve in the Lower 48. So I think there's many ways that we can mitigate those inflation factors.

Speaker 4

Okay, great. Thanks. And then just since it's been in the news quite a bit, what's been going on in Alaska, I was just curious, Well, I can't go forward. What do we think about in terms of other opportunities in Alaska? And have you noticed any meaningful changes since Hillcorp became the other partner in Prudhoe Bay?

Speaker 7

Yes, Roger, this is Nick. Just maybe a quick update on Willow. As you've probably seen in the press, Both the Department of Justice and ourselves decided not to appeal the Alaska District Court decision. We feel the best and most efficient approach there is to really work through the 3 substantive issues That were identified in the district court ruling. We'll do that through additional NEPA analysis.

Speaker 7

We're currently engaged with the BLM And the cooperating agencies up there, just working through those three particular issues. As you look forward, as As we mentioned, we continue to work through our detailed engineering and service of continued refinement Our costs and schedule and any development modifications, all in service of doing an FID. If you look at 2022, our capital program, that will reflect the continued engineering work. And then from a shareholder standpoint, we still see Significant support from the Alaska delegation, the State of Alaska, as well as the North Slope borough. So we remain committed on this front.

Speaker 7

As far as other projects, we spoke about in the June 30 market update, in Kapart as an example, we've got Nuna, We've got Coyote, these both leverage existing infrastructure, so existing pads, facilities and pipelines, very low cost of supply opportunities that we're progressing. And then The Prudhoe front, we're seeing great efficiency improvements and safety performance. They continue to reduce costs across the board. So our teams are heavily engaged. So all three legacy assets are performing well.

Operator

Thank you. Our next question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

Speaker 8

Our first question is on Scope 3, in conjunction with the Shell Permian acquisition, you announced an improvement in your Scope 1 and 2 emission intensity targets, which is great. At this year's meeting, I believe shareholders voted in favor of the company setting Scope 3 reduction targets as well. So could you maybe update us on the company's strategy for addressing that vote? And perhaps any color on feedback that you

Speaker 2

Yes, sure, Janine. I'll Let me make a few comments, and I'll turn it over to Dominic, who's been involved in all our shareholder engagement activity that's a normal part of our process this time of Yes, you saw consistent or coincident with the Shell acquisition announcement that we increased our targets related to Scope 1 and Scope 2. And not maybe hopefully not missed in that. We went from a gross operated to a net equity, which we think the industry needs to move to as well. So it's not only What you operate, it's what you are involved in from a net equity perspective.

Speaker 2

So yes, pretty focused on our commitment to reduce our scope 1 and scope 2. As you state, we did get a resolution that got 50 some percent of the vote, not binding, but one that we have to engage with our shareholders So we've been doing that on the Scope 3 side specifically, and I can get Dominic maybe to comment on what that looks like or what we've heard So far from shareholders.

Speaker 9

Well, thanks, Janine, for the question. We are continuing in dialogue with shareholders. This is an ongoing I think to share some key elements of that dialogue. As an E and P company, we continue to believe our Paris The first line climate risk framework that we launched about a year ago is both credible and ambitious and addresses the realities of our triple mandate that you often hear us So that's responsibly meet transition pathway demand, deliver competitive returns And achieve net zero emissions on the emissions we control, and that's Scope 1 and Scope 2. And we have established just earlier this year a dedicated low carbon technology group, and they are supporting our business units in their ongoing And they are supporting our business units and their ongoing progress to achieve our Scope 1 and 2 targets and our net zero ambition.

Speaker 9

But we are not ignoring Scope 3 end New opportunities in low carbon businesses with a focus on carbon capture and storage and hydrogen, both of which have a strong adjacency to our core business But those opportunities must, of course, deliver competitive returns for shareholders. And on the policy side, we continue to advocate For a well designed economy wide price on carbon, and we see that as the most viable solution for addressing demand and actually reducing Scope 3 end use emissions. But we don't believe a Scope 3 target for a paracelined E and P company like ConocoPhillips makes sense It wouldn't address consumer demand and it would shift supply away from top tier ESG producers to less accountable producers And jurisdictions. And we believe in fact that a Paris aligned E and P company with a focus on low GHG intensity and low cost of supply production Has a valuable and crucial role actually to play in the energy transition. So now of course, we take our stakeholders' views very seriously, and we're Continuing our engagement to understand their perspectives, it's an ongoing process.

Speaker 9

We'll continue that through the next couple of months here, but That perhaps gives you a flavor of the nature of the dialogue.

Speaker 8

Okay, great. That's really helpful. We look forward to the carbon capture and Hydrogen Development. So I guess our second question, maybe a little housekeeping item here, is on the affiliate distributions. So the distributions, they were slightly below what we think was implied by prior commentary on the 2Q call, and it was a little bit below our forecast.

Speaker 8

So we're We're just wondering if there was anything unexpected related to the timing of distributions. We understand their seasonality, for the quarter or if there's any change in the Your outlook of $700,000,000 in APLNG distributions for this year?

Speaker 3

Sure, Jeanine. We received distributions of $85,000,000 from APLNG in the 3rd quarter and that brings our total year to date to $430,000,000 for the year. And we now expect full year distributions of around $750,000,000 from APLNG this year. As you noted, We typically receive lower distributions in the 1st and third quarters and higher distributions in the second, 4th quarters. And as you think about PLNG due to the pricing lag with APLNG's long term LNG sales, there's really little sensitivity to price for the remainder of 2021 distributions As LNG pricing is essentially set, so we feel very good about $750,000,000 for the full year.

Operator

Thank you. Our next question is from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.

Speaker 10

Good morning, team. And let me start by thanking Ellen for her service to the industry and to the investment community. Congratulations on your retirement, Ellen. You are going to be sorely missed.

Speaker 2

Thank you, Neal. Yes. I appreciate the call out, Neil. We're going to miss her as well.

Speaker 10

Yes. Ellen, you can't escape us, so you know where to reach us. Look, I'm

Speaker 1

not going to try.

Speaker 2

She's not going to escape us completely either, Neil.

Speaker 1

You're in great hands. It's been an Honor, everybody, truly an honor, and ConocoPhillips won't miss a beat.

Speaker 10

Well, that's great. Well, you left it in great shape. Well, Ryan, I want to kick off on a big picture question for you. And then, Tim, I had a follow-up for you on the Permian. But the big picture question is, Randy, you think we're in the beginning of a structural up cycle here, which is we've been through 7 years of very dark period of oversupply in the industry.

Speaker 10

Under investment might be kicking in here. Do you see multiple years ahead of a potential recovery? And to the extent we actually are at the beginning of the structural up cycle, The last time we had one, the industry destroyed a lot of value over the long term by not seizing the opportunity appropriately. And so How you do it differently this time to create structural value to the extent you have a period of excess cash flow?

Speaker 2

Yes. No, thanks, Neil. I certainly pretty constructive for a number of reasons. We're seeing the Demand recovery post pandemic and for all the reasons you stated, this becomes turns into a supply problem. And I think That's going to be some pretty constructive tailwinds for the industry.

Speaker 2

So yes, you asked a bit of A provocative question there. So what would I say? Maybe a few things. For my peers, I would say, we've got to restore sector sponsorship, and that's only going to happen through consistent returns on capital employed, And they have to be competitive with the market. So I think that's the opposite of what we saw in this boom bust industry.

Speaker 2

So I think investors need to have us on a short lease and a short leash. And I think that would be Good for this sector. So that's kind of what I would tell my peers. What would I tell investors? It is different right now because I think Shale industry is being run as a free cash flow business.

Speaker 2

And so now we have short cycle inventory They can be managed for returns of and returns on capital. But I think you have to remember one thing in that Shale business that inventory quality really does matter because the ones with the best inventory like ConocoPhillips, We're going to be able to make market competitive returns, and we can do that without having blown through the roof on growth. So with modest growth, you can deliver those kinds of market competitive returns for people that have the top quality shell inventory. And I think That's a pretty big paradigm shift. So that discipline on growth and returns on enough capital really, really matters.

Speaker 2

Lastly, and this would be for investors and my peers, for everyone really, is the energy transition is happening. We are going Through a transition today, but I think that's a new lens that we have to look at this business through, and it requires a bit of new thinking. And I think Dominic just referred to that in the last question that Janine had, which is our triple mandate. We must do those three things simultaneously, And we've got to do them really, really well. So we have to meet the transition demand.

Speaker 2

Whatever slope that demand going on, we've got to be there to supply it With low cost to supply barrels because we've got to deliver on our returns and we've got to meet our net zero ambition Ultimately, by 2,050 in this business. So I guess that would be the few things that I would offer, Neil. And Really shame on us if this industry can't do it, and I can guarantee you ConocoPhillips will.

Speaker 10

Yes. You guys absolutely have delivered the playbook, and that's a good Dovetail into you, Tim, and just your perspective on the Permian position at this point and specifically talk about where we are in terms of the Concho assets and you've probably gotten more time to take a look under the hood of the Shell assets. How do you feel about what you've acquired?

Speaker 6

Yes, it's pretty exciting that first of all, I'm really proud of our team of being able to integrate this Concho acquisition and deliver on all the production and cash flow and get the wells drilled and Not miss a beat on execution and deliver all the synergies that we're talking about. That's an important concept as well. So things the blocking and tackling of our business is going really well in the Permian. But in addition to Excuse me, ConocoPhillips has 4 really great shale basins in the U. S.

Speaker 6

And watching how information is being transferred, how much teamwork is going on between those Groups, they're continuing to make everything better. The wells are getting better. We're delivering more efficiency all the time. So That's exciting for the future. And then when you look at the opportunity with the Shell acquisition, what we can do with those assets And how we can create value with them.

Speaker 6

And that's kind of what our teams live and die for is the opportunity To go get something like that and make it better. So I'm pretty excited and I'm proud of the work that's being done right now.

Operator

Thank you. Our next question comes from Steven Richardson from Evercore. Please go ahead. Your line is open.

Speaker 11

Thank you. I was wondering if I could follow-up on that last question with Tim. Tim, I appreciate that you haven't closed the Shell transaction yet And haven't got your hands on the assets, but it seems to us one of the big areas of upside could come from equalizing working interest and Some swaps and trades and blocking up your total position, including Shell. Could you just talk a little bit about that opportunity as you see it? And Have you had incomings from industry knowing that you will be the holder of those assets in short order?

Speaker 6

Yes, managing assets like that is kind of what I think we do best. And there are so many ways that we can create value from the way the wells are drilled, the way the wells are completed, the marketing arrangements. And it also gives us the opportunity with those additional assets coming in. We have way more flexibility What we can dispose of and how we can high grade our portfolio. So it gives us the opportunity to do What I think we're really good at, from an operation standpoint, but also from property management and The swaps and trades, we have a dedicated group around that and they can create a lot of value In the basin, all the operators are trying to get out of each other's way and not have so much outside operated And create longer lateral drilling opportunities, all kind of things like that.

Speaker 11

Thank you. If I could just follow-up with Bill, on Cenovus specifically, it looks from what we can glean from the public filings, it looks like that sell down is happening In a pretty orderly way, in terms of pace. But I was wondering if you could talk about experience so far, executing on that. And also Noted a nice uptick in the contingent payment associated with that Western Canadian sale a number of years back at these oil prices. And maybe you could Remind us all of the quantum of that and where that would stand and the duration of that as well, please.

Speaker 3

Yes, sure. Happy to. So first starting with the CV monetization program, we've sold about 67,000,000 shares year to date. That's about 30% of our And so we reduced our equity stake in Cenovus from about 10% to about 7%. Those proceeds have been used to buy back about $600,000,000 of ConocoPhillips shares through the Q3.

Speaker 3

And you'll note on Our slides for cash that that was about $400,000,000 for the Q3. We have accelerated our sales. We Expect to exit our position sometime early part of next year, and we're executing those sales in a thoughtful and measured way. We continue to monitor market Conditions that we move forward, assuming that they remain supportive, will be out early part of next year. You also asked about the contingent payments from Cenovus during the quarter.

Speaker 3

We recognized about $100,000,000 in pretax earnings, Bringing our year to date total is about $200,000,000 so far in Cenovus contingent payments. And at current pricing, We'd expect to recognize another $100,000,000 in the 4th quarter. Now the contingent term expires at the end of the Q2 2022, but At current strip prices, we'd expect to continue to accrue contingent payments in the 1st and second quarter of next year. It's probably also worth mentioning that we are still continuing to receive contingent payments also from our San Juan sale. Just would throw that in there a bit.

Speaker 3

We've accumulated so far $30,000,000 in pretax this year with $21,000,000 in the 3rd quarter We expect to accrue another $21,000,000 on that in the Q4. And at current prices, that should continue through calendar year next year.

Operator

Thank you. Our next question is from Doug Leggate from Bank of America. Please go ahead. Your line is open.

Speaker 12

Thank you. Let me add my congratulations to Ellen. I'm pretty sure I'm not going to be on the call Good luck, and thanks for all your help over the years. I really am good. We're going to miss you.

Speaker 12

A couple of things, if I may. Brian, I know we get to the cash return question a lot when I come to a question you on this, but I just wonder if I could pick your brain on whether your thinking is evolving any. And what I'm looking at is, you're You're pretty much bigger than BP at this point. You're knocking on the door of Total and Shell in terms of scale. And on average, your yield is about running about 60% of those peers.

Speaker 12

You could easily step that dividend up And get greater recognition for the value proposition in my opinion. Why not?

Speaker 2

Yes. I think I tried to be pretty clear, Doug. I appreciate the question and the push. I think What I've tried to be pretty clear about is our 30% of CFOs going back to the shareholders. So that's a commitment you can take to the bank as an investor in ConocoPhillips.

Speaker 2

And with this run up in the prices that we've seen here lately, you should expect to get 30% of our cash coming from our operations As a result, you asked what about the channel. I'd say maybe before the channel conversation too with the Shell acquisition, we'll probably look to try to Put some more money onto the balance sheet as we go through the course of this. But more directly to your question about the channel, I've been comfortable based on our outlook and And our view of the macro where things are going right now to split the distribution between the ordinary dividend and share repurchase. So how do I think about the ordinary dividend? For me, it needs to be something that's incredibly reliable.

Speaker 2

It's transparent. It's growable. It's reliable. You can count on it. You can take it to the bank.

Speaker 2

And it works at the downside of this sector in the whenever we go through those downturns. That's how I think about the dividend. And I think you can get euphoric when these times are pretty good, but I think you got to think about the dividend being Commitment, reliable, always there, and it's growable. And so that's how I think about the dividend. But more importantly, you should expect to get A 30% of our cash coming back from our operations, that's our commitment.

Speaker 2

That's what we've done for a number of years, and that's what we're going to continue to go do. So as that CFO goes up, you're going to get those dollars. And we've been pretty open to the channel. We've had this conversation with the market and with our investors. And as we see circumstances changing, we're not locked into a specific channel to go Do that, but, so I take your point, Doug.

Speaker 2

I think I'll probably think about the ordinary dividend just a little bit differently.

Speaker 12

I appreciate the answer. I guess it's more about trying to figure out what the market is best prepared to recognize is kind of what's behind my question. But I appreciate the answer. Thank you.

Speaker 2

Yes. The recognition Doug needs to be over the long term, not just over a month or a quarter. But Well, what builds value? What's the right model over the long haul in a very volatile business?

Speaker 12

Sure. Very different capital structure today for you guys than a few years ago. My follow-up is very quickly. You touched on high grading the portfolio. I don't think we've heard you say that in a little while, and obviously, you've now got a very large slug of production coming in.

Speaker 12

I just wonder if I could push you a little bit to touch Touch on

Speaker 9

some of the things

Speaker 12

you were thinking there to flesh that out, and I'll leave it there. Thank you.

Speaker 2

Yes. No, thanks, Doug. I think we sold through this quarter a couple $100,000,000 worth of assets. Those are largely in the Lower 48. We've got another couple of large packages in the Lower 48 on the market Today that are significantly larger than what we've talked about closing today and a couple of other things.

Speaker 2

But We're pretty committed. We announced at the after the Shell transaction that we would sell $4,000,000,000 to $5,000,000,000 We had 2 From the June market update, we're well on the line well on the road to delivering that $2,000,000,000 to $3,000,000,000 We up that to as a result of the Shell transaction just because when we get the first look at the portfolio, primarily in the Permian, we think there's going to be Some cleanup that we can do with Tim's team and the trading and the swapping that he described earlier and some outright sales. So I feel pretty comfortable with that $4,000,000,000 to $5,000,000,000 target, obviously take us into 2023, but making probably a lot of progress Through the first half of next year in delivering those targets.

Operator

Thank you. Our next question comes from Phil Gresh from JPMorgan. Please go ahead. Your line is open.

Speaker 13

Yes. Hi, good afternoon. My first question is just on the prior guidance around the ending 4Q cash balances post The Shell acquisition of about $4,000,000,000 in cash. Any updated thoughts there now that we've gone through 3Q and

Speaker 3

Yes, sure, Phil. We still feel very good about that $4,000,000,000 of ending cash. The Shell transition headline price It's $9,500,000,000 but the effective date is July 1 this year. And so as we go through the year, we would Expect to end up with a little over $4,000,000,000 of cash by the end of this year.

Speaker 13

Okay. And then second question, Bill, for you would be, you gave a little teaser in your prepared remarks around Cash taxes, do you have any updated thoughts around when you would become a cash taxpayer, You're kind of factoring in the impacts of the Shell acquisition, the higher oil prices, etcetera?

Speaker 3

Yes, sure, Phil. So current pricing if current pricing continues into 2022, we would expect to move into a significant tax Paying position in the U. S. By early to mid-twenty 22.

Speaker 13

And how about just for the overall company?

Speaker 3

Well, so the overall company, we Would be similar. So if you look across our international assets, many of them are already in a cash tax paying position. So the main change is in the U. S.

Speaker 13

Got it. Got it. Okay. Thank you.

Operator

Thank you. Our next question comes from Paul Chen from Scotiabank. Please go ahead. Your line is open.

Speaker 14

Thank you. Let me add first my congratulations to Alan and wish you a wonderful and healthy Retirement. So thank you for your help. Thank you. Two questions.

Speaker 14

Maybe that this is for team. Maybe that we read too much. In the Q3, legal cost production actually sequentially down. I think in your previous 10 year strategic long term, the target is Eagle Ford maybe Reaching, say, close to about 300 in the longer term and stay there for a long period of time. So wondering that with the added Permina, is that still the game plan and what we see in the Q3, just the timing of the well coming on stream Or that we should read more on that.

Speaker 14

So that's the first question. Then maybe I will ask the second question maybe later.

Speaker 6

Good. Thank you. Yes, the way we think about managing the Eagle Ford and the Bakken and the Permian As one asset that we can allocate capital around, we said on this call before that the Eagle Ford and the Bakken are much closer to being at their Optimal plateau than the Permian is. The Permian doesn't get there for a long time, but we are increasing activity in the Eagle Ford. It will be at That optimal plateau rate that you referenced and the sequential quarter over quarter is more about Timing and things like that of wells coming online.

Speaker 6

But I'm very pleased with the performance of that asset. And There have been things like refracs and other things that we've talked about that have continued to improve the performance of the Eagle Ford.

Speaker 14

Tim, when does you think Eagle Ford will reach that petrol tire production rate in 2024, 2025 or maybe sooner? So in other words, how aggressive are you going to ramp them up?

Speaker 12

Yes. Well,

Speaker 6

it's we haven't given guidance on things like that, Generally, it reaches its plateau much sooner.

Speaker 14

Okay. Thank you. The second question maybe is for Bill or for Ryan. I think When you set up the RMB6 1,000,000,000 on the cash return, that's based on the RMB60 WTI for this year. Obviously, the price is much stronger.

Speaker 14

So should we assume that you're going to return more than that? Or because of the Shell transaction, You're going to stick to that and just have the additional cash to strengthen the balance sheet?

Speaker 2

Yes. No, at this point, we're our guidance is the $6,000,000,000 of return this year. And stay tuned for what that looks like for next year. But yes, we're sticking to the plans we have in place for 2021 It gets us pretty close to $6,000,000,000 total return. That's through the ordinary dividend and through our the shares that we're buying and the shares that we're swapping with CV or Sunovus.

Operator

Thank you. Our next question comes from Neal Dingmann from Tuohy Securities. Please go ahead. Your line is open.

Speaker 15

Ryan, just a quick follow-up on what you just said. I just want to make sure I was clear on the shareholder return on the $6,000,000,000 It looked like the bulk, a good size of that, I think it's onethree of it is coming this quarter. Is that just the result How it played out from the cash flow and the stated cash flow payout?

Speaker 2

Yes. I think you probably saw some And the swap with the Cenovus shares, the dividends obviously ratable across the 4 quarters other than the raise that we announced here Recently, and we restarted our share buybacks outside of the Cinnova swap after the Q1. So Yes, they're not quite ratable. And you saw the ramp up there in the Q3 if you look at our results, and you should assume that that continues into the Q4.

Speaker 15

Okay. Okay, great. Great clarification. Then my second probably for Kim. Tim, you just mentioned earlier on the activity.

Speaker 15

My question is more on Permian activity you were talking about. I know one of your peers suggested kind of a notable increase in print activity remainder of this year turning into 'twenty two. I'm just wondering, Post the Shell deal, would we continue to see a ramp in that? I just want to see if that's what you're indicating On the last, given you mentioned the plateau in the other two plays, could we see some ramp there? Or is it still in the works to hold things steady, Obviously, no, and you don't have 2022, 2023 guide now yet.

Speaker 6

We haven't completed all our planning for next year. That's what Ryan referred to that we're Going through, but I would tell you that as we're planning for Shell, until we get our hands on the steering wheel, it's kind of Just continuing the level of activity that they currently have going on there. I would tell you We really believe strongly in the steady as she goes. And as we add activity, it will be ratable and kind of a I wouldn't call it a I would call it slow steady growth because I think that will build the most efficiency in our operations.

Operator

Thank you. Our next question comes from John Freeman from Raymond James. Please go ahead. Your line is open.

Speaker 5

Good afternoon. Thanks. I just I want to revisit the 10 year plan, which obviously got enhanced after the Shell transaction. And just when I'm thinking about the different sort of, I guess, we'll call them toggles that you have. Obviously, given the unhedged nature of the portfolio, You have talked about if you do have a $10 or higher oil price, then your oil assumption there, it's an incremental $35,000,000,000 And I'm just trying to make sure that I'm on the same page with how you all are thinking about that.

Speaker 5

The last time that the free cash flow got enhanced from the Shell transaction, with the incremental, let's call it, 10,000,000,000 Over that 10 year plan, that full $10,000,000,000 basically went to the incremental shareholder distributions. So I'm just trying to, I guess, Ryan, just how you think about what it would theoretically take for you ought to look at something other than that kind of 3% kind of And it just it doesn't really matter what the oil price is, the incremental goes to the shareholder distributions or just how you think about it? Ryan would be helpful.

Speaker 2

Yes. Thanks, John. I think you should think about it on top. Again, the market update plan was at a $50 a barrel price deck. So our commitment to our investors is that 30% of the cash will go back to the showers as price increase and our cash flows increase, you should expect the distribution to the shareholders to increase.

Speaker 2

We're still going to maintain a very strong balance sheet, and having some cash on the balance sheet is important to the company. And then we'll deliver modest growth. But that's always been Output out of our plans. We want to make sure that we have a good idea of where the macro is going to go for the next year. We're going to set our capital budget plans to Deliver the strongest returns on that capital that we can manage.

Speaker 2

We don't want to blow into the face of really high superinflation. We've seen what that's done Look forward to return, so we'll be very conscious of that as we go into what we think is a pretty constructive view of The macro going for the next 2 to 3 years. So you ought to expect us to act like we've done in the past. We'll be really judicious how we spend our capital, make sure we're getting the most out of every capital dollar we can. Shareholders are going to get 30% of their cash back.

Speaker 2

They'll get that through the dividend and through some share buyback, Maybe another channel, we'll see if that's the right thing to do for the company with where we're at, and we're going to maintain a very strong balance sheet as we go through this process. But adding the shell Just made the company better, made it more resilient and made more cash flow and more so that means there'll be more returns of capital back to the shareholder. And remember, we're running the Shell assets just like we're running our own Lower forty asset Lower forty eight assets at about a 50% to 60% reinvestment rate. We're not again, that's what I tried to say at the beginning, we're executing the shale differently than what this industry did a number of years ago.

Speaker 1

Finara, this is Ellen. We'll take John's second question and then wrap it up.

Speaker 5

Okay. Thanks. And then just my follow-up question, Ryan, you talked about the inflationary pressures, CNN, The Lower forty eight with that kind of high single digit to low double digit inflation versus the international part of your portfolio, which is Still rather modest, kind of 2% to 3% inflation. Obviously, Tim and his team have done a great job on the efficiency gains side on the Lower 48, but It doesn't sound like, at least for the 2022 plan that we should anticipate any material shift in sort of I guess international versus lower 48 sort of mix, but just, I realize this is oversimplifying it, but like how wide would That spread has to be from a service concentration perspective, lower 48 versus international, where we might see all Lean a little bit more on the international portfolio.

Speaker 2

Yes. I don't think we'll probably allocate capital based on how we see those different inflation rates going. So I think we just wanted to be clear about how we kind of see it developing in the significant categories of spend that we have in the company and try to give you An idea of what we're seeing today, we'll continue to watch it. I think it's probably more goes to our Lower forty eight business. If we see Hyperinflation starts to see running away from us.

Speaker 2

We might adjust our scope modestly, so we're not going to try to go into that. So again, it's with Really focus on making sure the returns are adequate for the capital that we're investing. And I think Tim said in one of his responses, we're a large company. We've got a very sophisticated supply chain organization, very commercial organization and the efficiencies that we're wringing out of the business are still there. So we think we have a way to mitigate Quite a lot of it, and we'll just adjust our plans if it gets out of control as an example.

Speaker 2

So that's where we stand out as an E and P We're global, we're big, and that's a huge advantage to us when we think about the impacts of these kinds of things on our business.

Operator

Thank you. We have no further questions at this time. I'd like to turn the call back over to you, Ellen. Thank you.

Speaker 1

Terrific. Thank you to our listeners. Thank you, Zanara. Really appreciate it. Feel free to ring Investor Relations if you have any additional comments.

Speaker 1

Have Wonderful day and week. Be safe. Thank you.

Operator

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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