ConocoPhillips Q4 2021 Earnings Call Transcript

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Provided by Quartr
February 2, 2022

Key Takeaways

  • ConocoPhillips delivered 1.6 MM bbl/d production and a 14% ROCE (16% cash-adjusted) in 2021, generating $15.7 B in CFO and $10 B in free cash flow, and returned $6 B to shareholders.
  • 2022 distribution framework boosted total returns to $8 B—over 30% above last year—driven by increased share repurchases and a 50% higher Q2 VROC payment.
  • Medium-term emissions intensity reduction target raised to 40–50% by 2030 (gross operated/net equity) with $2.2 B allocated to Scope 1/2 cuts and low-carbon investments.
  • At a $75 WTI and $3.17 Henry Hub price deck, 2022 CFO is projected at ~$21 B and free cash flow at ~$14 B, with the company fully unhedged to capture upside.
  • Operating expenses face mid-single-digit inflation—especially on Permian tubulars, trucking, labor and chemicals—pushing 2022 op-cost guidance to $7.3 B.
AI Generated. May Contain Errors.
Earnings Conference Call
ConocoPhillips Q4 2021
00:00 / 00:00

There are 18 speakers on the call.

Operator

Morning, and welcome to the Q4 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'll now turn the call over to Mr.

Operator

Mark Keener, VP, Investor Relations. Mark, you may begin.

Speaker 1

Thank you, Zenera. Welcome to all of our listeners today. First, Let me introduce the members of our team who are on today's call. We have Ryan Lance, our Chairman and CEO Bill Bullock, Executive Vice President and Chief Financial Officer Dominic Macklin, Executive Vice President of Strategy, Sustainability and Technology Tim Leach, Executive Vice President of Lower forty 8 and Nick Olds, Executive Vice President for Global Operations. Brian and Bill will lead off today's call with some prepared comments, after which the team will be available to take your questions.

Speaker 1

Before I turn the call over to Ryan, a few quick reminders. In conjunction with this morning's release, we posted supplemental materials Excuse me, that include Q4 and full year 2021 highlights, earnings and cash flow summaries, preliminary reserve replacement information, Price realization analyses and updated 2022 guidance and sensitivities. During our call, we may make 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 with the SEC. And finally, we'll also make reference to some non GAAP financial measures today.

Speaker 1

Reconciliations to the nearest corresponding GAAP measure can be found in this morning's release and on our website. With that, I'll turn the call over to Ryan.

Speaker 2

Thank you, Mark. So 2021 was a truly remarkable year for ConocoPhillips. Our operating performance around the globe was outstanding. We generated strong returns on and of capital for our shareholders and closed on 2 significant highly accretive acquisitions in the heart of the Permian Basin. Our exceptional results last year are directly attributable to the talent and dedication of our global workforce.

Speaker 2

We produced 1,600,000 barrels per day and brought 1st production online at GMT2 in Alaska, The 3rd Montney well pad and the Malachi Phase 2 and S and P Phase 2 projects in Malaysia. We also completed the Tortue project in Norway And achieved all of this with excellent cost, schedule, safety and environmental performance. Financially, we achieved a 14% Full year return on capital employed or 16% on a cash adjusted basis and generated $15,700,000,000 in CFO With over $10,000,000,000 in free cash flow, and we returned $6,000,000,000 to our shareholders, representing 38% of our cash from operations. We also continued our rigorous portfolio optimization work, completing the truly transformative Concho and Shell Permian acquisitions and further high grading our asset base around the world. In the Asia Pacific region, we exercised our preemption right To acquire an additional 10% in APLNG and announce the sale of assets in Indonesia for 1,400,000,000 In the Lower forty eight, we generated $300,000,000 in proceeds from the sale of non core assets last year.

Speaker 2

Last week, we signed an agreement to sell an additional property set outside of our core areas for an additional 440,000,000 Collectively, these transactions reduce both the average cost of supply and the GHG intensity of our more than 20,000,000,000 barrel resource base, And we're well down the road toward achieving our $4,000,000,000 to $5,000,000,000 in dispositions by 2023. In early December, consistent with our 10 year plan and capital allocation priorities, we announced a returns driven capital budget for 2022 that's expected to deliver modest growth this year. We also introduced a new variable return of cash or VROC tier to our distribution framework And provided a full year target of $7,000,000,000 in total returns of capital to our shareholders. Based on current prices and the forward curve, We've increased the target to $8,000,000,000 with the incremental $1,000,000,000 coming in the form of increased share repurchases and a higher variable return of cash.

Speaker 3

The $0.30 per share of VEROC announced for

Speaker 2

the Q2 represents a 50% increase over our inaugural variable return to shareholders that we paid this quarter. Now to put the $8,000,000,000 in perspective, it equates to an increase of more than 30% from the $6,000,000,000 returned last year And a greater than 50% increase in projected cash return to shareholders. Our 3 tier distribution framework provides a flexible and durable means To meet our returns commitment through the price cycle and truly is differential to others in the sector as our returns commitment is based on a percentage of CFO And not free cash flow. And as you know, we are guided in everything we do by our triple mandate. We must reliably and responsibly deliver oil and gas production to meet energy transition pathway demand.

Speaker 2

We need to generate Competitive returns on and of capital for our shareholders and achieve our Paris aligned net zero ambition by 2,050. Just as I'm very proud of the excellent operational and returns focused performance we delivered in 2021, I'm equally pleased about the progress we have made In support of the 3rd pillar of our mandate, we increased our medium term emissions intensity reduction target to 40% to 50% by 2,030 and expanded it to include both gross operated and net equity production. As a reminder, we're also committed to further reducing our methane emissions And achieving our 0 routine flaring ambition by 2025. And as highlighted in our December release, We've allocated $2,200,000,000 of this year's capital program for projects to reduce the company's Scope 1 and 2 emissions intensity and investments in several early stage low carbon opportunities that address end use emissions. We strongly believe that this level of focus on And performance toward fully realizing our triple mandate has ConocoPhillips very well positioned to not just survive through the energy transition, But to thrive regardless of the pathways it takes.

Speaker 2

While we're on the topic of energy transition, I'd like to touch on the macro environment. Commodity prices today reflect global energy demand returning to pre pandemic levels, along with supply being impacted by decreased investment In oil and gas over the past couple of years, concerns about inventory levels and the amount of available spare production capacity in the system, All these factors demonstrate the ongoing importance of our sector to the global economy today and for the foreseeable future. It's becoming increasingly clear that the energy transition isn't going to happen with the flip of a switch. What people and businesses around the globe need is a managed An orderly transition, but that's not what the world is seeing to this point. Supply and demand balances are fragile at the moment, Likely driving continued volatility and the current commodity price situation in Europe may be providing a cautionary signal.

Speaker 2

The simple reality is that most alternative energy sources still have a long way to go toward becoming as scalable, reliable, affordable And as accessible as the world needs them to be, which brings me back to our triple mandate and the importance of performing well across all three of the pillars For our shareholders and for the people of the world who need and use our products. Now with that, let me turn the call over to Bill, and he will cover the Q4 and our

Speaker 4

Thanks, Ryan. Looking at 4th quarter earnings, we generated $2.27 per share in adjusted earnings. This performance reflects production above the midpoint of guidance and strong price realizations As well as some commercial and inventory timing benefits, partially offset by slightly higher costs in DD and A. Lower forty eight production averaged 818,000 barrels of oil equivalent per day for the quarter, including 483,000 from the Permian, 213,000 from the Eagle Ford and 100,000 from the Bakken. As previously communicated, Our Permian and overall Lower forty eight production were both increased roughly 40,000 barrels of oil equivalent per day in the quarter Due to the conversion from 2 to 3 stream accounting for the acquired Concho assets.

Speaker 4

At the end of the year, We had 20 operated drilling rigs and 9 frac crews working in the Lower forty eight, including those developing the acreage we recently acquired from Shell. As Ryan touched on earlier, operations across the rest of the portfolio also ran extremely well last year Turning to cash from operations, We generated $5,500,000,000 in CFO, excluding working capital, resulting in free cash flow of $3,900,000,000 in the quarter. For the full year 2021, we generated $15,700,000,000 in CFO, dollars 10,400,000,000 of free cash flow And return $6,000,000,000 to shareholders. In addition to the asset dispositions Ryan covered, we also sold 117,000,000 shares We held in Synovus in the year, generating $1,100,000,000 in proceeds that we used to fund repurchases of our own shares. This left us with a little over 90,000,000 Synova shares at the end of the year, which we intend to fully monetize by the end of this quarter.

Speaker 4

We ended the year with over $5,000,000,000 in cash, maintaining our differential balance sheet strength even after completing the all cash Acquisition of Shell's Delaware Basin Assets. So to recap, it was not only a strong quarter, But one that also bodes very well for 2022 and future years. We continue to optimize the portfolio. Our businesses are running very well around the globe, And we have had an overall reserve replacement ratio of nearly 3 80%, establishing an incredibly Our cash flow performance and leverage to prices have substantially improved over the past couple of years as demonstrated by our 4th quarter results and expect it will continue to improve as we begin including the newly acquired Delaware And our consolidated results this quarter. Now demonstrating this point and appreciating that it's helpful for the market to have an accurate sense of Stronger CFO generating capacity at a WTI price of $75 a barrel with a $3 differential to Brent And a Henry Hub price of $3.17 $75 we estimate our 2022 Full year cash from operations would be approximately $21,000,000,000 which reflects us reentering a tax paying position in the U.

Speaker 4

S. This year at those price levels. And our free cash flow for the year would be roughly $14,000,000,000 And of course, we continue to be unhedged So we expect to fully capture the upside of the current price environment. We've provided updated sensitivities in today's supplemental materials to help estimate how much earnings and CFO Are projected to change this year with marker price movements. So to sum it up, all that we've shared with you today underscores our readiness to reliably generate Very competitive returns for our shareholders as we thoughtfully move forward as a responsible, valuable E and P player in the energy transition.

Speaker 4

That is our triple mandate. It's what we have ConocoPhillips built for and are ready to deliver. Now with that, let's go to the operator to start the Q and A.

Operator

Thank you. We will now begin the question and answer session. And our first question comes from Jeanine Wai from Barclays. Please go ahead. Your line is open.

Speaker 5

Hi, good morning, good afternoon, everyone. Thanks for taking our questions.

Speaker 2

You bet. Good morning, Suneet.

Speaker 5

Good morning. Our first question maybe for you, Ryan. It's Still pretty early in the year, but you have the confidence to increase the expected cash return by $1,000,000,000 to the $8,000,000,000 You provided an update on your macro view earlier in the call. And is this really the primary driver for increasing the cash return level? And Can you provide an update on how inflation is trending for Conoco given continued strong oil prices as well as we heard some of the General recent industry commentary from service companies.

Speaker 2

Yes. Thanks, Janine. It is the Primary reason we're increasing our returns of capital to our shareholder from the $7,000,000,000 that we announced here just a few weeks ago to $8,000,000,000 now. So again, it represents a pretty significant increase year on year, but it's a reflection of kind of our view. And as we step back and take a look like we will each quarter, Thinking about where the forward curve is at, where the market is at, where our capital is at, where the balance sheet is at.

Speaker 2

So it's a recognition of a strengthening commodity price market. And that's a reflection of that strengthening since the December timeframe when we announced our capital budget for the year. And we're seeing a bit more inflation as a result of the strengthening commodity price that we see. And I'd say it's Primarily in the Permian Basin as well, but we kind of spreading a bit to the Lower 48. Prior, we were probably in the Mid single digit kind of inflation across the whole company, I would say now we're in the mid level single digit kind of inflation rates.

Speaker 2

So we're seeing the impact of that. It's on certain commodities of spend like tubulars, trucking, labor, Chemicals, OTCG, those kinds of things and primarily in the more active parts of the Lower 48 like the Permian today. Around the whole world though, we see much lower inflation and that's the benefit of a global diversified portfolio. But We are seeing the a little bit higher pressure at these higher commodity prices than maybe what we would have said even A month and a half or 2 months ago.

Speaker 5

Okay, great. Thank you for all that detail. Our second question is on the Shell acquisition. We know it hasn't really been very long since it closed, but can you provide any color on opportunities related to the integration or Any efficiency gains and I guess we're thinking, for example, just using Concho as a playbook, you were very successful at capturing lower hanging cost savings related to Supply chain related to marketing optimizations and that added up to a big structural number. But for the Shell deal, you have a higher percentage of Non operator interest and that could dampen the impact of similar optimization.

Speaker 5

So are there other unique opportunities with the Shell assets? Thank you.

Speaker 6

Jeanine, this is Tim. Yes, let me address those questions. As a reminder, we closed The Shell acquisition on December 1, just 70 days after we made the announcement of the transaction, we've had a smooth and safe transition of Operatorship and personnel over the time. So that's been a huge success. We plan to continue running 4 rigs On that property, the same activity rate that Shell was running through the remainder of this year, but we've moved our Personnel, our rigs on.

Speaker 6

And since we've taken up operatorship, we've quickly transitioned to our style of Well drilling design, casing design, which has generated lower cost. We've also switched to Our fracking design, which provides better economics using our style of prompt fluid Specs and cluster spacing. So all those are kind of the blocking and tackling of us putting our style of operations on Those properties, I would tell you that the biggest opportunity in the near term is Transitioning from 1 mile wells to 2 mile wells, and that's with our partners out there in the field. All those companies that we're partnered with, we have done deals with in the past to core up and drill longer laterals. So I think that's the Low hanging fruit.

Speaker 6

We're in conversations with all of them. We've made transactions on some of those properties already. And just for frame of reference, the difference between drilling a 2 mile lateral on those properties and a 1 mile lateral, everything else Being held the same is a 50 basis point improvement on rate of return on well economics, which generates about a 30% improvement And cost of supply. The other thing that we're working on that I'm pretty excited about, the Shell deal in and of itself has allowed us More freedom for overall property management. You may have read in the last couple of weeks that we sold some non core assets On the New Mexico shelf and on the Central Basin platform, the kind of efficiency we get from those kind of property managements, For example, that one transaction allowed us to sell 25% of our operated well bores, And it only affected 2% of our production in the Permian.

Speaker 6

So that kind of efficiency will flow through the entire organization And it's just one example of how I think we're making things better.

Operator

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

Speaker 7

Good morning, team. Thank you. Ryan, you were quoted recently talking about the U. S. Production profile.

Speaker 7

I think Your point was entry to exit this year, you thought we might grow 800,000 barrels a day. I guess that's a crude. I just I'd love your perspective on how you're seeing the U. S. Production profile as you think about yourself and peers.

Speaker 7

And It's tough for us to get the same store sales growth rate For Conoco in the Permian because, of course, you've done some acquisitions here, but just as you think about the growth rate in 2022 versus 2021 for your own asset base, how are you thinking about that in the Permian? Yes.

Speaker 2

I can let Tim talk about specifically the Lower 48 in the asset. But I'd The macro, yes, it was quoted in a recent discussion with some of my peers that we put the entry to exit at about 800,000 barrels a day this year. And I think, in light of the last couple of announcements that I've heard, Neil, I would actually be moving that number up now, Because I think we were even a bit surprised by the strength of some of the numbers that we were hearing. But I think importantly, We would place and that is a crude and condensate number. It doesn't include NGLs.

Speaker 2

So I'd we're 8,000 to 900,000 probably barrels a day growth this year from the U. S. And probably a similar kind of number coming out next year, this year dominated by the privates, With some influence by the publics, but clearly next year probably having that swap a bit and the publics Kind of regenerating and coming out of a maintenance capital mode in 2021 and reenergizing just like we are. We plan to add some in both in all three of the big three, the Bakken, the Eagle Ford and the Permian as well. So I can let Tim Maybe talk a bit about how we sees that how that manifests in our portfolio on a normalized basis.

Speaker 6

Yes. I don't really have a whole lot to add other than to just remind you that underlying decline rate on the Permian is pretty substantial. And so the increase in activity that we've seen from the privates and such will generate more production and you've seen that show up in the numbers. But I think companies like ours and other large companies kind of think more of a sustainable growth rate because That's really where you get your efficiency is a disciplined kind of growth that allows you to move down the learning curve and Lower your cost of supply. We talked in our 10 year plan of a growth rate for our Permian in the high single digits and that As a result of that disciplined growth, so I do think there'll be more consolidation.

Speaker 6

So a company like us, you've seen our operated production grow more than 35% in the Permian since we did the Shell deal and other things. So I think There'll be some production moving around based on the consolidation.

Speaker 7

Thanks, Tim and Ryan. And actually that was my follow-up here, which is You've developed a core competence here, seeing the market around M and A between the Foster Creek transaction and then of course, Concho, in the Shell assets, how do you think of ConocoPhillips in terms of further consolidation and the role it can play, Particularly in the Lower 48.

Speaker 2

Well, I've said before, Neil, that I think further consolidation makes I think you have to get more assets in responsible hands like ConocoPhillips. We spent a lot of time talking about our triple mandate and The value proposition that we have and how we just think about the business, and I think getting more assets like that into responsible hands is going to make Clearly, with the addition of Concho and Shell, we got a lot on our plate and the bar is quite high inside the company. So, we're not immune to what's going on. We watch the market. We're on top of everything that's going on.

Speaker 2

It takes a lot to make us better As a company, and we've got to see that in any assets that we look at, make us a better company, make our 10 year plan, a better plan. And if we apply what we think is a better way of Drilling and completing these wells, can we add value to the assets that we might be looking at? So, yes, we're always looking and We've been ruthless high graders of the portfolio. So as you mentioned, even dating back to the Foster Creek Christina Lake transaction that we did that They just started us down this path and the $4,000,000,000 to $5,000,000,000 that we've committed to sell and high grade by the end of 2023 as well, And we're well on the pathway to do that. So we're always trying to lower the cost of supply in the portfolio, lower the GHG intensity, And we can do that through organic investments and we can do that potentially through inorganic if they compete.

Operator

Thank you. Our next question comes from Roger Read from Wells Fargo. Please go ahead. Your line is open.

Speaker 3

Yes. Thanks. Good morning.

Speaker 2

Good morning, Roger.

Speaker 3

I guess maybe come back to the commentary about Switching from the 1 mile to the 2 mile laterals, we even heard talk of an increasing percentage of 3 mile laterals. And I was just wondering As you think about that aspect of it, whether or not you've tried that yet, whether or not it made sense on your acreage and any sort of Idea what that might do in terms of a further impact on decreasing your cost to supply?

Speaker 6

Yes, Roger, we just in the Southern Midland Basin just completed a drilling project that included several 3 mile and 1, 3.5 mile lateral that we drilled in record time and have been very pleased with the results and the production from that. So I think that's A big opportunity for the future. It's another challenge for your lease configuration. That's why it's good to have big blocky acreage blocks.

Speaker 3

No doubt. And that leads into my next question, which, as Janine said earlier, very early in your Shell Permian acquisition. But I was curious, anything you've seen on the true swap side? You mentioned the one thing in New Mexico, but I mean like a real improvement in terms of acreage alignment where you can Become more active?

Speaker 6

Yes. We have one big partner and several other Pretty sizable partners that we've done business with for a long time on swapping and trading. The good news is that This is a win win for both parties. Everybody wants to be able to drill longer laterals where they have bigger interest in their own operations. So We've already accomplished some of this.

Speaker 6

I can't tell you if I think it's going to be a lot of small blocking and tackling or a few big trades, but Things are moving pretty rapidly in a good direction.

Operator

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

Speaker 8

Thank you. Good morning. Happy New Year, everybody. Ryan, I want to come back to your comments about the Permian. And I just want to ask you philosophically, are you concerned About the U.

Speaker 8

S. Going back to that level of growth, given the recent history of growth for growth sake, and we all know how Saudi On the to that, in global market, which despite the post COVID recovery still has a relatively pedestrian long term growth outlook. And how does that play into your strategy?

Speaker 2

Yes, Doug, thanks. No, I am. I think that It's very not so much the back of our mind, but right at the front of our mind, I am absolutely concerned about. I think The one change maybe relative to late 2014 2015, the last time we were Kind of at these levels is just what is the spare capacity sitting in the OPEC plus group. It was quite a different number back at that point in time, and you can We can all debate what that number is and the fact that the inventories are down quite a bit globally and certainly here in the U.

Speaker 2

S. I think there's a little bit of time that we have associated with that. But certainly, if we're getting back to the level of growth in the U. S. That If you're not worried about it, you should be and be thinking about it.

Speaker 2

I

Speaker 8

hope your peers are listening. My follow-up is, I don't know if you're able to give this yet, maybe a question for Bill. But with all the portfolio changes going on, one of our favorite kind of Outputs is the breakeven analysis you guys do, the sustaining capital that goes along with that. Are you able to give us an update on a post Tax basis given that you're now back to paying full cash taxes.

Speaker 9

Yes. Doug, it's Dominic here. I can I'll help with that a little bit. I mean, I'll just take you back to the numbers we showed in our 10 year plan. That all included Tax modeling, of course, of the prices that we had there.

Speaker 9

So that we were that mid cycle price, we were about $30 WTI, breakeven. So the higher prices, Obviously, we'd have a little bit higher taxes, but I think that demonstrates the competitiveness of the portfolio. So Bill, I don't know if you've got anything to add to that.

Speaker 10

No, that's well said, Dominic.

Operator

Thank you. Our next question comes from Scott Hanold from RBC Capital Markets. Please go ahead. Your line is open.

Speaker 11

Yes, thanks. With proxy season coming up, could you guys talk a little bit about the shareholder proposition on your Scope 3 And where you all stand on that right now?

Speaker 9

Yes. Thanks, Scott. This is Dominic again. We have engaged very extensively with our shareholders on the resolution as you would expect. So we've met With around half of our stockholder base, and that represents about 80% actually of our institutional investor base.

Speaker 9

So So we'll have a lot more detail coming in our proxy statement. But at a summary level, I would say we heard a lot of support For being the 1st U. S.-based oil and gas company to set a Power Cell Line net zero ambition on our scope of 1 and 2 emissions and for the progress we're making towards that, and that includes the $200,000,000 capital allocation we announced for this year, which will go To our Scope 1 and 2 emission reduction effort as well as some low carbon business opportunities. Our stockholders with very few exceptions Did not express an expectation for ConocoPhillips as an E and P upstream only company To set the scope 3 target, and that's because there was really a general recognition that this would amount to really a prescribed shift Of responsible Paris aligned production to other less accountable sources. And also that end use emissions will only be addressed Effectively, if all the many consumers across the value chain, industrial consumers, commercial consumers, retail consumers, They also addressed their Scope 1 and 2 emissions.

Speaker 9

So but we also were able to emphasize that we are not ignoring Scope 3. We are continuing to actively advocate for an economy wide price in carbon. Of course, that's so important to address both the supply side, but So important, the demand side. We're also engaging with our supply chain on their emissions and their reduction plans, And we're making some early stage investments in low carbon business opportunities that address end use emissions. And of course, we've talked a lot about that, and we're pursuing those.

Speaker 9

That's carbon capture Storage and hydrogen. So we believe a power is aligned E and P company with a focus on reliable low GHG intensity and low cost Supply production has a valuable and really a crucial role to play in the energy transition. So of course, we are continuing in dialogue with our shareholders, but that's It's really an update as to how that dialogue has progressed.

Speaker 11

I appreciate that. That was very thorough. As a follow-up, Can I ask on Norway? Obviously, you've got the Tor project online, and it seemed like gas volumes are very robust this quarter. Is that just it ramping up to full capacity?

Speaker 11

Or are you guys pulling some other dials given the strength in prices for gas over there?

Speaker 12

Yes, Scott, this is Nick. Yes, we on Tortue, we did bring all the wells online in May of last year. That asset is producing as expected. And then we did a lot of work with our non operated folks and just trying to make sure We maximize gas production through the end of 2021, and that's what you're seeing come through the bottom line. So yes, assets are performing well Tortue as expected and some additional gas flowing through 2021.

Operator

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

Speaker 13

Yes. Hi. Thank you for taking my question. My first question, just a bit of a follow-up On the activity levels planned for 2022, I was hoping you could elaborate a little bit more on the cadence and some of the moving pieces, particularly In the big three, in the press release, you gave some information on rig count and frac crews, but any additional color by basin and how you see things playing out as the year progresses?

Speaker 6

Phil, this is Tim again. The cadence of activity, as we talked about before, is kind of back end weighted in the year, and it's Cadence that we think will give us efficiency gains. But right now, we're at 20 drilling rigs and 9 frac spreads, and we would add approximately 4 more drilling rigs in the Lower 48 throughout the balance of the year. One of those is standing up in the Bakken, and I think the rest are in the Eagle Ford and the Permian. So it's kind of a measured pace, and We are being very disciplined.

Speaker 6

And as we said in the last quarter, it's a constrained pace in the Permian. We have lots of flexibility and capacity, but we think this is will give us the greatest efficiency.

Speaker 2

And I would add, Phil, what we talk a lot about is setting our scope early in the year with our teams and not wanting to whipsaw that scope. So just wanting to go execute it as efficiently as they possibly can. So on our operated scope, we want that to be we want them to know right What we expect them to go do and hope to execute that, but as Tim said, have

Speaker 13

flexibility. That makes sense. Thank you. One just quick follow-up for Bill. Very much appreciate the cash flow color for 2022.

Speaker 13

I did have one follow-up question there. Do you have anything pending in the Q1 for Libya for income tax Royalty Payments, one of your peers that operates there mentioned something on their call. And I presume your guidance would be kind of ex any working capital, of course. But just any clarification there. Thank you.

Speaker 4

Yes, sure, Phil. So on Libya, we're now current with our income tax Payments in Libya and current through the month of January, would expect that to continue through the year.

Speaker 13

Was there a particular payment in January?

Speaker 4

There was. So we became current for the year on January. It's about $900,000,000 was paid in January. That was catching up on taxes from last year. That was shown in working capital as you look at our financials for the year.

Speaker 4

So not a surprise on that.

Speaker 13

Got it. And the guidance of $21,000,000,000 would be excluding that, right?

Speaker 4

Correct, because of CFO.

Speaker 13

Yes. Okay. Thank you.

Operator

Thank you. Our next question comes from Ryan Todd from Piper Sandler. Please go ahead. Your line is open.

Speaker 14

Yes. Thanks. Maybe if I could just A couple of detailed follow ups. Regarding the operating expense guidance of $7,300,000,000 for 2022, you mentioned a number of factors Pushing the higher year on year. Maybe any rough breakdowns on roughly how much of that's coming from Portfolio change versus 2, 3 industry 3 streams switch versus how much is driven by inflation?

Speaker 9

Hey, Ryan. It's Dominic again here. Thanks for the question here. So just sort of provide a little bit of context here, I think you remember that last Q3 last year, we achieved a 6 $1,000,000,000 run rate target we set when we announced our acquisition of Concho and that was a $1,000,000,000 improvement to our cost structure versus the 2019 pro form a adjusted op cost of $7,000,000,000 So we're continuing to benefit From that, that's been a major advantage from the transaction and through the work we've done over the last couple of years. As we look at this year, so obviously, we're increased, we've said 7.3, 7.3 and that's really that's from incorporating Our Shell Pro Amine assets, obviously, we've got costs that come with those properties.

Speaker 9

Converting historical consul production for 2 to 3 stream, we've got some impact to that. And we do have some anticipated inflation. I would say in terms of general breakdown, I would say about half of the increase This is from the Shell Permian and the other the contra production 2 to 3 stream accounting and the anticipated inflation would represent the inflation would represent the rest about equally split, something like that. So but we're very pleased with the progress we've made on our costs.

Speaker 2

And I would put that a little bit in context, Ryan, too. We were just a reminder that Kind of pro form a concho, we're at about the $7 ish billion level, and we had 1,500,000 barrels a day of production. So we're at that kind of level now at 1,800,000 barrels a day of production for 2022. So I just want to put some Text around sort of where we've come and where we're at.

Speaker 14

That's very helpful. Thanks. Maybe one follow-up on realizations. Realizations continue to trend towards relative highs across budget year mix. We appreciate the slide that you've included in the deck.

Speaker 14

Any thoughts on what you may be doing as an organization that's helping to drive that? And looking forward, Is that something that we should expect to continue or should we expect those to widen back out at some point going forward?

Speaker 4

Yes, sure, Ryan. This is Bill. Looking at our realizations in the supplementary data, total realizations as a percentage of Brent, You'll notice that they increased to 82% versus in 4th quarter versus 77% in 3rd quarter, and that's Really driven by a 45% increase in Henry Hub and about 120% increase to our gas prices in Europe Versus just a 9% increase in Brent. So it's that relative outperformance by those that are driving that percent of overall realizations. I'd say on our crude realizations, those continue to remain strong.

Speaker 4

They're all within historical ranges. As you go Through there, I would expect those to continue as we go through the year, particularly as we continue to optimize our deliveries there. And then gas realizations is really the one that you saw the big change on. This shouldn't be a surprise to folks. The change here on Lower forty eight Really was, as our gas realizations move back to kind of the 90% level versus 115%, that's Primarily driven by conversion of the Concho volumes from 2 to 3 stream that we signaled on the Q3 call.

Speaker 4

It's in line with what we were expecting. So I would expect that what you're seeing as realizations here for Q4 are pretty good indication of where we expect to be.

Operator

Thank you. Our next question comes from Josh Silverstein from Wolfe Research. Please go ahead. Your line is open.

Speaker 15

Yes. Thanks, guys. Just had a question on the asset divestitures, the $4,000,000,000 to $5,000,000,000 there. As these start coming in, are the proceeds going right to debt reduction? Or could this potentially accelerate the return of capital Profile, whether it be via the buyback or dividend.

Speaker 15

I ask because that you have about $1,200,000,000 of short term debt, but don't think there is a lot of Big maturities over the next few years.

Speaker 2

No, it's pretty ratable maturities over the next few years. I can have Bill can Give you the specifics on that, but no, I think cash is cash, Josh. We look at the cash flow that's Coming in and we look at the proceeds that we're getting in as well. And I think if you look at our past history, we've been sharing pretty significant Percentage of both our cash and our proceeds back with our shareholder on an annual basis. So it's all fungible cash and We watch the balance sheet as well.

Speaker 2

We have a $5,000,000,000 gross debt reduction target, and we're on track. And Bill can maybe provide a little bit of color on that with respect to the balance sheet.

Speaker 4

Sure, Ryan. Yes, we're right on track to achieving our $15,000,000,000 gross debt target by 2026. And as you noted, we do have some debt maturing this year, about $800,000,000 of Debt, we're expecting to repay that when it matures. And then as we've said previously, we're looking at potential Debt refinancing and that would depend on multiple factors, including cost to retire and cost to issue new debt and how we decide to manage that overall portfolio. And We're looking at those factors, and you could expect to see us act sometime relatively soon to take advantage of that supportive market if all things stay where they've been at.

Speaker 4

And as Ryan pointed out, we don't mind putting cash on the balance sheet.

Speaker 15

Got you. Thanks for that. Just a question on the asset base and the portfolio mix. You're increasing your position in APLNG. It's an asset that you already have a stake in.

Speaker 15

But How do you think about Calf's position within the global gas market? And is this an area of the portfolio where you may want to get bigger given what's happening with Europe and Asia prices?

Speaker 2

Well, I mean, we're pretty longer term, we're bullish on LNG prices both in Europe and Asia given the The transition and what the planet is going to be going through and the role the gas is going to play in that. So yes, that informed some of our The pre empt on the sale of some of the APLNG assets is why we're interested in the Northfield expansion in Qatar. It's LNG that services both Europe and Asia. And then looking at what role we play in In terms of that here in the U. S.

Speaker 2

As well, it's the beauty of our cost of supply model. It's kind of indifferent to gas and oil. And if we See a structural advantage to gas developing over the next few years, it will show up in our cost of supply model and will attract Additional investment, but that's the basis again, the basis and the foundation for how we allocate capital, whether it's Geographically or by product type or by geology.

Operator

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

Speaker 16

Hi. Thank you. Good morning, guys.

Speaker 2

Good morning, Paul.

Speaker 16

Ryan, that maybe that is only a bit detailed, but In from the 4th to the Q1, since that you're going to add Shell, which the production is, say, call it 175 to 200. Alaska production is also going to be higher. So it seems like without other offset, The Q1 production should be higher than your guidance. And also that, I mean, we assume that the Permian Legacy production will also be somewhat higher. So I mean, where's the offset that in order for the Q1 Production guidance to come down to the 1.75 to 1.79.

Speaker 16

The second question is just I mean, it's not such a big deal, but I think you and Total is going to take over the Shell Interest in Libya. You already have the ownership there, but given the really high tax regime over there And also that the political volatility, just want to understand the rationale behind why that Kyle, M and A, would be interested to you.

Speaker 2

Yes. Let me go production first, and I can have Dominic add a little bit of color to it as well. I think what Paul, at a high level, I'm not worried about production at all. We're going to be just fine. It's as Tim described earlier, it's a bit of a back end ramp in our Lower forty eight.

Speaker 2

That's always going to be lumpy on a quarter by quarter basis depending on When you get the frac spreads out to complete the wells and when they come online, what's probably missing from people, there's a planned Turnaround in Qatar in the Q1, it wasn't in the Q4. So there's a few ins and outs with respect to that. So I think that's maybe around the edges why if you're looking at just sequential production from the Q4 to the Q1, you might see a little bit of differences. On your the Libya question, Paul, it's we were approached, it sounded like Hess Swatted out of Olivia, and it's a partnership after Total bought Marathon's interest. It Remained Total, ConocoPhillips and Hess as the 2 key parties in the venture in Libya.

Speaker 2

We were approached and said, would we want to participate with Total to take pickup that has interest in there, and It's a pretty good deal. Take all your points. It's relatively low margin. It's a contract that is Just a gross margin contract. We recognize that, but the deal was quite attractive on a cost of supply basis for us.

Speaker 2

And frankly, we'd like to control who the partnership is, Not necessarily interested in an outside partner coming in to take some of that. And then clearly with Total and ConocoPhillips, Olivia, there may be some opportunity to have some different kinds of conversations with the Libyans going forward.

Operator

Thank you. Our next question is from Bob Brackett from Bernstein Research. Please go ahead. Your line is open.

Speaker 4

Good morning. If I think about that U. S. Growth rate of 0.8000000 to 0.9000000 barrels a day and the lion's share of that being in the Permian, You can start to see the day where Permian gas takeaway gets exhausted. How do you guys think about your gas takeaway To meet your growth targets and how do you see the whole basin shaking out?

Speaker 2

Yes, I can start and anybody else can chime in, Bill, with our commercial team as we're all over this, Bob. And yes, we see the potential for some of that, I guess, take. We're in really good shape based on the Position that we have and the infrastructure we have, we can evacuate gas south, we can go west and we can come into the Katy hub And into the Gulf Coast as well. So but we're watching it pretty closely because we got to make sure industry wide, we don't go back Flaring is an industry and all those kinds of things. So we've got to build the gas infrastructure and offtake capacity has to be there To support these macro offtakes in the oil side coming out of the broader Permian Basin and maybe I can have Bill add a little bit

Speaker 4

of color from Commercial team? Yes, sure, Ryan. You're exactly right, Bob, that watching the takeaway capacity out of the Permian Basin is something that's important to do, As more production is coming on and particularly as associated gas starts ramping up, we're probably a couple of years away before you start hitting That capacity, but it's important to keep an eye on. I think as we look at a couple of things to know. First, We are currently moving several multiples of what our current production is across the Permian Basin.

Speaker 4

We've got a very skilled commercial organization in terms of How we move that volume, so we have flow assurance for ConocoPhillips production. And then you've seen in the market, there's been a couple of recent Proposed pipelines coming out that would put additional takeaway capacity both down to kind of the Corpus Christi area and the Houston area. I think those are going to be important to keep an eye on as we look at where the market goes. But flow assurance is something we definitely keep an eye on For our physical production. Great.

Speaker 4

Thanks for that. A quick follow-up. What's your appetite or philosophy around revisiting the capital program in Sort of mid year results?

Speaker 2

Well, we watch it every month, Every day, Bob. And so we're looking at the inflationary pressures that might be in the system. We're looking at what our partners are validating us for what they operated by other activity level and certainly they see these kinds of prices and That pressure on the OVO spend is there. So we look at that every year. Obviously, we can impact that through our operated As we watch it, absolutely, and we've got lots of levers in the toolbox to manage to an outcome should we choose to go do that.

Speaker 2

But that's that will be conversations and things that will come on the next couple of quarterly calls as we kind of watch the macro, watch the Activity level, watch the inflationary forces that might be out there and what sort of offsets that we're seeing on the efficiency side Because as we integrate the Shell assets into the portfolio that Tim talked about, we still have those opportunities as well. There's a lot there's a number of moving parts, but absolutely we'll be all over it and update the market as necessary through the remaining quarters.

Operator

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

Speaker 17

Good afternoon.

Speaker 2

Hello, John.

Speaker 17

The first question I had hi, the first question I had was Just a follow-up on the inflation topic, just to make sure I understand what's kind of built in on the guidance. The couple of $100,000,000 that you've got in the budget for inflation is can you give some ideas like pretty much Almost all of what you would have from a service cost inflation standpoint, is that locked in? Or are there certain items that as you go through the year, you're still I guess the spot market for certain items.

Speaker 2

No, we're not fully locked in on And again, it's predominantly in 4 or 5 categories of spend. Those are the ones that we watch pretty closely. Interestingly, TCG started at 1,000 a ton went to 2,000 has now come back down to 1300, so for rolled steel. And We get updates frequently from our supply chain organization, chemicals, because they a lot of them originate out of Europe are up right now With the supply chain constraints that are in that. So, again, then local kind of impacts with trucking and labor, Sand and some of those things, we watch them pretty closely, but they're probably In fighting a bit more, as I said earlier, than what we would have thought just 8 weeks ago when we put out Our capital guidance for the year, we've included some inflation to your point and we're watching that because we're also generating efficiency as a company and We'll update that as the year progresses.

Speaker 17

And so Ryan, is there I know at least there's a few of your peers that will put out Slides that say, well, x percent of our service items are sort of locked in for a given year. I mean, is there any ballpark kind of round number You could use in terms of what's locked in versus what's still exposed?

Speaker 2

No, I don't we'd have to get back you on that, John, you cut out on the first part of your question, sorry, but I can have a quick follow-up.

Speaker 17

Yes, sure. And then just the last question for me, just thinking about maybe a longer term perspective. When we look at the three peers, where you all been sort of returning returns to shareholders. If you kind of exclude the Cenovus shares Sales and you just sort of look at kind of your base cash flow, you've kind of had that ordinary dividend and the buybacks have sort of been Relatively kind of equal and then anything you get incremental has gone to the vROC. Do you think of like Tier 1 and Tier 2 is That's kind of the framework that you like when you sort of think about, I don't know, your 10 year plan or something where those are relatively kind of equal or do you see those kind of shifting Over time.

Speaker 2

Well, we don't necessarily think of it as equal, look at that. We actually Think about what's an affordable ordinary dividend through the bottom end of the cycle. We want to make sure that we can it's affordable, it's reliable, it's transparent, it's growable, It's competitive with the S and P 500. So we look at the ordinary dividend, we think about it at the bottom end of the cycle, but we also have our view of the mid cycle price and Some combination of dividend and repurchasing our shares that we believe is a mid cycle price is what we'd like To be able to do for our shareholders and more importantly, make sure that it represents at least 30% of our cash going back to the shareholder. And then our Mid cycle price, a combination of those two things does that in the kind of proportions that you described.

Speaker 2

But and then on top of that, we recognize the torque that we have to the side with these higher commodity prices and we're doing this we're swapping into the Cenovus shares and the strength of the Cenovus share price It's allowed us to swap into more ConocoPhillips shares, which will be complete in the Q1 of this year. So all that kind of weighs in and what's left To hit our 30% target and above is coming through that 3rd tier that we introduced last year called the V ROC, Which is a cash variable return back to the shareholders. So that's how we're using it. We think the 3 tiered system is durable, It's reliable, and it recognizes the reality of the volatility that we're seeing in this business. And so that's why We put a 3 tiered system together.

Speaker 2

We like ratably buying our shares through the cycles. We think they're still a good deal. And we like an ordinary dividend that's predictable and reliable. And we like we want to recognize that we've got a lot of torque to the upside and shareholders deserve A significant amount of that cash over 30% at least or more in these up cycles like we're experiencing today. Sunira, we probably have time for just one more.

Operator

Absolutely. Thank you. Our last question comes from Neal Dingmann from I'm sorry, Truist Securities. Please go ahead. Your line is open.

Speaker 10

Thank you all for excuse me. And, just one last, I guess, 2 quick ones, if I could. Just, Again, it's notable the amount of cash you all are kicking off, obviously. And my question is, given the returns and the cash you're kicking off, Why not and I know you guys have been opposed to this, but why not maybe lock in some of this with at least callers or something along with that nature?

Speaker 2

Yes. We're unhedged, Neil. We think shareholders buy our Because of the upside that it represents in the commodity price and the torque that we have to the upside in the way we set up the company. So, no, We prefer to remain unhedged and frankly, hedging would do little help. So we have a very strong balance sheet, which helps us on the downside And shareholders ought to expect full exposure to the upside that we're experiencing today.

Speaker 10

No, great point. Okay. And then just lastly on divestitures, Tim mentioned, I know you've done a couple of small ones. My sort of two questions around that. Is there anything sort of that you'd Sort of considered non core that might be in that sort of near term divestiture category.

Speaker 10

And then secondly, why even do any given how strong your balance sheet is now? Does it the requirement to put it in the non sort of core, does that make it more difficult and less likely to sell given how strong the balance sheet is? Thank you.

Speaker 2

No, not really. We just want to take advantage of the strong markets we're seeing today, and we recognize that we've made 2 Transformational transactions over the course of the last year, and it's raised the bar in our whole company on cost of supplies. So There's things that we're probably not going to invest in that we recognize others will invest in. So we that's been part of our mantra and our drumbeat For the last 10 years in this company, so we're constantly trying to high grade the portfolio. And we see again, we see some more opportunities To do that across the Lower forty eight, primarily the Permian, as we think about what's going to be competitive in the current portfolio.

Operator

Thank you. I'm not showing any further questions at this time. I would like to turn the call back over to Mark.

Speaker 1

Thank you, Zenera, and thanks to all who dialed in for today's call. And Zenera, I'll pass it back to you for your wrap up. 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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