Shale is not broke, and will come back, said ConocoPhillips Chairman and Chief Executive Officer Ryan Lance as part of a CERAWeek conversation by IHS Markit. Lance talked about the outlook for US shale and the new value proposition to E&P investors.
“There's going to be some very low-cost to supply shale resource and they still exist in US. We have a lot of that in our own company as well—reserves and resource that we will come back to, putting rigs back to work, putting frack spreads back to work and investing in growth again in shale. So, it will come back.”
“But I do think it comes back slower because there's going to be pressure on companies to confine their capital program, maybe not grow dramatically as they were before, because I don't think the access to capital in the investor community, at least in the public side of the business, is going to be as robust as it was over the last decade.”
“If I were a betting man, today I would say it would be pretty difficult for us to return to 13 million b/d. But we'll get back above 10 million b/d, back above 11 million b/d maybe encroaching on 12 million b /d as we go through. A lot of that depends on the shape of this recovery.”
“That's just the value proposition conversation about how do we get value investors and energy investors back into this business. That's going to be a function of giving money back to the investor, modifying your growth so don't have to grow that fast, and a real heavy focus on return on capital employed. That what's going to get the investors back and excited about the E&P space,” Lance said.
Lance also talked about the potential for consolidation in the industry. “The fundamental point is we got to put these assets in less hands, more rational hands, and run them for returns, not necessarily growth for growth's sake. Doing that then cuts the fixed cost of the system, brings the cost of supply down, and makes the US energy system and the global energy system more competitive with a lot of the NOCs and the other people that are competing in this business.”
“There has to be some rational conversation amongst boards and management on what's the right value proposition going forward for this business. And how do we participate with companies that can offer that kind of the value proposition. Those are important conversations that people need to have because that's how we're going to get more investors back into the business and that's how we're going to show good returns which is paramount to try and increase the valuation of your company.”
ConocoPhillips’ strategies
“We did a lot to the company in terms of re-identifying the portfolio that we thought could exist and what we felt like was going to be a lower mid-cycle price with a lot of volatility, given the short-cycle nature of the shale. We saw that shale production coming—we referred to that a number of years ago as a ‘tidal wave scenario’ we had in our planning. It just informed our view that we really had to rethink the whole value proposition associated with E&P companies.”
“We basically said you’ve got to give a fair amount back to the shareholder—in our case it’s greater than 30% of our cash. You want to do that in a variable way, through a dividend channel and we did it the variable way through buying some of our shares back. But more importantly grow our company on 70% of the cash. Both grow it modestly and a real hyper-focus on cost, low cost of supply, and really generating competitive returns—not only in the E&P industry but into the broader S&P 500 or the industrial space.”
“The ESG, the transition discussion, is not going away. The world needs to transition to lower carbon fuels over time. But even then, there's space for oil and gas because it's so important for cheap reliable energy in all four corners of the world. Against that backdrop, they also see that it's a rational decision to say, ‘you need to keep the shareholder’. You just can't go grow and spend 120% of your cash flow continuing to grow. That's not going to be a model that gets rewarded over time.”
Regarding ConocoPhillips’ production curtailment, Lance said that the decision was made pretty early. “We were getting single digit kinds of offers at the wellhead for some of the product that we were producing, and we just didn't feel like that was sufficient.”
When asked whether the costs of shutting in horizontal wells are high, Lance said: “We don't think so. We've had some experience. You get pipe turnarounds that you have to do. Two years ago we had to shut in for about 20 days just due to Hurricane Harvey. Then, of course we do well maintenance. So, in our experience there's a little bit of extra costs associated with it, but not a lot.”
“The experience is that there is flush production when these unconventionals come back. If you have spare capacity at the surface to handle that flush production, then it is a very rational economic decision to do the kind of curtailment, as long as you have the balance sheet and the capacity to forego that cash flow. It’s a very rational decision when you have a declining profile like an unconventional well. When you open it back up you do see flush production come back. It takes a period of years to produce all of that volume, which is why it becomes a quasi-investment decision.”
Meanwhile, the company is considering on bringing production back as the market environment is strengthening. “We've got about a third of our production shut-in as a company—400,000 b/d. But we see some strengthening in the market so we are in the process of thinking about under what circumstances should we start coming back into the market and then start selling our product,” Lance said.
“We do have to be worried about a double bump in this process, depending on what the OPEC+ countries do. There's quite a bit of production shut-in right now to try to balance the market in the US and keep inventories at a reasonable level. I would say we're probably thinking of slowly coming back into the market over the next few months and reducing the amount we've got curtailed because we're seeing some strengthening in the price.”
Lance also mentioned the virtues of a having a strong balance sheet heading into the market downturn. “We came into this downturn with a pretty significant comfort on the balance sheet. We had $8 billion in cash; we have a $6 billion revolver. So we've got a very strong relative competitive position and we're going to maintain that as we go through this. That has allowed us to make some decisions on curtailments that maybe others can't go do.”
“We haven't done layoffs inside our company. We've tried to hold the productive capacity of the company intact and we've been doing that on the back of our balance sheet, the strength of that balance sheet, because we want to come back into the next upturn, which we know is coming.”
Response to COVID-19
When talking about ConocoPhillips’ responses to COVID-19, Lance said that the company’s Chinese operations led to protocols and best practices globally. “In China we have a large operation in Bohai Bay that is offshore. In working with our partner, CNOOC, we came up with a protocol that said there was about a 14-day incubation period for the virus, send people offshore and have them work for 14 days and then the next group coming in would have to self-quarantine and isolate for 14 days.”
“It really helped us work through the operational protocol that then was applied to the North Slope of Alaska where we had 4,000 workers, and to our offshore operations in Norway and elsewhere around the whole world.”
Market-driven sustainability models
“We’re about trying to reduce the methane emissions. We don't need regulations to do it because companies are voluntarily doing it today. We're trying to reduce the fugitive emissions. We're trying to reduce flaring and get that down and the CO2 footprint has come down in the US, despite the fact that we've seen this dramatic growth in oil and gas production over time.
“Companies are trying to do the right thing and trying to manage through this transition and improve the sustainability of the product we have. We are going after our Scope One and Scope Two emissions. Our company alone has taken seven million tons of equivalent CO2 out of our business over the last five to six years. We're trying to address the Scope Two emissions and as a company, we've joined the climate leadership council and support a tax on carbon as a means to address Scope Three emissions from the products out of the material we produce today. We are trying to be reasonable, trying to be good actors, but also trying to deliver that affordable and sustainable energy to all four corners of the world.”