ConocoPhillips cuts 2016 budget 25% to $7.7 billion

HOUSTON -- ConocoPhillips unveiled a significantly reduced budget for 2016 on Thursday. The company has set its 2016 capital budget at $7.7 billion, which represents a 55% reduction from 2014 and a 25% reduction as compared with expected 2015 capital spending.

“We’re setting an operating plan for 2016 that recognizes the current environment, which remains challenging. We are significantly reducing capital and operating costs, while maintaining our commitment to safety and asset integrity,” Chairman and CEO Ryan Lance said. “We also retain the flexibility to adjust capital spending in response to market factors. Our plan highlights the actions we accelerated over the past year to position our company for low and volatile prices.”

The company also announced that it expects to close approximately $2.3 billion of non-core asset sales. This number includes approximately $0.6 billion from transactions that closed through the first three quarters. The remaining $1.7 billion represents transactions with definitive agreements in place that are expected to close in the fourth quarter of 2015 or the first quarter of 2016. Production from these assets, of which 80% is natural gas, accounts for more than 70 Mboed of 2015 production. The company continues to pursue ongoing, non-core asset sales across the portfolio.

Budget allocation

ConocoPhillips’ $7.7-billion capital budget includes funding for base maintenance and corporate expenditures, development drilling programs, major projects, and exploration and appraisal spending. Reductions compared with expected 2015 capital spending of $10.2 billion come primarily from lower major project spending, deflation capture and efficiency improvements.

By category, capital is allocated with approximately $1.2 billion, or 16%, to base maintenance and corporate expenditures; $3.0 billion, or 39%, to development drilling programs; $2.1 billion, or 27%, to major projects; and $1.4 billion, or 18%, to exploration and appraisal.

By region, the capital-budget breakdown is as follows:

Lower 48. Approximately $2.6 billion, or 34%, is allocated to the Lower 48. This is a reduction of about 30% compared with 2015 expected spending, primarily reflecting improved efficiencies, lower average rig count and lower infrastructure spending in the unconventionals, and deflation.

Capital spending in 2016 will focus predominantly on the unconventionals where the company plans to maintain current activity levels with 13 rigs across the Eagle Ford, Bakken and Permian, with ongoing flexibility to ramp up or down activity in these plays. Other spending will target exploration and appraisal activity in the Gulf of Mexico, base maintenance and the conventional drilling program.

Canada. Approximately $0.8 billion, or 10%, is planned for Canada. This reduction of approximately 30% as compared with 2015 expected spending is primarily due to the roll off of spending at Surmont 2. 2016 capital will focus on development drilling and appraisal in the unconventionals, continued ramp up at Surmont 2 and two exploration wells offshore Nova Scotia.

Alaska. Approximately $1.3 billion, or 17%, is allocated to Alaska. This reduction of about 5% as compared with 2015 expected spending is predominantly the result of reduced major project spending in the region following the startup of CD5 and Drill Site 2S in 2015. Capital in 2016 will mostly target development drilling, base maintenance and the progression of several major projects. 

Europe. Approximately $1.3 billion, or 17%, is allocated to Europe. This reduction of approximately 15% as compared with 2015 expected spending is primarily the result of reduced conventional drilling and lower major project spending across the region. Capital in 2016 will focus on major projects across the region, development drilling in the Greater Ekofisk Area and base maintenance.  

Asia Pacific and Middle East. Approximately $1.4 billion, or 18%, is allocated to Asia Pacific and Middle East. This reduction of roughly 30% compared with 2015 expected spending is largely the result of reduced major project spending at the Australia Pacific LNG (APLNG) project. The 2016 capital budget includes approximately $0.6 billion of capital at APLNG to achieve the startup of Train 2 and complete deferred activity from 2015. The remainder of the 2016 capital will primarily fund major projects in Malaysia and China, as well as development drilling around legacy assets.  

Other. Approximately $0.3 billion, or 4%, is allocated toward other 2016 activity, including corporate programs.

Production Outlook

The company’s full-year 2015 production guidance remains unchanged at 1,585 to 1,595 Mboed, excluding dispositions. Full-year 2015 production associated with $2.3 billion of divestitures is approximately 70 Mboed. Adjusted for these volumes, 2015 production guidance would be 1,515 to 1,525 Mboed. This is the new baseline from which the company expects to grow 1% to 3% in 2016. All guidance excludes Libya.

Production growth in 2016 will come primarily from the startup of APLNG in Australia, continued ramp up of oil sands production in Canada and recent project startups in Alaska. Growth from these areas will be partially offset by a decline in Europe and the Lower 48.