ConocoPhillips' (COP) CEO Ryan Lance on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: ConocoPhillips (COP)

ConocoPhillips Company (NYSE:COP)

Q2 2014 Earnings Conference Call

July 31, 2014 12:00 PM ET

Executives

Ellen DeSanctis – VP, IR and Communications

Ryan Lance – CEO and Chairman

Jeff Sheets – EVP-Finance and CFO

Matt Fox – EVP, Exploration and Production

Analysts

Ryan Todd – Deutsche Bank

Blake Fernandez – Howard Weil

Paul Sankey – Wolfe Research

Doug Terreson – ISI Group

Ed Westlake – Credit Suisse

Paul Cheng – Barclays

John Harlan - Societe Generale

Doug Leggate – Bank of America Merrill Lynch

Roger Reid – Wells Fargo

James Sullivan – Alembic Global Advisors

Pavel Molchanov – Raymond James

Operator

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

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

Ellen DeSanctis

Thanks Christine and thanks to our participants for your interest. We know it’s a very busy day. On today’s call Ryan Lance, our CEO and Chairman will provide a very brief overview of our strong operational performance for the quarter. Jeff Sheets, our EVP of Finance and our Chief Financial Officer will then address the financial results for the quarter. And finally Matt Fox our EVP of E&P will cover the operational highlights and our production outlook for the rest of the year. Finally we’ll turn the call over to you for Q&A. We would ask respectfully that you try to limit your questions to one plus a follow up and then get back in the queue if you have additional questions.

We will make some forward-looking statements this morning and obviously the risks and uncertainties in our future performance are described in the Safe Harbor statements shown on slide two of today’s presentation materials as well as in our periodic filings with the SEC. That’s also available from our website along with our GAAP and non-GAAP reconciliations and supplemental data.

With that I’m gone turn the call over to Ryan.

Ryan Lance

Thank you Ellen and let me extent my thanks to all of you who also joined the call today and for your interest in the company. We’re at the halfway mark in 2014 and I’m pleased to say that our company’s performance is progressing consistent with our plans this year. Top line growth and margin expansion are showing up in our performance and we’re delivering on our commitments. The second quarter was certainly a volatile one geopolitically and there was a lot of sector activity on the domestic front, all of which we of course watch closely, but we continue to take what we believe is a sound long-term approach to the business. So we’re staying the course and sticking to our plans. And our goal as we’ve mentioned numerous times is to deliver predictable consistent performance and I think we achieved that again in the second quarter.

Operationally, the business ran very well. We produced 1.556 million BOE per day from continuing operations excluding Libya, which represented growth of 6.5% year-over-year. Now adjusted for downtime in Libya, we grew underlying volumes 4% this quarter compared to one year ago. And this performance exceeded our prior guidance, which Matt will cover a bit more detail in his comments. But our growth came from the several places notably the Eagle Ford and the Bakken but as well as recent startups in Europe, Asia Pacific and in oil sands. And the work continues to bring additional major projects online later this year and into 2015 and 2016.

Now if I switch financially, the quarter was also very strong. Adjusted earnings were $2 billion or $1.61 per share, that’s up 14% year-over-year. Our cash flow from operations including the equity affiliate distributions funded our capital and dividend for the first half of the year. That leaves our cash position relatively unchanged from year-end 2013. And we’re also seeing the visible margin growth and that should accelerate later in the year and into 2015 as our volumes continue to increase in high margin areas.

Now strategically while we’re focused on our high value asset base that has a lot of running room, we’re also looking to add organic options and choices through explorations. Today in addition to our unconventional and Gulf of Mexico exploration activities we’re drilling in Senegal and Angola. Now these two areas have higher risk but also higher reward if successful. And we recently took a position in a large exploration concession offshore Nova Scotia. And yesterday we announced the completion of our sale of our Nigerian business. And that’s a big milestone that completes the strategic divestiture program we announced two years ago. That program has generated nearly $14 billion of proceeds for our company. With these divestitures behind us we’re now fully focused on executing our growth plans.

And finally earlier this month we approved a dividend increase of 5.8%. Giving back capital to our shareholders remains a tough priority and we believe an attractive dividend is the key part of our investment offering. Now that’s kind of quick recap of the quarter. But let me just recap the key messages; the business is on track, we’re delivering on our commitments and are building a strong momentum for the second half of the year and beyond.

So with those brief opening comments, now let me turn it over to Jeff for a financial review of the company.

Jeff Sheets

Thanks Ryan. I’ll begin by reviewing the second quarter’s results which are add on slide six. As you’ll see it was a straightforward quarter overall. Production volumes exceeded guidance and the balance sheet remained strong. Looking at earnings, second quarter 2014 adjusted earnings were $2 billion or a $1.61 per diluted share, 14% above last year’s second quarter. Second quarter earnings are shown in the chart in the lower right – segment earnings are shown the chart on the lower right. The financial details of each segment can be found in the supplemental data that accompany this morning’s release but I’ll highlight a few items for you.

The Lower 48 segment earnings this quarter largely reflected ongoing volume increases lead by Eagle Ford and Bakken which contributed to a 22% increase and Lower 48 liquids production year-over-year. This benefit was partially offset by wider differentials and $85 million of higher exploration expenses as a result of the Coronado Miocene appraisal well and Deep Nansen wildcat being deemed as non-commercial.

Canada continues to have a very solid year. This quarter’s earnings reflected strong bitumen prices and steady production growth. Alaska performed in-line with expectations. Europe production benefited this quarter from continued major project ramp and better than planned turnaround activity. Sequentially earnings in Europe were negatively impacted by lift timing, increased maintenance cost and lower natural gas prices. Our Asia Pacific in the lease segments continues to perform well. Earnings this quarter benefited from some favorable lift timing versus the first quarter.

One quick note on our other international segment, effective this quarter we moved our Latin American and Poland operations into this other international segment. And our corporate segment results were also in line with guidance.

Lastly you’ll see from our earnings release this morning that we have reaffirmed our prior guidance for capital DD&A in our corporate segment. Exploration expense guidance of $1.5 billion is also unchanged and includes risks dryhole expense. The outlook for production and SG&A cost is up modestly from our prior guidance to a range of $8.7 billion to $8.9 billion as compared to the original guidance of $8.5 billion.

If you will turn to slide seven I’ll cover our production results for the quarter. As you know our convention for production is continued operations excluding Libya. On this basis, our second quarter averaged 1.556 million BOE per day which compares to 1.461 million per day in the second quarter of 2013. This is a headline increase of 95,000 BOE per day or 6.5%. 2.5% of this growth was due to lower downtime and the 4% or 60,000 BOE per day represents organic growth. This 60,000 BOE per day of growth was essentially all from increased liquids production with the largest source of growth being the Lower 48 unconventionals. Declines in North America gas production were offset by increases in international gas production.

I’ll review margin growth next on slide eight. This slide shows changes in tax margins from second quarter 2013 to second quarter 2014 and also on a sequential basis. On the left side of the chart is the margins on an as-reported basis which were up 11% year-over-year. And are on the right our margins on a price-normalized basis. So on a price-normalized basis margins improved 2.4% year-over-year. Among the factors influencing margins in the second quarter were positive impacts from lower production in Libya and a positive impact from increased liquids production in the Lower 48 and adverse impacts from increased cost levels and wider differentials.

As we’ve said previously this metric will tend to be volatile on a quarter-by-quarter basis but we expect margins to improve as we continue to shift production to higher value products and to places with more favorable fiscal terms. Once the heavy maintenance is completed in the third quarter we expect to see stronger underlying margin in the fourth quarter as higher margin volumes grow. And this set us well to achieve full year 3% to 5% margin growth in 2014.

Finally I’ll review our cash flow waterfall for the first half of the year on the next slide. As Ryan mentioned we remained cash neutral over the first half of the year. We began with $6.5 billion of cash and short term investments. We generated $8.6 billion from operating activities and also added $1.3 billion from the SCCL distribution earlier in the year. With this we funded our capital program and dividend and ended the first half of the year with $6.4 billion in cash in short term investments.

The recent Nigeria closing will add net proceeds of approximately $900 million in the third quarter. Recall, approximately $550 million of the $1.4 billion of sales proceeds were already collected and included in our cash balance.

I’ll wrap up the review of our financial performance by noting that we continue to have a strong balance sheet which gives us significant flexibility to execute on our investment plans.

Now I’ll turn the call over to Matt for an update on our operations.

Matt Fox

Thanks Jeff. As Ryan and Jeff already mentioned the business is running well and we are delivering on our organic growth goals. We exceeded our production guidance in the second quarter across several of our business segments, but particularly in the Lower 48. Some of this high performance is probably not repeatable and I’ll explain that in a minute or so.

More importantly once we are through our annual turnaround activity in the third quarter we expect to accelerate our growth in the latter part of the year and that’s going to position us for strong 2015 and beyond. So it’s an exciting time for the business.

Please turn to slide 11 for an update on our Lower 48 and Canada segments. In the Lower 48 second quarter production averaged 540,000 BOE per day. That’s a 10% overall increase from the second quarter of last year and represents a 30% increase in crude oil production over the same period. Sequentially volumes grew 33,000 BOE per day or 7%. And the biggest contributors to growth in the quarter were the Eagle Ford and Bakken. The Eagle Ford grew 12% sequentially from an average of 140,000 BOE per day to 157,000. We experienced a strong second quarter as we brought on a higher than average number of wells in March, commissioned a number of compressor projects and experienced flush production coming from the recovery of first quarter weather impact.

The remainder of the 2014 will see a flatter production profile as we continue to move to multi well pad drilling that in the medium term slows down the number of new wells coming on production. But production from those wells will start to show up late this year and in to next year. The Bakken was up 19% from last quarter, averaging 51,000 BOE per day compared to 43,000 in the first quarter. This growth was helped by flush production and backlog reduction.

We expect to have multi pad drilling effects and we are anticipating winter weather impacts in the fourth quarter. So the rate of growth will slow in the second half of the year. The net effect of this is we are still on track to achieve our 2014 volume targets for both the Eagle Ford and Bakken but we do expect rates to flatten in third and fourth quarters and then begin to ramp up as we head in to 2015. Unconventional appraisal also continues in the Permian and the Niobrara. And we remain optimistic about these emerging plays. In addition to our unconventional activities appraisal continues this year in the Deepwater Gulf of Mexico on all four of our significant discoveries, Shenandoah, Tiber, Gila and Coronado.

Our Canada business also performed very well operationally during the second quarter. We produced 284,000 of BOE per day which includes a 19% increase on liquids production year-over-year. In the oil sands Foster Creek Phase F is expected to start producing in the fourth quarter of this year and Surmont Phase 2 remains on schedule for flushing in mid-2015.

Our Western Canada program continues to deliver good returns with the large identified drilling inventory and we continue to explore and appraise our unconventional plays in the Duvernay and Montney. On the exploration front we acquired a 30% working interest and approximately 5 million gross acres off the Coast of Nova Scotia and drilling is expected to begin there in late 2015.

Next I’ll cover our Alaska and Europe segments on slide 12. Alaska average production was a 193,000 BOE per day, in line with the expectations. At CD5 the Alpine Center facility – project has begun and fabrication is now underway. This project remains on track for start-up in late 2015. In the second quarter, we resumed export from our Kenai LNG plant in April and have already sold two cargos. We are also making good progress at our Drill Site 2S, [inaudible] one and 1H NEWS projects. 1H NEWS is the third new project we’ve initiated since the passage of Alaska Production Act last spring.

On June 30, the AKLNG parties executed a joint venture agreement. In addition we have jointly applied for an export license from the Department of Energy. So we are making progress in the technical work to assess the feasibility of this project as a way to monetize the significant North Slope gas resource base. Finally, we recently executed a contract for a new build rig to begin drilling in 2016. One last point on Alaska as you probably know Alaskans will vote in August on whether or not to approve the More Alaska Production Act commonly known as SP21. And we certainly hope the legislation prevails. We believe it’s important for continued oil and gas development in Alaska. We have identified and are actively developing opportunities for growth.

Moving on to Europe, second quarter production averaged 213,000 barrels a day up 23% year-over-year, reflecting major projects start ups, Eldfisk II, sail, Jasmine and EIS as well as lower downtime than in the second quarter of last year. During the second quarter of this year we completed our J-Area turnaround work ahead of schedule and brought online the J-12 exploration well. The Britannia Long-Term Compression project is on track to start up later this quarter. Sail away and installation of the topsides was completed to Eldfisk II and the project remains on schedule for early 2015 start-up. With significant turnarounds underway in the UK this quarter this will impact third quarter volumes as we expected but overall the Europe segment is operating well and remains on schedule to deliver on its growth commitments.

Now let’s review our Asia Pacific and Middle East segment and our other international segments on slide 13. In APME we produced 323,000 BOE per day in the second quarter roughly flat with last year. But the segment remains positioned for high margin growth in the second half of the year and in to 2015. Our partner operated Gumusut project is progressing towards first oil late in the third quarter. In June topside sailed away for our Kebabangan project and was successfully installed and we remain on track for first production there in the fourth quarter.

At APLNG the first [conderbrie] gas processing facility started up this quarter and that was an important milestone for the upstream project. On a combined downstream and upstream basis this project is now about 75% completed and remains on schedule for a mid-2015 start up. Finally, we continue to evaluating opportunities with ongoing appraisal offshore in Australia, at Poseidon and Barossa. In our other international segment the key 2014 activities are exploration related. Currently we’re drilling the [Camosh] well in Block 36 in Angola and the [FAN] well in Senegal. We expect to have some initial drilling results in these wells later in the year.

In Poland we recently safely completed a 25 stage 7.5 million pound hydraulics stimulation of the [Loblewo] well and will short list the well on an expanded floor test. And in Colombia we expect to begin exploration drilling in the La Luna Shale later this year.

Our volume outlook is shown on slide 14. So this is our typical chart of quarterly volume guidance for continuing operations excluding Libya. The first and second quarter represent actuals and the third and fourth quarter show our expected ranges which are unchanged from prior guidance. However, our full year range has narrowed and the midpoint has increased to reflect a strong operational performance year-to-date.

As expected third quarter production dropped primarily due to customer planned downtime and this year the key area for schedule turnarounds include Alaska, Canada, the UK and [inaudible] Importantly the – shutdown will take about 36 days will include brownfield activity for the tie-in of two new subsea wells that should come on in 2015. We expect to achieve a strong finish to the year with an exit rate of over 1.6 million BOE per day. By the fourth quarter our turnaround should be complete and several additional incremental projects should come online in the UK, Malaysia and oil sands. In addition to these we should have ramped gas sales to QC LNG in Australia which are scheduled to commence in the fourth quarter.

The bottom line is we expected to deliver 3% to 5% production growth this year with strong momentum going into 2015. So this concludes my comments and I’ll turn back to Ryan for closing remarks.

Ryan Lance

Thank you, Matt. So our story this quarter is really no difference than our previous several quarters. We’re focused on delivering our stated goals of 3% to 5% volume and margin growth while returning capital to our shareholders through an attractive dividend. Our capital plans are on track, cash flow neutrality is getting closer and we continue to create options and choices to sustain our long term success. So we’re following the plan and the path that we laid out over two years ago and it’s working.

So with those comments I’ll turn it over back to the operator and we’ll take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question is from Ryan Todd of Deutsche Bank. Please go ahead.

Ryan Todd – Deutsche Bank

Thanks everybody. If I could start with one on the U.S. Onshore I appreciate the clarity on the trajectory over the second half of the year. But I guess if we look at the Eagle Ford and the Bakken I know you’re quite active in both in both spacing pilots and then the Eagle Ford as well, with the upper Eagle Ford there, can you – any the comments and what you seen so far and what the trends are in that direction?

Matt Fox

So we’re still executing those pilot tests and we announced earlier this year that we had enough evidence accumulated to go to an atrophical and 80 acre high low development lower part of the Eagle Ford. So we’re implementing that now. And we’re continuing the pilot pass looking at the upper Eagle Ford and looking at tighter spacing there. And the same comments really apply in the Bakken we’re still looking at the opportunities to tighten up well spacing and other layers but there’s nothing really new to report there, Ryan this quarter.

Ryan Todd – Deutsche Bank

Okay, great. Thanks. And then if I could maybe one follow up on the cash margin trends I mean there was a slight tick and I realize this is on quarter basis it’s pretty dangerous but in slight down tick 2Q where there mix issues, can we think about – I guess how mix shift affected us, was that a result of some of cost increases that we saw in the quarter and looking forward over the rest of the year with the heavy turnaround schedule in 3Q, how would you expect trends to go?

Jeff Sheets

Yeah, I think you have the correct observations there, Ryan. The mix shift continues to be a pretty substantial positive for our cash margins. And what we saw this quarter is that was offset somewhat by wider differentials that we saw across our portfolio.

Ryan Lance

When we look at cash margins we do price normalization based on how much market prices have moved and when we don’t see the same kind of movement in realized prices that we saw in market prices that has adverse impacts on cash margins and that was the case this quarter, when we saw some wider differentials across the portfolio.

And we did see some level of higher cost as well but mix shift is still long term what’s driving higher cash margins. We’re going to continue to see that trend develop. I think your observation and maybe this can be volatile from quarter to quarter is something that we’re going to continue emphasize. But if you look over the whole year as we mentioned earlier, we are on track to be in 3% to 5 % margin gross range on a price normalized basis.

Ryan Todd – Deutsche Bank

That’s good. Ryan, your comments on the cost increase side, on the cost – was some of that driven by just the fact that you guys have raised production guidance a little bit with higher production has brought some little bit higher cost or was it all inflation?

Ryan Lance

There is a bit of both of those and if you think about what we’ve done with cost guidance overall. We started the year with a cost guidance of $8.5 billion. That compares to a number that was more like about 8.25 or so last year. So we increased our cost about equivalent to what we’re projecting production growth. And we’re refining a little bit higher production growth and just a little bit higher cost than what we’ve seen before but not any one particular item that we can point to on cost but cost are generally a couple of percent higher than what we thought at the beginning of the year.

Ryan Todd – Deutsche Bank

Great, I appreciate that. I leave it there.

Ellen DeSanctis

Thanks Ryan.

Operator

Thank you. Our next question is from Blake Fernandez of Howard Weil. Please go ahead.

Blake Fernandez – Howard Weil

Folks, good morning. Thanks for taking the question. I was curious. Some of your peers in the Eagle Ford have applied and received permits for exporting condensate and I am curious if you can comment as to whether for one you have applied for a similar permit and if not, do you think that would be something that could benefit your realizations in the basin?

Ryan Lance

Yeah. Thanks, Blake. We’re aware of what a lot of people are doing on the export. We’ve been out pretty publicly as a company supporting and advocating on the half of not only the condensate exports but the crude oil export is well which we think the condensate solves a very, very small problem. The larger issue we are having in North America is growing light oil production and the feasibility or the capacity being used up in the refining sector to really absorb that creating some of the differential issues that Jeff talked about and we have been facing back. But we follow it pretty closely. Right now we’re getting most of our condensate to the Gulf Coast putting it on ships and getting it around. We don’t see the – back but we certainly we watch it pretty closely and if we think there is an advantage to doing that we’d be in talking with the Department of Commerce as well.

Blake Fernandez – Howard Weil

Okay, great. Second question, this is probably a long shot but in the past you had used proceeds from asset divestitures to buy back stock fully appreciate that you are kind of past that program. But at least looking first half of the year you’re technically cash flow neutral and I am just curious if there would be any consideration to maybe use these proceeds to buy back some additional stock?

Ryan Lance

Yeah. No, thanks Blake. I appreciate it. I think as I said before we are kind of executing the plan we laid out and that plan from a couple of years ago we knew we would be in a little bit shorter cash flow neutrality but we grow into that by 2016. So we’re really using the cash on the balance sheet to fund the programs that we’ve got. We made those assumptions of modest commodity prices as commodity prices has maybe been a little bit higher than our expectation it’s freed up little bit cash but it’s really gone to our investment program and into the extent we fully fund all of our high quality investment programs we will consider share buyback at that point in time. But right now it’s being used to fund our dividend and our capital program.

Blake Fernandez – Howard Weil

Thank you Ryan.

Ryan Lance

Thanks Blake.

Operator

Thank you. Our next question is from Paul Sankey of Wolfe Research. Please go ahead.

Paul Sankey – Wolfe Research

Hi everyone. Could you talk – hey guys – your CapEx is high relative to the $16 billion you have guided it to on an annual run-rate could you talk about whether you attempted to spend a little more given things going for the wells you and I particularly I noticed the exploration expense is up so, whether or not that that you may be spending a bit more on exploration given that as I said things are going well. Thanks.

Jeff Sheets

So our CapEx for the year is running pretty much on track with our guidance. We have guided to $16.7 billion for the year and we are I think we are $8.1 billion though half of the year so, little bit less than the CapEx base. We think we are on pace for about $16.7 billion for the year on capital.

Paul Sankey – Wolfe Research

Are you going to keep that flat going forward? It was – I mean I am still working I guess back on the old number $16 billion is the run rate that we were working towards when you started the…

Jeff Sheets

Yeah, as we talked about at our analyst presentation in April I think we see capital in kind of $16.5 billion to $17 billion range for the next few years.

Paul Sankey – Wolfe Research

Yeah, I think that what I am trying to drive at is really the exploration program and whether or not you are happy with how much is being spent there and whether or not you would spending more?

Ryan Lance

Yeah, I would say Paul we are taking advantage of some opportunities. We talked about Nova Scotia we are drilling now in Angola and Senegal both. I kind view sort of the capital the $16 billion that we have talked is kind of running this year at about $16.7 billion as we said earlier at the Analyst Meeting but that’s looking at opportunities that we have in the portfolio and some of the extra cash we are getting from the higher commodity prices and deploying that in the places we think are adding value both in a little bit faster pace in the Eagle Ford Bakken and some of the exploration that we are doing around the world.

Paul Sankey – Wolfe Research

Yeah, and that’s Gulf of Mexico?

Matt Fox Yeah, so we have an appraised program going there Paul in all of their existing discoveries and that’s what dominates our exploration capital for this in the Gulf of Mexico.

Paul Sankey – Wolfe Research

Okay, I get it. I’m just trying to really focus on the idea that we want to keep capital down but I understand that particularly in the [Guam] that was potential to spend more on an outright exploration. You kind of successfully close the – keeping on cash flow you successfully lose the Nigeria deal which I think was pretty much last one if I am not wrong of the previous program. Is there potential for you to further improve the cash balances by more – another around of major disposal. Thanks and I’ll leave it there. Thank you.

Ryan Lance

Yeah, no, I think yeah, in terms of the announced sort of large disposition plans Nigeria really completes that what we talked about when we spun the company a couple of years ago. As I tell people we continue to look at the portfolio and quite a high grade it is, opportunities present themselves and we will continue to look at that. But I don’t see another major capital disposition program or announcement that you see coming us but we will be constantly looking at trying the high grade portfolio and clean up the bottom end and focus all of our investments in the top end of the portfolio. That really is really is driving the growth and the higher margins and the returns.

Operator

Thank you. Our next question is from Doug Terreson of ISI Group. Please go ahead.

Doug Terreson – ISI Group

Good morning everybody.

Ryan Lance

Good morning Doug.

Doug Terreson – ISI Group

In Australia it appears that exploration or maybe appraisal success has continued recently near the [inaudible] Discovery which I think Matt might have alluded to and on this point I want to see if there are any updates there and also where the one type of development is more likely then another meaning is this hopefully going to eventually feed the LNG facility nearby. So just a general update on that situation is what we are after?

Matt Fox

Okay, thanks Doug. We are getting close to completing our appraisal program in the Poseidium complex and we designed that program to give the information us that need to do exactly what you are Doug to make sure that we are optimizing the development plan for Poseidium and we have the same goal in mind on the exploration that we just commenced in the Barossa area. So basically this appraised activity is designed to establish of course the best backfill opportunity for the Duvernay LNG plant for example.

Doug Terreson – ISI Group

Okay, thanks a lot.

Ryan Lance

Thanks Doug.

Operator

Thank you. Our next question is from Ed Westlake of Credit Suisse. Please go ahead.

Ed Westlake – Credit Suisse

Hey, good morning, good afternoon. Just actually a quick forward on Australia, I mean how much gas do you think you’d be able to get over and above APLNG from sort of sales to other project there, I think you mention QCLNG gas any sort of rough order magnitude?

Ryan Lance

Well I mean it depends very much when these projects – I mean we don’t tend to take the opportunity to sell [ramped] gas to those projects but the exact magnitude of that will be dependent upon the timing of those stack ups relative to our stack-up. So it’s hard to put a number on that just now. But we have the capacity available to provide those ramp gas sales when the opportunity arises.

Ed Westlake – Credit Suisse

All right, I am going to get to something more closer to whom but any progress on Venezuela or timing around that?

Ryan Lance

Yeah, on Venezuela we are in discussions with the Tribunal both sides, ourselves and the Venezuelans are now putting in their damages assessment and putting forward their – our positions with respect to the damages that were created from the Tribunals earlier award indicating that we unlawfully expropriated by the Venezuelans. So that award is also – we are in the process now of our damage assessments on both sides and we are saying that probably takes about a year to go through that process. It started a few months ago that’s kind of time line that we are operating under.

Ed Westlake – Credit Suisse

Okay, and then moving back in the U.S. I mean let’s just talk briefly about Permian. I think in your Analyst Day slides you were testing an area over in the Delaware and then sort of Southern Midland and I think you gave numbers I think it was 150 million acres in the Delaware and I think just under 100 in the Midland. So first question are those the total acreages that you have in those two shale basins or is it just those sort of areas that you are testing and then maybe give us some color about the recent well results and your rig plans for those two basins as we go forward and then I have quick follow-on.

Matt Fox

Okay, those numbers that you quoted, the 150 and 90 doesn’t [inaudible] for the Delaware and the Permian. Those really represent the acreage of where we are looking at unconventional development over a million acres in the Permian as a whole. But those are really representative of the areas where we are focusing on unconventional and exploration appraisal. Right now we have four rigs running and they all focus just now on the Delaware Basin. We have well repairs underway from the wells that were previously drilled in the Midland basin but we do drilling activity there right now. So that’s really – and what we are doing is basically testing the whole section as we describe at the Analyst Day there is about 4,500 feet of prospective section within the Permian Basin and certainly in the Delaware and we are going through the process of making sure that we explore and appraise those different horizons and so we get a clear understanding of what the development plans should be for that going forward.

Ed Westlake – Credit Suisse

And are they mainly – is that mainly lease acreage with royalties or is this some fee acreage mixed in that from legacy production in terms of wells position?

Matt Fox

The areas that we are focused on for unconventionals are predominantly leased acreage.

Ed Westlake – Credit Suisse

Right, okay, thanks very much.

Ryan Lance

Thanks Ed.

Ellen DeSanctis

Thanks Ed.

Operator

Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead

Paul Cheng – Barclays

Hi, guys.

Ryan Lance

Hi, Paul.

Paul Cheng – Barclays

On Venezuela there is markets rumor that [FICO] maybe selling their refinery. Wondering have you checked with your legal advisor whether you guys – in the event that they go forward can you put an injunction on that to sort of force Venezuela to speed up their settlement?

Ryan Lance

You know it’s probably not appropriate for us to comment on tactics that we might take in that regard Paul.

Paul Cheng – Barclays

Okay. Or that maybe as a – for Ryan, the North American crude differential market look like it’s continued extremely volatile and is still not 100% clear that when or if the government is going to allow the export of crude – on I know that it’s only two years ago that you spin off the refining. Have you ever thought about to recreate an integrated operation or this is totally behind and you guys not consider given that look like there is pretty large refining system may be available in the market now?

Ryan Lance

Yeah, that’s a bit of a curve ball Paul I will give you that. Right now we are pretty much focused on our plans as an independent E&P company. So we’re pretty focused on trying to grow our production, grow our margins as we’ve outlined and be one of best E&P companies in the space today and part of that does – we have a large North American position certainly with the Eagle Ford, Bakken and the unconventional at our legacy position in the North America. So the export issues something that’s pretty important to us and we’re spending quite a bit of time advocating on behalf of that back in both on the Hill and with the administration.

Paul Cheng – Barclays

And the final question, first can you share with us any preliminary CapEx and production estimate for 2015?

Ryan Lance

Well I think we’re in the middle of putting our plans together but what I want to take us back to the analyst presentation that we did back in April and our plans really are unchanged from what we described to you guys back then, both capital and production.

Paul Cheng – Barclays

And maybe this is for Matt, Matt if I look at you indicated that third quarter with downtime from – and maybe that’s some third party operation that the startup maybe a little bit delayed. If you look at of your standpoint what is the biggest risk for you to achieve as your production target or that planned target for the next six to 18 months, is there any major project that you think is a little bit more concern or any particular area on the supply chain or anything?

Matt Fox

I think the range that we’ve given for both the third quarter and the fourth quarter captures the uncertainty that we see in the overall portfolio and the third quarter there was a bit uncertainty on the duration of some of our downtime and the fourth quarter is dominated more by the timing of the new projects coming on. One of the advantages that we have as a diversified company is that no individual – no single project is going to make a big difference in the overall scheme of things and that diversification in the portfolio helps us to limit the exposure to individual projects prices. So I think the range that we’ve given from third and fourth quarters is – captures all of that.

Operator

Thank you. Our next question is from John Harlan of Society Generale. Please go ahead.

John Harlan – Societe Generale

Yeah three unrelated questions hopefully not strain your consciousness. With APLNG if you get approval how long would it take to really develop it? I know it’s beyond the scope of an investor call but I’m just curious?

Matt Fox

Well we made a lot of progress in APLNG this year I mentioned that we’ve signed a joint venture agreement and applied for the export to FTA and non-FTA countries. So we’re starting – and that will taking 12 to 18 months or so. And then feed would then take two, or three years so that’s our final investment decision would be in 2017, 2016-2017 timeframe and first production would be in 2022 to 2025. So that’s a sort of timeline that we’re looking at, John.

John Harlan – Societe Generale

Okay thanks Matt. With respect to Paul and Matt, did you want a core on the well you’re now testing and if so how did the rocks compare to say gas shales in the U.S.?

Matt Fox

So we didn’t go to horizontal section but we do have crude information from the vertical wells that we have are drilled there. And it’s difficult to tell there’s a good looking section that we’ve drilled the horizontal well and as you know until you actually frac and produce these unconventional reservoirs it’s difficult to know what you’re going. So we do not – we have already the usual data it looked like in the U.S. and the frac that we’ve just done on this well is basically an Eagle Ford style frac and so we’re getting our best shot and we’ll get sense of whether or not what sort of rates we can achieve but and we get to the end of the yield this year.

John Harlan – Societe Generale

Okay great. Last one from me, as regarding your deepwater exploration in Angola and Senegal, you’re going to be releasing well result individually or just on the quarterly call?

Ryan Lance

I suspect that certainly in Senegal we have some smaller companies involved they’ll be releasing information about – on a regular basis and on the Angola well I don’t know unless we win sea – so far things go but we remain get some information in advance of the quarterly call, we see another calls.

John Harlan – Societe Generale

All right thanks very much.

Ryan Lance

Thanks John.

Operator

Thank you. Our next question is from Doug Leggate of Bank of America Merrill Lynch. Please go ahead.

Doug Leggate – Bank of America Merrill Lynch

Thanks for getting on guys. I want to just follow up on Paul’s question about the front loaded CapEx or what seems to be front loaded CapEx this year and Eagle Ford is specifically not you talked about more completions in the second quarter can you just give us an idea on what the pace has been relative to – I think it was like a 190 wells you were planning for the year originally. Are you running ahead of that, or is that’s still a good number and how much of that we grew so far and then I’ve got a follow up please.

Ryan Lance

Yeah so that’s a good number so – a quarter that we’re working through and that place has been very consistent in terms of getting again the wells drilled. As you know as we move to pad drilling there tends to be more batch lake as the production comes on in terms of executing the number of wells we’re drilling we’re on pace for data around a 190 or so that we thought we would be for this year.

Doug Leggate – Bank of America Merrill Lynch

So second quarter I thought in your prepared remarks you had few more wells come on, so was it less in the Q1 or more in Q2 or just want to understand the pace that you see there?

Matt Fox

So a bunch of wells come on rate at the beginning of the quarter which meant that those wells were in production all the way through the quarter. That was one of the reasons the quarter was higher production than we expected. But overall from pace perspective it’s much same from a drilling piece from a completion and bringing on production that perspective that of course is influenced by the batch drilling associated with the pads and that’s what I was trying to indicate in the prepared remarks that’s going to be a bit more lumpy than it has been in the past because of the pad drilling.

Doug Leggate – Bank of America Merrill Lynch

Thanks for that. My follow up is a bit more conceptual I think it straddles a number of issues, asset monetization amongst them but mindful of Brian’s commentary, when you look at some of your peers Devon Energy for example with their handling situation and what they are doing there, now going go to Midstream MLP how do you guys think about your midstream infrastructure spending because obviously it’s a big enabler as you guys know I’ve been trying to reconcile the level of spending in Eagle Ford relative to the activity and I’m guessing mid-stream’s a big part of that. So how do you think about how you might be able to perhaps more efficiently monetize your midstream given the high level of CapEx and I’ll leave it there. Thanks.

Jeff Sheets

If you look at our midstream position overall Doug going back in history most of that midstream position went into the DCP joint venture which has since gone with 466. So there are not a lot of midstream assets that are out there that could form the core of an MLP for us. As we look – as we go forward we’re having some midstream investments in the Eagle Ford and in the Permian, but those are really not of the size that we feel like we have the critical mass to be thinking about an MLP but that’s something that we’ll just continue to evaluate as we go through time.

Operator

Thank you. Our next question is from Roger Reid of Wells Fargo. Please go ahead.

Roger Reid – Wells Fargo

Hi good morning. Nearly had a – anyway. I guess a quick question for you getting back to the Lower 48 we’re seeing I guess two pronged question one is your gas production only down slightly here on a year-over-year basis after declining fairly aggressively for the last several quarters or years is that something now that we see the size of your shale play associated gas enough to gas production itself its ongoing down I think of that as consistent with what we’ve seen across the broader industry but I was hoping for some clarity on that.

Matt Fox

Yeah gas production in a broad sense is going to remain roughly flat in Lower 48, we’re not drilling any wells dedicated to dry gas but we have then associated gas production with Eagle Ford and Bakken for example, such that on a broad basis we’re going to be relatively flat in overall gas product probably for the next several years.

Roger Reid – Wells Fargo

And the follow up to that we’ve seen one company very large one in the space to swap of one type of likely very gassy assets for stuff from the Permian is that something with an overall I want to call you are CapEx constraint but let’s say at least capped level of CapEx that you would be interested in pursuing. I mean now the big asset sales are essentially down with Nigeria but I was wondering if that’s maybe something a little bit more imaginative side that you’d be willing to pursue here?

Jeff Sheets

Yeah I mean that it really then goes a long way for Ryan we’ve seen at or about I mean on an opportunistic basis the things like swaps and of underlying assets may make sense to this. So we’re always open to consider those sort of things for this. But it’s not big part of our ongoing plans.

Roger Reid – Wells Fargo

And if you were to look at more acreage in either the Permian or the Niobrara given your efforts that are ongoing right now, is that how we should think of the funding or is it that’s a future unallocated CapEx in ‘15, ‘16, or ‘17.

Matt Fox

And then the plans that we’ve laid out for $16 billion of capital, we’re including in there the fact that we intend to be develop our overall unconventional resource base including the Permian and the Niobrara.

Ryan Lance

And that includes Roger some lease acquisitions money as well. So we’re in the market every day, every week in these areas trying to build our positions and core output we think are good deals.

Roger Reid – Wells Fargo

Okay appreciate it. Thank you.

Ellen DeSanctis

Thanks Roger.

Operator

Thank you. Our next question is from James Sullivan of Alembic Global Advisors. Please go ahead.

James Sullivan – Alembic Global Advisors

Hey folks thanks for taking the questions. I just want to look ahead a little bit. As you guys are absorbing the result of the non-op US Gulf of Mexico program that you guys have been participating in the last couple of years. Can you speak just a little bit about what looks interesting to you as you contemplate launching the operated program next year?

Ryan Lance

Yeah primary focus on the Gulf of Mexico has been and will continue to be the [paleongene]. We do have some interest in Miocene prospects that we will drill we get are operated and rigs available. But I would say that the primary focus going forward will be in Paleocene and we’ve had a lot of success there as you’ve seen with the four five significant discoveries. And we’ll go back to over 2 million acres of deepwater position there. And it’s about 70% to 80% Paleocene focused but we do have some insights in the Miocene opportunities as well.

James Sullivan – Alembic Global Advisors

Okay great. The other thing I want to talk about quickly on the onshore obviously you guys have commented generally about the programs in the Permian and Niobrara but just looking at Niobrara and I know that you probably don’t have much you can say about the anti-fracking measures on the balance but in terms of handicapping that, but has that effected your activity levels there, are you guys thinking about ratcheting back whatever your plan was in the second half of ‘14 as you think about risking likelihood of some type of negative outcome over there.

Ryan Lance

It hasn’t effected of execution of our plans change. We’ll just have to see if that those dollars actually make it to the – or not and then we’ll adjust the plans if we need to be some of those results there.

James Sullivan – Alembic Global Advisors

Okay but no kind of proactive stuffs. If I could sneak one more in I know you guys are doing a stratigraphic well in the La Luna in Columbia on shore this year. I wondered if you guys or couple of other operators are picked up bigger offshore pieces in the license surrounds that they run out there and they’re also and they’ve talked about the targeting the Lumina offshore. Have you guys looked at that or would you consider that?

Matt Fox

Right now we are focused on the onshore position that will good position which we believe in the La Luna and you’re absolutely right the first well the – this year will be a stratigraphic test to calibrate the geology the thermal maturity and so on. So at least as because I we’re not looking that offshore for the unconventionals around Columbia.

James Sullivan – Alembic Global Advisors

Okay, great. Thanks guys.

Operator

Thank you. Our next question is from Pavel Molchanov of Raymond James. Please go ahead.

Pavel Molchanov – Raymond James

Thanks for taking the question. I realized this is less than 1% of your portfolio but can help asking about the polar light with Rosneft in the context of the new sanctions. Any color on how that might affect the business.

Matt Fox

Yeah Pavel as you know we’ve pretty much exited Russia with some of the moves that we’ve made as a company over the last two to three years. And right now we’re in a process work we’re actually marketing our – line interest. So that’s hopefully coming to some sense of conclusion over the course of this year.

Pavel Molchanov – Raymond James

Okay, fair enough. You think that sanctions will influence the marketing process or any sign of that.

Ryan Lance

Well it hasn’t today but we watch it I mean we obviously watch it pretty closely if the latest around the sanctions got ratcheted up a little bit more significantly both on the European and the US side. Today it hasn’t impacted it but again we’re watching it closely but as you indicated pretty small portion of the portfolio, it’s not a lot of proceeds that. What I put in the kind of the portfolio cleanup category right now that not leveraging but some just we need to cleanup in our portfolio.

Pavel Molchanov – Raymond James

Understood. And then on LNG I realized it’s still about a year before start up. But do you have a sense of how long it’s likely to take before it reaches full nameplate.

Ryan Lance

We have the – as you know we have two trains there Pavel. The first one will come up in the around the middle of next year. The second train will six and nine months later than that. And we should get to full capacity relatively quickly. We have the resource base that we need. We have the wells and facilities being developed that we need to do that. So we should get to full capacity hopefully by the middle of ‘16.

Pavel Molchanov – Raymond James

Okay at both trains?

Ryan Lance

Yes.

Pavel Molchanov – Raymond James

Got it okay. Thanks very much guys.

Ellen DeSanctis

Thanks Pavel.

Operator

Thank you. And our last question is from Scott [Hanold] of RBC capital markets. Please go ahead.

Unidentified Analyst

Hi thanks. Just a couple of quick ones here. You obviously discuss a little bit of a midstream monetization opportunities. Can you discuss little bit on like mineral interest ownership you only have. I mean Anadarko obviously came out and discussed some stuff that they had it’s a looks like there is potentially some value here. Do you guys have something similar?

Ryan Lance

We’ve got a big Lower 48 Western Canadian Gas portfolio. So we do have assets where we have royalty interest and overwriting royalty positions. These are potions which provide us with revenue and really high margin production without any kind of corresponding operating expense or capital requirements. And we think these like we really think of other assets in our portfolios as we’re always thinking about whether what we could sale them for and get on an after tax basis is more or less than our hold value. One of things you got a think about an interest like this as we have pretty low tax bases in these types of assets, and that’s will gone be a real consideration. So we’re going – we’re just continue to monitor the asset market for something like in evaluated see if it’s kind a applicability for us in the future.

Pavel Molchanov – Raymond James

Okay could you give us a sense of how big that ownership is and what the revenues are roughly on an annual basis?

Ryan Lance

We really think it’s probably more appropriate that we do something like that if we get serious about doing a transaction like this.

Pavel Molchanov – Raymond James

Okay understood. And my second question is on Jasmine, I guess one of your partners discussed some compartmentalization and some performance, not to expectations. Can you give us a little bit of color on that and what you all thinks you can do here.

Matt Fox

Jasmine the production performance has been a bit below what we anticipated it would be because of a bit more reservoir complexity. It’s within the range of our expectations but at the lower end of the range. In fact as we’re drilling the Jasmine development wells we actually now believe that there is more gas in place, gas and condensate in place in Jasmine than we thought. But it’s a bit more stratigraphically complex. So we’re evaluating that just now and because we knew that there were some uncertainty we actually installed the platform at Jasmine that has 24 slots on it. And our initial plans were only to drill eight wells from it. So there is a lot of flexibility for us to add production and overcome this reservoir heterogeneity issue as time goes on.

Pavel Molchanov – Raymond James

Yeah, can you give us a sense on what kind on incremental CapEx spend it would take to kind of get it back to say the midpoint of that range of expectations.

Ryan Lance

Now it’s really too early to see where we’re digesting in those out from our production performance to date. And we’ll build to our plans as we get a better understanding of the reservoir dynamics.

Pavel Molchanov – Raymond James

Okay understood. Thanks.

Ellen DeSanctis

Thanks.

Operator

Thank you. I will now turn the call back over to Ellen DeSanctis Vice President Investor Relations and Communications.

Ellen DeSanctis

Thanks Christine thanks everybody. Feel free to call us if you have any future questions or follow-up questions. We appreciate again your time and interest. 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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ConocoPhillips (NYSE:COP): Q2 EPS of $1.61 in-line. Revenue of $14.7B (+4.0% Y/Y) misses by $680M.