Bartiromo: One on one with ConocoPhillips CEO
A funny thing happened on the way to a major cutback in jobs and expenses in the oil sector. Just as rig counts plummeted, jobs were cut, and capital investing trimmed, oil prices have mounted a comeback. Oil prices are up 40% from the lows earlier this year, 25% higher in April alone, indicating a cutback in spending worked to push prices back up. I guess consumers were right not to go out and spend all of those savings they made at the gas pump, because it wasn't all that long lived after all. In fact, oil man T. Boone Pickens tells me oil prices should be back above $75 a barrel by year end, partly because rig counts have been cut. Still, the oil sector, long the source of job growth in America, has begun a series of painful cutbacks because of how much oil prices are down the last year and a half. I caught up with Ryan Lance, who as chairman and CEO of ConocoPhillips is one of the leaders in the industry, to assess the volatility. Lance was in Manhattan meeting with investors to present his plan for growth regardless of where prices stand. Our interview follows, edited for clarity and length.
Q: Volatility is the watchword for oil markets. What has the impact been of the pullback in oil?
A: It has been a pretty stark falloff starting in early November last year. We've enjoyed a pretty good run since the recession due to the shale revolution in the U.S. We've added pretty significantly to the jobs, and the GDP growth of the U.S. And unfortunately for our business with the decision by OPEC not to reduce production, we've seen a dramatic decline in prices even though the supply/demand imbalance is not as significant as it's been in years past.
Our company alone is reducing capital spending by about 30% in 2015 from 2014. A number of other companies are announcing similar reductions ranging from 10% all the way up to as much as 50%. We've seen 1,000 rigs come offline since November and that downturn has been dramatic. Each rig carries anywhere from about 120 to 150 employees. And these are good, blue-collar kinds of jobs that are high-paying, $80,000 or $90,000 a year. They're jobs that come with medical, health and welfare benefits. And they're jobs that come with a 401(k), and in many instances a retirement plan. So it has been a pretty significant impact to our industry as we think about this downturn relative to the last three or four that have occurred in our industry over the last 30 years.
Q: Is the drop in the price of oil, and the lower revenue than expected because of it, why you have had to resize your business?
A: That's a big piece of it. It's just the cash coming in. We're an industry that is very capital intensive. We reinvest 80% or more of cash back into the business by. When the cash flows are down there's less to reinvest in the business. When you have less to reinvest, you have to go to where you have your flexible capital programs. And those end up being the drilling programs like those characterized here in North America. Then many companies are looking forward to the next two to three years with OPEC's decision not to be a swing producer, a lot of us feel like we're in for a lower price, more volatile world going forward.
Q: What about what is happening in the Middle East? We've got ongoing talks with Iran. Do you think that Iranian oil will come back onto the market at some point?
A: Iran is rumored to have over 30 million barrels sitting on offshore storage tankers. So If sanctions were lifted, short-term that oil can come on the market. Medium term, if you believe the Iranians, they say they can ramp from 500,000 to 1 million barrels a day pretty quickly, meaning over the next couple of years. Then the longer-term is about investment to go back to Iran, and some longer-term implications.
Q: What decisions are you making, as you face this volatility, to keep a growth plan in place?
A: It goes back to a world outlook for the next few years that we think is characterized by lower commodity prices and more volatile prices. It looks like if OPEC is not going to cut production, the swing production could be U.S. shale production and some of the other non-OPEC forces.
So we had to think about a commodity price world that is lower and more volatile over the next few years. The three-year operating plan that I laid out was reducing our capital spending from about $16 billion a year down to $11.5 billion and holding that for the next three years. We're doing that so we can reach what we call cash flow neutrality by 2017, which is where the cash coming in the door is equivalent to the capital plus the dividend that we're paying to our shareholders. We reaffirm that dividends are our highest priority use of cash. So we'll pay our shareholders first. Then we'll invest capital to grow the company But even at a more modest capital spending, we're able to grow the company 2% to 3% this year, and a little bit faster in the next couple of years on our way to reaching 1.7 million barrels a day by 2017.
Q: One of the things that we've seen is consolidation the business. Shell acquiring BG Group in a $70 billion dollar deal. Were you surprised by that?
A: Certainly a $70 billion U.S. deal is quite large and a substantial change for our industry. the two companies had been rumored to be looking at each other for quite some time. And you can see the strategic rationale behind the deal. Both are very highly focused on natural gas, and specifically the liquid natural gas business, and see a growing demand for that commodity. So bringing those two together creates quite a big player in terms of global gas and LNG business. You can see some of the rationale. The amount paid is a bit of a surprise. But obviously they see synergy.
Q: Does your company need to get bigger to create more scale?
A: We have a pretty deep inventory. Today we produce over 1.5 million barrels a day. We have a reserve base of about 8.9 billion barrels, and a resource base of 44 billion barrels. So we set out on a pathway a couple of years ago when we spun the company, and created ConocoPhillips, today the largest independent producer. We created a pathway to continue to modestly, organically grow the company while protecting the dividend to our shareholders. And we're really on path to go do that. We have a great balance sheet. We're global, we're diverse, we're not dependent on anyone, geology, geography, or product type. we're really well-placed in the marketplace today, and have a deep inventory to organically grow. So I don't feel like I have a strategic hole in our portfolio that we need to go fill through the acquisition channel.
Q: What about the impact of the broader cutbacks in the industry? For the longest time much of the job creation for the U.S. was from the oil industry. The Dallas Federal Reserve reports that much of the jobs created since 2007 were around energy. If we're seeing this kind of resizing of the business, will that have a broad affect on U.S. unemployment?
A: It will have an impact. Some of the data that I've seen shows that our industry was about a third of the GDP growth that came post-recession with the investments made. So the jobs that we have in our business are not the sort of jobs that you see tracked by the Labor Department. These are very high-paying jobs. There are some public policy things that can help though. One of those is exporting crude from the U.S. Our U.S. crude trades at a discount to global crude, and it shouldn't do that. That's one of the reasons causing the lower cash flow, and the lower amount of capital that's being deployed And it has had an impact on the slowdown. repealing the export ban is a pro-consumer policy. Because it will reduce the price of gasoline for the consumer. The more oil we can get into the global market, the better chance we have of stabilizing the price, lowering the volatility, and that will lower the gasoline price to the consumer.
Q: What about the shale revolution? There are a fair amount of leveraged players out there and lower prices create a make-or-break time for them. Will some players will go out of business?
A: You're starting to see some of that. You've seen some companies people forced to go to the debt markets, and when their balance sheet can't stand going to the debt market, they're recapitalizing by floating equity. So you've seen that today in this business. but with that said, there's still a lot of money on the sidelines in this business from private equity. So the access to capital is still there for people that have good assets,
Maria Bartiromo is anchor and global markets editor at the Fox Business Network. Watch her on FBN weekdays 9-11 a.m. ET and Sundays and the Fox News channel 10-11 a.m. ET. @mariabartiromo and @sundayfutures on twitter