ConocoPhillips Q2 FY2025 Earnings Call Transcript

ConocoPhillips (NYSE:COP) reported its second-quarter 2025 financial results ahead of the opening bell on Thursday.

Below are the transcripts from the Q2 earnings call.

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OPERATOR

Welcome to the second quarter 2025 ConocoPhillips earnings conference call. My name is Liz 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. During the question and answer session, if you have a question, please press Star one one on your touchtone phone. I will now turn the call over to Guy Baber, Vice President Investor Relations. Sir, you may begin.

Guy Baber (Vice President, Investor Relations)

Thank you Liz and welcome everyone to our second quarter 2025 earnings conference call. On the call today are several members of the ConocoPhillips leadership team including Ryan Lance, chairman and CEO Andy O’Brien, chief financial Officer and Executive Vice President of Strategy and Commercial Nick Olds, Executive vice president of lower 48 and global HSE and Kirk Johnson, Executive Vice President of Global Operations and Technical Functions. Ryan and Andy will kick off the call with opening remarks after which the team will be available for your questions. For Q&A, we will be taking one question per caller A few quick reminders today. First, along with the release, we publish supplemental financial materials and a slide presentation which you can now find on the Investor Relations website. Also during this call we will make forward looking statements based on current expectations. Actual results may differ due to factors noted in today’s release and in our periodic SEC filings. We will make reference to some non GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today’s release and on our website. With that, I’ll turn the call over to Ryan.

Ryan Lance (Chairman And CEO)

Thanks Guy and thank you to everyone for joining our second quarter 2025 earnings conference conference call. Starting with results and outlook, we delivered another strong execution quarter, once again exceeding the top end of our production guidance range. We reiterated the midpoint of our full year production guidance even with the announced agreement to sell our Anadarko basin asset for 1.3 billion and our capital spending and operating cost guidance ranges, both of which we lowered last quarter, remain unchanged on return of capital. We remain on track to distribute about 45% of our full year CFO to shareholders this year. That’s consistent with our prior guidance and our long term track record. The bottom line, we’re operating well, we’re delivering on our plan and we’re well positioned for a strong second half of the year with clear free cash flow tailwinds including lower capital spending. Turning to the Marathon Oil acquisition, I’m pleased to announce that the asset integration is now complete and that we’ve significantly outperformed our acquisition case. We added more High quality, low cost supply resource. We’re achieving more synergies, we’re delivering a more efficient Lower 48 development program, and we’ve already announced more asset sales than we guided at the time of the transaction announcement. While these are all significant achievements, we’re not stopping there. Given our integration success, which builds upon other successful transactions, as well as our recent implementation of a new company wide enterprise resource system, we continue to drive for improvement across every level of the organization. As part of this effort, we’ve identified more than 1 billion of additional cost reduction and margin enhancement opportunities. Now to be clear, that’s on top of the more than 1 billion of marathon synergies we’ve already expected to realize. Additionally, now that we’ve exceeded our 2 billion asset sales objective ahead of schedule, we’re raising our total disposition target to 5 billion. Collectively, these initiatives will strengthen our ability to generate strong returns on and of capital through the cycles and enhance our long term value proposition. And that’s a value proposition that’s already differentiated not only relative to our sector, but relative to the broader S&P 500 as well. We believe we have the highest quality asset base in our peer space. Our global portfolio is deep, durable and diverse and we’re recognized as having the most advantaged US Inventory position in the sector. We believe this advantage will become increasingly apparent as the US shale industry continues to mature and investors are forced to more clearly sort through what we call the inventory haves and have-nots. We are a clear leader in the US Inventory halves. In addition, we’re uniquely investing in our high quality portfolio, specifically in our longer cycle projects in LNG and Alaska to deliver strong returns and a compelling multi year free cash flow growth profile. Assuming a $70 per barrel WTI price environment, we expect the major projects we’re currently progressing in combination with the additional cost and margin enhancements we just announced to drive a 7 billion free cash flow inflection by 2029. That would almost double the consensus free cash flow expectation for the entire company this year. Now with that, let me turn the call over to Andy to cover our second quarter performance, 2025 guidance and strategic objectives in more detail.

Andy O’Brien (Chief Financial Officer And Executive Vice President Of Strategy And Commercial)

Thanks Ryan. Starting with our second quarter performance, as Ryan mentioned, we had another quarter of strong execution across the portfolio. We produced 2,391,000 barrels of oil equivalent per day, once again exceeding the high end of our production. Guidance in the Lower 48 production averaged 1,508,000 barrels of oil equivalent per day. Alaska and international production averaged 883,000 barrels of oil equivalent per day as we successfully complete turnarounds in Norway and Qatar. Regarding our second quarter financials, we generated $1.42 per share in adjusted earnings and $4.7 billion of CFO. We had a $1.5 billion working capital headwind, effectively offsetting the equivalent sized tailwind we realized last quarter capital expenditures were $3.3 billion. Slightly down quarter on quarter we returned $2.2 billion to our shareholders, including $1.2 billion in buybacks and $1 billion in ordinary dividends. Through the first half of this year we’ve returned $4.7 billion to our shareholders, about 45% of our CFO. Consistent with our full year guidance and long term track record. We ended the quarter with cash and short term investments of $5.7 billion plus 1.1 billion in long term liquid investments. Turning to our outlook for full year production guidance, we have narrowed the range and reiterated the guidance midpoint. Even after adjusting for the Anadarko sale of approximately 40,000 barrels of oil equivalent per day which is expected to close at the beginning of the fourth quarter. Our capital spend and cost guidance ranges, both of which we reduced last quarter, are unchanged. We now expect our full year effective corporate tax rate to be in the mid to high 30% range excluding one time items lower than we previously guided due to geographical mix and we now expect a total full year deferred tax benefit of about half a billion dollars, primarily reflecting the positive impacts from the One Big Beautiful Bill. In the second half of the year we expect free cash flow tailwinds in the form of higher APLNG distributions, cash tax benefits and lower capital spending. Further guidance details can be found on our earnings slide deck. Turning now to our strategic updates, as Ryan noted, we have completed the Marathon asset integration and are realizing comprehensive outperformance against our acquisition case. We’re delivering everything we said and much more. First, we’ve upgraded our low cost supply resource estimate by 25%. While we were most attracted to Marathon’s significant Eagle Foot and Bakken positions, both of which are every bit as good as we expected and delivering excellent well results. The majority of the increase has been driven by the Permian where our resource estimate has approximately doubled versus the initial estimate. The second point I would highlight we have significantly outperformed our initial synergy guidance. At the time of the transaction announcement we guided $500 million of annual synergies. With our steady state capital development program achieved and critical system cutovers now in the rearview mirror, we are on a glide path to realize more than $1 billion of run rate synergies by the end of the year. In addition, we’ve identified over 1 billion of one time benefits, largely cash tax related. While we don’t count this as a synergy, it’s real value and a material benefit to our company. The third point I’d highlight we brought the power of our more efficient and steady state development program to the combined portfolio. At the time of the transaction announcement, we highlighted our ability to more efficiently develop Marathon’s acreage. Given our size and scale, advantage and ability to level load our program versus Marathon’s practice of ramping activity up and down, we’ve now achieved optimized level of steady state activity and we’re delivering more combined production with 30% fewer rigs and frac crews in comparison to the pre transaction pro forma activity levels. And finally, with the announced Anadarko sale, we’ve now signed over $2.5 billion of dispositions within nine months of the transaction close, beating our $2 billion target well ahead of schedule. Given our growth in recent years and implementation of our new company wide ERP system, we are taking the opportunity for further cost and margin improvements. Across the entire company, we’ve identified more than $1 billion of opportunities that we expect to realize on a run rate basis by the end of 2026. All of this is in addition to the $1 billion of marathon synergies we previously discussed that we expect to realize on a run rate basis by the end of this year. These additional improvements will be wide ranging, encompassing cost reductions across our SGA operating costs and transportation costs as well as margin enhancement through commercial opportunities. All in including the Marathon synergies, we expect to drive over $2 billion of run rate improvements by the end of next year. In addition to furthering our cost reduction initiatives, we are more than doubling our asset sales target to $5 billion which we also expect to achieve by the end of next year. We see a clear opportunity to further high grade our portfolio and accelerate value realization for assets that are not currently competing for capital. So to wrap up we continue to execute well operationally, financially and across our strategic initiatives. We are well positioned for the second half of the year with clear free cash flow tailwinds and we continue to find ways that enhance our differentiated long term investment thesis. That concludes our prepared remarks. I’ll now turn it over to the operator to start the Q and A.

OPERATOR

Thank you. We will now begin the question and answer session. In the interest of time we ask that you limit yourself to one question. If you have a question, please press star 11 on your touchdown phone. If you wish to be removed from the queue, please press star one one. Again, if you’re using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star11 on your touchtone phone. Our first question comes from Neil Mehta with Goldman Sachs.

Neil Mehta (Equity Analyst)

Good morning, Good afternoon, Ryan. Andy team really appreciate the incremental disclosure and love this slide. And so Ryan, maybe we could start there, which is if you look at street numbers at around 60 to $70 WTI, you’re generating close to $8 billion of free cash flow this year. So if you add 6 to 7, you’re kind of getting closer to 14, which implies by 29 a 12% free cash flow yield. So first want to just check the math on and make sure that we’re not missing any pieces around it. And then to the extent that is the right framework, which is a great prize in a couple years, the pushback might be, you got to wait for it. And so Ryan, maybe your perspective on, hey, with every year you de risk towards that free cash flow number as the capital intensity improves, so you don’t necessarily have to wait to 2029 would be a theory, but it would be just your perspective on all that.

Ryan Lance (Chairman and CEO)

Yeah, thanks, Neil. Go to the head of the class. Your math is pretty good. Look. Yeah, we’re working pretty hard. As you mentioned, the numbers fit exactly where we’re thinking about in that 60 to $70 range. You know, we’ll add about $7 billion of free cash flow between now and 2029. I mean, you don’t have to wait till 2029. Some of that’s coming through the, about a third or so is coming through the LNG channels. And there’s going to be consistent startups starting next year with Qatar, one of the trains in Qatar, 27 with Port Arthur, 28 with another train in Qatar, and then 29 with Willow. So all of that’s coming, everything’s on track. And you’re right, it nearly doubles our current consensus free cash flow that I said in my opening remarks. And I think this is a trajectory and a, you know, things that are coming that are unique in the business. There’s no other E and P that I think can match, you know, what’s coming for us, including the integrated majors. So I think we’re unique in this space. We’ve been leaning in and making these investments that are very competitive in the portfolio. Low cost Opportunities for the company that are going to, you know, contribute to our growth and development for decades to come. And, and I would say too that it does not include the inventory advantage we currently have in the lower 48, a very deep and tier one inventory that we have and where we’re constructive in the macro going long term. And if the call for shale production starts to come up, because where is the supply coming to meet the growing demand that we believe is going to be there? This doesn’t even include what we could do to lean into our lower 48. A little bit more. We haven’t because the call hasn’t been there to date. So we’re growing at a bit more modest rate. But we’re taking advantage of the integration, we’re taking advantage of the synergies. You know, I remind people we haven’t added a rig in three, four years. So we’re just continuing to grow our lower 48 just through the efficiency in the channel. So none of that even includes what we could do depending what the call is for unconventional production going forward. So no, your math’s good, Neil. We’re excited about the opportunities for the company.

OPERATOR

Our next question comes from Arun Jayaram with JP Morgan. Your line is now open.

Arun Jayaram (Equity Analyst)

Yeah. Good morning. Good afternoon, team Ryan. I was wondering if you could unpack the billion dollar cost reduction and margin optimization plan, which looks to be a new aspect in the update. You mentioned the ERP system integration? I was wondering if you ...