ConocoPhillips Co (NYSE:COP) Q1 2021 earnings call dated May. 04, 2021.
Corporate Participants:
Ellen DeSanctis — Senior Vice President, Corporate Relations
Ryan Lance — Chairman and Chief Executive Officer
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Tim Leach — Executive Vice President, Lower 48
Nick Olds — Senior Vice President, Global Operations
Dominic E. Macklon — Senior Vice President, Strategy and Technology
Analysts:
Neil Mehta — Goldman Sachs — Analyst
Jeanine Wai — Barclays — Analyst
Phil Gresh — JPMorgan — Analyst
Roger Read — Wells Fargo — Analyst
Ryan Todd — Simmons Energy — Analyst
Josh Silverstein — Wolfe Research — Analyst
Stephen Richardson — Evercore ISI — Analyst
Doug Leggate — Bank of America Merrill Lynch — Analyst
Bob Brackett — Bernstein Research — Analyst
Paul Cheng — Scotiabank — Analyst
John Freeman — Raymond James — Analyst
Leo Mariani — KeyBanc Capital Markets — Analyst
Raphael Dubois — Societe Generale — Analyst
Neal Dingmann — Truist Securities — Analyst
Presentation:
Operator
Welcome to the First Quarter 2021 ConocoPhillips Earnings Conference Call. My name is Hilda, and I will be your operator for today. [Operator Instructions]
I will now turn the call over to Ellen DeSanctis. Ellen, you may begin.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Thank you, Hilda. Hello and welcome this morning to our listeners. I’ll first introduce the members of our ConocoPhillips Executive Team who are on today’s call. We have Ryan Lance, our Chairman and CEO; Bill Bullock, our Executive Vice President and Chief Financial Officer; Tim Leach, our Executive Vice President of the Lower 48; Dominic Macklon, our SVP of Strategy and Technology; and Nick Olds our SVP of Global Operations. Today, several of our executives will make prepared remarks and then the team will take your questions.
Before I turn the call over to Ryan, a few quick reminders. In conjunction with this morning’s press release, we posted a short deck of supplemental material that includes first quarter highlights, earnings and cash flow summaries, operational highlights and updated sensitivities. We also announced this morning that ConocoPhillips will host a Virtual Market Update on June 30. So save that date, we will be providing details on that meeting shortly.
In today’s call we will make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in today’s press release and in our periodic SEC filings.
And finally, we’ll also refer to some non-GAAP financial measures today. Reconciliations to the nearest corresponding GAAP measure can be found in this morning’s press release and on our website.
And with that, I’ll turn the call over to Ryan.
Ryan Lance — Chairman and Chief Executive Officer
Thank you, Ellen, and welcome to our call participants. It’s a very busy but exciting time at ConocoPhillips with the Concho transaction now closed, our entire workforce is on a mission to emerge from last year’s extreme sector volatility and the transaction integration activities as the strongest competitor in our business. We’re viewing 2021 as a catalyst moment like we did in 2016 to improve every aspect of our business and again step out from the pack by taking our disciplined shareholder friendly value proposition to the next level. We’re taking actions across every aspect of the company to improve our underlying drivers and our first quarter results represent an early indication of our progress.
Some of the actions we’re taking are transformational, such as capturing synergies. Others are chipping away at core drivers to improve efficiency and returns, such as the debt reduction plans we announced this morning. Here’s what everyone in our organization is focused on. First, we believe a safe company is a successful one, with the Concho transaction, we’ve combined two industry-recognized safety leaders, which has aided our overall integration. And again I want to recognize our workforce for their exceptional handling of the many challenges presented by the Winter Storm Uri last quarter.
We’re continually — continuously driving to lower the cost of supply of our diverse resource base. We have a deep inventory of the very best rocks, which is a clear source of sustained competitive advantage, and we’re always working to further high grade the portfolio through asset sales. But our low cost inventory alone isn’t enough, we’re focused on applying our rigorous capital allocation process to optimize investments, based on the metrics investors demand, free cash flow and returns. We’re driving improvements in free cash flow and returns by driving down our sustaining capital through well cost and supply chain efficiencies as well as margin improvement, driving down our cost structure through synergies and balance sheet improvements, driving down our sustaining price through the combination of lower sustaining capital and a lower cost structure. And finally we don’t cap the benefit from higher prices, which means upside and free cash flow above our sustaining price.
We’re only a short time into the Concho integration, but we’re already seeing the previously announced synergies materialize and we expect to yield additional benefits as our integration progresses. We remain committed to returning a significant portion of capital to our shareholders with a five-year track record of exceeding our target of greater than 30% of CFO, in fact our return to shareholders since implementing our returns focused strategy in 2016, has been 43% of cumulative CFO. So our capital return approach represents a floor on the level of capital returns not assuming. We don’t tie our returns to free cash flow like others are doing. So in other words, investors directly benefit from CFO expansion, including from higher prices when they occur.
And as you saw in today’s release, we’re taking actions to further increase our returns of capital in 2021. In addition to our ordinary dividend and our previously announced $1.5 billion of buybacks, we intend to begin reducing our Cenovus ownership stake, using proceeds to purchase incremental ConocoPhillips stock. We’re taking action to further strengthen our balance sheet. This morning, we also announced that we’re planning to reduce gross debt by $5 billion over the next five years. This will reduce our annual interest expense cost and help lower our sustaining price.
And finally, we’re focused on leading in ESG, especially in emissions reductions. All of this is underpinned by our talented, motivated workforce. They are the driving force in our progress. You can tell from my comments, that we’re encouraged by the improvements we’re seeing across the company. That’s why we announced in today’s press release, our intention to accelerate our 2021 Market Update from November to a virtual event on June 30.
Now, here’s what you can expect at that update. We will reiterate our disciplined philosophy for the business and how we expect to enhance our through cycle performance for a volatile price world, but also for a more stable price world should that transpire. We will reaffirm the allocation priorities that have been foundational to our company for years. Compared to our plan two years ago, we believe every part of the business has improved. And our goal is to put ConocoPhillips in an even better position to deliver multiple years of free cash flow and returns to shareholders post Concho. We will provide an update on our outlook for 2021 and beyond, including our synergy capture progress and our business driver improvements. We will also provide updates on our asset base and our ESG efforts and plans.
As I said earlier, it’s a busy time for the company, but we’re going to take advantage of our momentum to reengage the market sooner rather than later on our compelling future.
Now let me turn the call over to Bill, who will address high level quarterly results as well as our announced debt reduction and some of his COP share plans.
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Thanks, Ryan. We’re certainly off to a good start in 2021. In today’s posted materials, there’s a summary of highlights from the first quarter and I’ll cover just a few of those items. As we foreshadowed on our March 31 Market Update, the financial results reflected some one-time contra related items. Adjusted for these known items, underlying financial performance was very strong. Adjusted earnings were $0.69 per share versus $0.45 per share in the first quarter last year. Production came in at the high end of the range and all producing segments generated positive earnings in the quarter.
As shown in the cash waterfall in the supplemental materials posted on our website, first quarter cash from operations was $2.1 billion and free cash flow was $0.9 billion. These figures include the cash flow impacts related to previously announced contra related items which reduced both CFO and free cash flow by about $1 billion. But even with the roughly $1 billion and one-time transaction related impacts, our CFO of $2.1 billion very nearly covered capital, dividends and buybacks. We returned 46% of CFO to shareholders in the quarter in the form of our ordinary dividend and share repurchases and we ended the quarter with $7.3 billion of cash in short-term investments. As a reminder, we issued updated first quarter and full year 2021 guidance per key business drivers on March 31. And today we provided updated cash and earnings sensitivities.
I call your attention to these, cash flow toward to the upside has improved significantly as a result of the Concho transaction. And in a more constructive price world, we’re going to differentially capture the benefit of higher prices, hence we’re unhedged, where liquids weighted and we have exposure to diverse markets globally.
Turning to today’s announcements. We view our balance sheet as a strategic asset just like we do our portfolio of low cost of supply resource. And our balance sheet is very strong with top-tier leverage due to our low net debt. Of course, our cash balances are a component of our net debt and given that our borrowing costs exceed the returns on our cash, we plan to put some of that incremental cash to work along with future free cash flow to reduce gross debt by $5 billion over the next five years. This will reduce our ongoing interest expense, lower our ongoing free cash flow breakeven price, improve returns and create greater flexibility on our overall debt structure, all while maintaining a strong leverage position. As part of our program, we may refinance some of our high coupon debt to take advantage of historically low interest rates and facilitate the total quantum of our debt reduction over time.
Next, I’ll address the Cenovus share monetization plan we announced. As a reminder, we own approximately 10% of Cenovus, which is valued at about $1.6 billion today. The shares were received as part of the consideration for our sale of Canadian assets to Cenovus in 2017, and we’ve always stated that we did not intend to be a long-term strategic owner of Cenovus shares. Over the years we’ve looked at several strategies reducing our position. We believe the market has responded to the positive steps Cenovus has taken, including its recent commitments to balance sheet strength and operational efficiencies. We intend to begin selling our Cenovus shares in the open market in the second quarter, while simultaneously turning the proceeds in ConocoPhillips shares. We will be thoughtful and measured with our sales program, as you would expect, with an intention to fully dispose of our Cenovus position by the end of 2022.
We believe this plan to swap Cenovus shares for ConocoPhillips shares aligns well with both our commitment to return capital to shareholders and to monetize our Cenovus position. Taken together, our planned debt reduction and our planned swap of Cenovus shares for ConocoPhillips shares further strengthened both our balance sheet and our ongoing ability to consistently deliver differential returns of capital to our shareholders, all while lowering our sustaining price.
Now I’ll turn the call over to Tim for an update on the Lower 48 business.
Tim Leach — Executive Vice President, Lower 48
Thanks, Bill. We’re just a few months into the ConocoPhillips Concho integration process and like Ryan and our other leaders, I’m more excited now than ever to tell you about our vision for the company and a great progress we’ve already made. I’ll do a quick recap of the Lower 48 from the first quarter, which was nothing short of historic. Not only because of the fast pace integration activity, but because of Winter Storm Uri. Overall, the storm impacted Lower 48 production by about 50,000 barrels a day for the quarter. However, facility damage from the storm was negligible and we quickly resumed production in March. It was a heck of a test for our expanded Lower 48 region. They passed with flying colors.
Total Lower 48 production for the quarter was 715,000 BOEs per day, which includes 405,000 in the Permian; 187,000 in the Eagle Ford; and 86,000 in the Bakken. We exited the first quarter with 15 drilling rigs. 11 in the Permian and four in the Eagle Ford. And we had seven frac spreads; five in the Permian and two in the Eagle Ford. It doesn’t get a lot of attention, but I also wanted to mention that during the quarter, we executed several innovative pilots across the Lower 48, including more than 40 twin frac wells. Electrification of our frac spreads and additional V5 completions. The point is while we’re executing the base business, we’re also combining the experience of both companies by conducting numerous tests that should yield future efficiency gains.
My entire Lower 48 organization is excited about the role we can play in making ConocoPhillips a company that can supply the cheapest, cleanest barrels to the market, successfully navigate the price cycles, achieve the highest level of execution efficiency and continue to lead the industry on the innovation front. From a size and scale perspective, Lower 48 is clearly differentiated in the industry with the acquisition of Concho, the Lower 48 grew to be about half of ConocoPhillips production and among the largest domestic producers. We have a high quality set of assets, with a low cost of supply resource base made up of core positions in the three premier tight oil basins in the world.
Our Lower 48 team is focused on capturing the strategic advantages of both Concho and ConocoPhillips to make our operations more efficient and drive down sustaining capital, with the primary goal of maximizing our cash generating capacity. We’re creating a massive free cash flow machine from our combined business that will contribute towards the company’s ability to deliver on its priorities through cycles. All of us recognize that the largest opportunity for value creation is going to come from bringing the best out of both companies and elevating the combined ConocoPhillips to a level unachievable by either company on their own. I’m happy to say that the new organization has embraced this challenge and we are seeing even more opportunity than we initially expected.
I couldn’t be more pleased with the quality of people we have working on this. Starting with the Lower 48 leadership team, which consist of both heritage ConocoPhillips and Concho leaders. We made it a priority to work closely together and leverage the knowledge base of both very experienced operations. In fact, we continue to see substantial improvements in our well cost. We have our eyes on additional ways to get more for less. Beyond working together to generate the best plan of development and drive efficiencies in our operations, our team is working hard to identify commercial opportunities to improve margins as well as supply chain opportunities to leverage our global scale and drive down cost.
I want to leave you with a strong sense of optimism, about what the Lower 48 can deliver. We are fully dedicated to extracting the full value of this deal and I’m looking forward to providing more detail at our mid year market update.
And now I will turn the call over to Nick to provide the status of our operations and the rest of the world.
Nick Olds — Senior Vice President, Global Operations
Thanks, Tim. While there’s clearly a lot going on in our Lower 48 business, we believe ConocoPhillips has a significant advantage over our independent peers, because we also have diverse global businesses that generate significant free cash flow. Today our Alaska and international businesses comprise about 50% of our company’s operated 1.5 million barrels per day production.
I’ll take this opportunity to recap some of the achievements from the first quarter and bringing up to speed on activities we have underway around the globe. So starting in Alaska. I’m pleased to report that Greater Mooses Tooth 2 project has made significant progress over the past several months. And facility and construction costs are about 10% below budget as we finish our third and final construction season. The project is expected to be online by the end of this year at approximately 10,000 barrels a day, with peak production of 35,000 barrels a day that will leverage our existing Alpine infrastructure. We’re also back to development drilling on the slope after suspending virtually all activity in 2020, we are restarting four rigs across our operated assets in Alaska. In the Western North Slope we restarted drilling at CD5 and commissioning activities on the new extended reach drilling rig. The ERD rig will play a significant role in augmenting Alaska’s base business, allowing us to drill wells in excess of 35,000 feet, accessing low cost of supply resources while minimizing surface disturbance. So our base Alaska business is performing very well, and we’ve built a strong momentum coming out of 2020.
And of course, it’s been an eventful quarter for Willow. Let me give you a quick update on where that project stands. We continue to progress the front-end engineering and design work, while at the same time taking actions to address the legal challenges that have been recently raised. The 600 million barrel oil discovery remains very competitive in our portfolio, but we won’t take final investment decision or make significant long lead investments until the litigation risks have been resolved.
Now moving to Canada. At Montney, we continue to optimize our development plans to incorporate the liquids rich acreage we acquired from Kelt mid last year. We’re leveraging our Lower 48 unconventional resource expertise and have reduced drilling cost by 25% over the first four pads. This part of our business doesn’t get a lot of external attention yet, but it’s worth noting that’s currently producing approximately 30,000 barrels a day of which 50% is liquids. We continue to be excited about our future in this premier of 300,000 acre unconventional position. At Surmont, we continue to take actions to reduce costs, improve net-backs and reduce emissions and we’re seeing encouraging improvements on all three of these fronts. So in summary, Canada remains an important part of our business with quite a lot of upside and learning curve opportunities.
Now moving to our Europe, Middle East and North Africa segment. In Norway, we’ve made good progress on several projects which benefit from the fiscal incentives implemented by the Norwegian government last year. We’re nearing completion of Tor II and are on track to make final investment decisions on both Tom Leighton Alpha [Phonetic] and Covra East Keiko [Phonetic] later this year. And work continues to assess our recent discoveries at Warka and Slagugle. In Qatar, our QG3 asset continues to deliver very strong performance and generate free cash flow. And we continue to advance our evaluation of the North Field Expansion opportunity. We are still very interested in participating in this project, if it fits our financial framework. So we’ll keep you posted as this plays out.
Moving on into our Asia-Pacific region. APLNG is running extremely well. Production continues to be strong, which when combined with ongoing focus on reducing capital, operating and financing costs has brought the cash breakeven down to $25 per barrel Brent. APLNG distributed almost $100 million to the company in the first quarter of 2021 and is expected to distribute about $200 million in the second quarter. Finally in Malaysia, we have several low cost to supply high margin bolt-on projects at various stages of development. The Malikai Phase 2 project achieved first oil in this year and SMP [Phonetic] Phase 2 and Gumusut Phase 3 are on track for first oil in late 2021 and ’22 respectively.
So that’s a brief update of our global operations. In summary, we have a lot of exciting work underway that will continue to enhance free cash flow generation.
Now, I’ll turn it back to Ryan for some short closing comments.
Ryan Lance — Chairman and Chief Executive Officer
All right, thanks team. To wrap up, let me go back to how I started today’s call. Reviewing [Technical issues] an opportunity to further hone every part of the business and continue leading this sector. [Technical Issues] aspects of the company to improve [Technical issues] and we’re looking forward to sharing more on that and what that means for our shareholders when we get together with you again on June 30. So now with that, let’s open it up to Q&A.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Neil Mehta from Goldman Sachs.
Neil Mehta — Goldman Sachs — Analyst
Good morning team. And I think Matt’s last day if I’m not mistaken was May 1, so if he’s listening from the mountain somewhere wish him well in his retirement and congratulations to everyone on their promotions here.
Ryan Lance — Chairman and Chief Executive Officer
Thanks, Phil. Rest assured, he is probably listening. And greeting us.
Neil Mehta — Goldman Sachs — Analyst
Okay. Well, good. I guess the first question is around to Cenovus. So you could have approached this Ryan in a couple of different ways. Certainly a block sale and you elected to do at this through the end of 2022. So talk about why you thought this was the optimal way to release the shares into the market. And just a housekeeping question here. So you get this annualized $1.5 billion buyback program, but as you’re selling Cenovus shares. This will be incremental to the baseline $1.5 billion, right. So this is — this would be a supplemental to the $1.5 billion that you’ve already announced. So two questions there.
Ryan Lance — Chairman and Chief Executive Officer
Yes. Thanks, Neil. Yes, let me handle the last one first, maybe turn it over to Bill for a little bit of color on why? You’re exactly correct. So we have the dividend that we’re paying. We announced earlier that we were buying $1.5 billion of our shares back. And this Cenovus swap for ConocoPhillips shares is incremental or on top of the $1.5 billion that we’re currently doing in terms of buying our shares back in. We’ve looked at this in lots of different ways over the course of the last number of years as we’ve been an owner of Cenovus shares. And let me ask Bill to kind of give you a little bit of color on why now and why under this sort of plan?
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Sure. Good morning, Neil. So as I mentioned, we’ve always said that we did intend to be a long-term holder of the Cenovus shares and as Ryan mentioned, we’ve looked at several methods. We did look at block sales and we considered that. We think the exchange of Cenovus shares for COP shares over time and open market makes the most sense to us. The voice of discounts associated with open — with block type transactions, and we think that the market has responded positively to recent Cenovus announcements so that the exchange ratio for Cenovus and COP’s really come back to a more historic level. So we see this as an opportunity to one, trade into the COP shares which we like the upside on. Two, monetize an asset on the balance sheet, which we don’t think it’s a lot of value. And three, give that value back to shareholders.
Neil Mehta — Goldman Sachs — Analyst
That’s very clear. And thanks for the color Bill here. The second is if you guys can provide some big picture thoughts on the macro recovery. Certainly it seems like the supply side is responding well and prices are firmer, but demand is still uncertain. So, Ryan, how are you thinking about the Brent price outlook from here and the sustainability of the recovery. Any thoughts on the natural gas or global natural gas side as well as that’s firmed up nicely as well?
Ryan Lance — Chairman and Chief Executive Officer
Yes. Thanks, Neil. No, we continue to kind of execute the plan that we laid out at the beginning of the year and it’s largely due to our view of the macro as you kind of describe. Demand still is off to pre-pandemic levels. Pick a number 96 million, 97 million barrels a day of demand. Spare capacity still exists on the supply side, largely with the OPEC group or OPEC plus. So we still view kind of 5 million, 6 million barrels a day of spare supply out in the world. So we still have a balancing that we need to before we got to see where the price falls out at that point in time and what the call is on say US tight oil going forward. So we think it’s prudent to kind of stay the course right now and not change. We also don’t want to loose [Phonetic] our programs. So we want to be stably executing our programs and driving the efficiencies that Tim and Nick talked about across the global portfolio with a lot of emphasis on what we’re doing here in the US in the Lower 48.
So until the market against rebalanced, we’re doing all that, watching it before we make any differences as well. So we’re positioning ConocoPhillips for any kind of market we think enters the fray. So if it is going to be volatile or if it’s going to be sort of a sustained more stable kind of price, we’re positioned to react to one of those kinds of markets, it’s a bit uncertain with the pandemic and the demand how quickly that’s going to recover.
Now, if you asked us, we believe it’s going to recover. We think we probably hit 1 million or so barrels a day of demand later this year and on an annual average we expect 2022 to be at that kind of a demand level. So at that point in time, we would hope the market is balanced on a supply demand perspective, but it’s going to take really the remainder of this year to see that. But our value proposition is pretty firm and delivering money back to the shareholder like we described and hopefully you see from today’s announcements that we’re enhancing that and again the 30% are floor [Phonetic]. And you look over the last five years, we’ve delivered 43% of our cash back to our shareholders. So this point matters and returns matter and that’s what we’re all about.
Operator
Thank you. The next question comes from Jeanine Wai from Barclays.
Jeanine Wai — Barclays — Analyst
Hi, good morning, good afternoon, everyone. Thanks for taking our questions.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Good morning Jeanine.
Ryan Lance — Chairman and Chief Executive Officer
Good morning.
Jeanine Wai — Barclays — Analyst
Good morning, thanks. My question is really on capex and Q1 capex was $1.2 billion versus the full year guide of about $5.5 billion. So that implies a little over $1.4 billion a quarter on average for the rest of the year. And so we know that it’s part of the ratable capex outside of [Indecipherable] and we can appreciate that, plus there is noise in the Q1 number based on Conoco and weather, and other stuff. But how do you see activity progressing or ramping throughout the rest of the year if at all. And we understand the production is an outcome for Conoco, but we’re just trying to get a better sense of the new steady state now that Conoco is in effect?
Ryan Lance — Chairman and Chief Executive Officer
Yes, Jeanine. The first quarter was a little bit artificially low given exactly what you described is the weather impacts in the Lower 48 that kind of shut things down for a period of time and then people forget too that we had kind of a — we had to react to a winter drilling season in Alaska that produced the gap a little bit. So it’s not a ratable, you can’t just take the first quarter times four, but we are driving the teams to greater efficiency and trying to get as much done with the precious capital dollar that we can. We will provide a more of an update in the June update that we’ve talked about. And I’d say thirdly is, we designed this to run stable. We designed our programs at the beginning of the year and asked our teams to go execute that scope and really not interested in trying to drive that on a quarterly basis and whipsaw the teams around doing those programs. We just want them to efficiently and effectively execute the programs that we set out at the beginning of the year, but we’ll provide more of an update as we see the year progressing in June.
Jeanine Wai — Barclays — Analyst
Okay, great. Thank you. We’ll wait for that update. And our second question is just on the debt reduction target. We’ve got balance sheet enhancement, dividends, buyback, capex all moving pieces on capital allocation. So maybe can you talk a little bit more about how you take the $5 billion target over five years and you noticed that it succeeds the amount that’s coming due in that time. So maybe something on cadence as well. And I guess we’re just really trying to back into how much cash return is available now that we have at this time both debt target, how better, we need to allocate the cash? Thank you.
Ryan Lance — Chairman and Chief Executive Officer
Yes, thanks. I can let Bill talk specifically about the debt. I would just say, back to my opening remarks a bit Jeanine is, that we’re looking at every piece of the business. We are looking at the portfolio. We’re looking at the balance sheet. We’re looking at the cash sitting on the balance sheet and all those pieces of it and we haven’t forgotten about the shareholder at least, saw that today with our announcement on the trade with the Cenovus shares and the ConocoPhillips and again that’s incremental to the $1.5 billion that we’re doing already. Let me ask Bill, he can give you a little bit more color on why $5 billion, why five years?
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Yes, sure. Thanks, Ryan. Good morning Jeanine. So first, I just would start with you know both heritage Conoco and heritage Concho had a really strong balance sheet, so does this combined company. And in fact, as we look at this, our net debt to CFO consensus is under 1 times materially less than our peer group. But with the Concho transaction, our gross debts increased from $15 billion to $20 billion and we have some legacy high coupon debt that’s out there on our balance sheet. So we think this as unique opportunity to reduce our ongoing interest, lower ongoing free cash flow breakeven. We think that improves returns. I think it creates greater flexibility in our debt structure and all that supports our ability to maintain greater than 30% of returns to our shareholders.
When you think about why $5 billion, while that’s certainly over what the natural maturities of our bond ladders would be right now. We’ve got about $3 billion of bonds retiring over the next five years. So some of that will be early retirements. And you could see us do that with public tenders or open market repurchases or perhaps a combination with refinancing. All that’s going to be taking a process favors flexibility and optionality. And in the case of our $5 billion over five years, that is our base case. We think that gives us the ability to moderate the reduction and take advantage of supportive market conditions, which you may see us accelerate that a bit if efficiencies in the market allow us to do that earlier. So that’s a bit of a context on why we’re looking at reducing our debt structure, how we got to $5 billion and a bid on the pacing.
Operator
Thank you. Our next question comes from Phil Gresh from JPMorgan.
Phil Gresh — JPMorgan — Analyst
Yes. Hi, good afternoon. I supposed there was a bit of a follow-up to Jeanine’s question, there is a lot of excess cash that would be available if you’re paying down the $5 billion of gross debt between free cash flow and the cash in the balance sheet and Cenovus shares. Perhaps some of this, you want to save for the Analyst Day, but any additional high level commentary you could share around capital allocation?
Ryan Lance — Chairman and Chief Executive Officer
Well, yes, we will see what the market gives us Phil over time. I would say too that we described to you back in November 2019 how we think about the cash on the balance sheet, there is the operating cash, there’s some reserve cash to deal with the volatility of the market and then we like to hold some strategic cash as well. And we still think the market is going to be quite volatile. So we’ll see what the market gives us but we want to be prepared for any kind of market that we find ourselves in. And then — and thirdly, you should think about some of that cash will make sure that shareholders are fully satisfied based on forecast experience and what we’ve done as a company. And then thirdly, I would say it’s — we are thinking about some of the future calls, whether that’s — if we’re successful in the North Field expansion, what we might do at Willow, we had some exploration discoveries in Norway, we hope to be successful in Malaysia. So some of that cash that you might see on the balance sheet will go to some of those projects as well such that we can continue to reap all the benefits from the annual free cash flow that we’re getting and distribute that back out to the company and to our shareholders.
Phil Gresh — JPMorgan — Analyst
Got it, okay. My follow-up would just be, Ryan, you made a comment about certain minimum cash levels. How do you think about what that should be today? And then if I could glu in one question around Alaska, do you still target trying to sell down Alaska as — a portion of Alaska as you discussed at the 2019 Analyst Day. Would that be another source of potential cash still?
Ryan Lance — Chairman and Chief Executive Officer
Well, I think more broadly, direct to answer your question Phil is yes, we’re still looking at potentially marketing some of the Alaska position, but more broadly, I think with the Concho acquisition, we’re coming through the portfolio to make sure that we’re continually high grading and take the opportunity of the commodity price environment we find ourselves in. So we’ll have more to say on that in June as well. From the various gas positions, I think, came [Phonetic] in the first, we think about $1 billion of operating cash and a $2 billion dollars of $2 billion to $3 billion of reserve cash, which is our — what happens in the market, we can respond, we can keep our programs running consistently and not whipsaw our programs, we want to have the cash there to do that and then we have strategic cash on top of that, which are for other uses that I described in your first question.
Operator
Thank you. Our next question comes from Roger Read from Wells Fargo.
Roger Read — Wells Fargo — Analyst
Hello, good morning.
Ryan Lance — Chairman and Chief Executive Officer
Good morning Roger.
Roger Read — Wells Fargo — Analyst
I guess, getting beaten pretty hard here. But I’m going to try one other thing on the debt structure here. I mean looking back to where you were in ’16, the changes you made three with the Concho acquisition, it would appear you’re aiming for a lower level of debt. You mentioned lowering breakeven as a component of that. It would seem, you could get there by refinancing the debt and bringing the overall interest expense down. So I’m just curious as you think about it as a part of your capital allocation right, return to shareholders, granted reducing debt can be seen that way, but I’m just curious how it all kind of fit together as the goal of reducing by $5 billion?
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Sure. Roger, this is Bill. I’ll take that. Yes, certainly, as part of our $5 billion debt reduction over five years, I mentioned, we’ve got about $3 billion, that’s just naturally maturing towers. We are absolutely looking at refinancing a portion of our debt, our purchasing debt and we like our path to $5 billion, but with a high coupon out there, it’s possible to refinance and I think that will depend on a couple of factors, including the cost of debt retired and reissued and how we decided to approach our debt reduction targets. But, certainly refinancing is a component of the overall debt restructuring portfolio and it works in combination with considering public tenders or open market repurchases. But you’re absolutely right. We could make some steady progress on that just by refinancing some of our high coupon debt.
Operator
Thank you. Our next question comes from Ryan Todd from Simmons Energy.
Ryan Todd — Simmons Energy — Analyst
Great, thanks. Maybe at a higher level, what are you seeing on capital efficiency enhance your portfolios, we kind of emerged from the pandemic a little bit and with the addition of Concho to the portfolio, do you have an estimate for what you think the maintenance capex is and the right way to think about long-term capital spend. You used to talk about kind of $6 billion to $7 billion a year at the rough range of that. Has there been any adjustment to kind of what you see as a kind of a normalized level of longer-term capital spend?
Ryan Lance — Chairman and Chief Executive Officer
Yes, we will be talking about that Ryan in June and kind of provide an update relative to what you saw back in 2019 would be premature for me to talk about that. I would just tell you we’re constantly trying to drive down our sustaining capital and lower the breakevens in the company, and I think Tim and what we’re doing in the Lower 48 mix, doing around the rest of the globe, we’re seeing a lot of progress and that goes with the synergy capture that we can talk about if you like, but all those things are manifesting themselves on lower capex, lower sustaining and lower breakeven.
Operator
Thank you. Our next question comes from Josh Silverstein from Wolfe Research.
Josh Silverstein — Wolfe Research — Analyst
Thanks guys. Just on Alaska, I know last year was a COVID shortened drilling program. Can you talk about all the exploration activity that’s taking place this year. And then just, again with the timing around Willow with litigation of what needs to happen there to progress that forward?
Nick Olds — Senior Vice President, Global Operations
Yes, Josh, so this is Nick, why don’t I start with Willow. I apologize Josh. Let me start with Willow. First the big focus this year is related to the front-end and engineering design as I mentioned as well as detailed engineering, that’s all related to reducing or understanding our capital, the schedule and ultimate development considerations prior to taking FID later this year, that’s the target. As a reminder for the group, we got two lawsuits that are currently in Federal Court filed by two environmental groups challenging the BLM and the Army Corps record of decision for the Willow project. As you recall, as well, we also had all the permits for the 2021 Willow construction received in early January. However, due to the granting of the injunction by the Ninth Circuit Court of Appeals that 2021 activity which was a very small modest scope of gravel work has been deferred into 2022. And as all projects, we have scheduled floater, scheduled contingency, Josh, so that won’t impact your overall timeline.
In addition to the feed that I just mentioned, the primary focus now relates to the merits of those active lawsuits and we anticipate a decision by the district court in the third quarter. I also want to just mention, we have significant stakeholder support as an example, got State of Alaska in the North Slope Borough, have both intervene in the court case supporting the BLM record decision. We also have several more slow village councils and travel organizations who have sent strong letters of support to Congress in the Secretary of Interior.
But I think I’ll just reiterate, as part of my opening remarks, we will not take FID or make any significant longly [Phonetic] investments until such time as key litigation risks have been addressed. And finally, Willow is a great investment opportunity and we have the flexibility to adjust the pace of the project if needed.
Operator
Thank you. Our next question comes from Stephen Richardson from Evercore ISI.
Stephen Richardson — Evercore ISI — Analyst
Hi, thank you. Ryan, I was wondering if you could expand a little bit on this idea of 2021 as a catalyst moment as you contemplate June 30 and that update. I’m not asking you to kind of preview it, but I think the — it would seem to us that one of the big differences today at ConocoPhillips relative to last time you did one of these updates was just the predictability of your portfolio is probably better than it’s ever been. So I was wondering if maybe you could reflect a little bit on that predictability acknowledging oil price is still the big externality, but the predictability of the business you see internally and how that’s informing kind of your longer term targeting and kind of willingness to think out more than a couple of quarters or even a couple of years?
Ryan Lance — Chairman and Chief Executive Officer
Yes, Stephen, you’re right. As we said in the opening remarks, the Lower 48 is half the company in terms of production today and the shorter cycle nature of that business is a lot — is pretty predictable, but I wouldn’t, I’d say we’ve gotten to a place where we understand in running the base business across the whole world is good too, and so we understand the portfolio really well obviously, and know what the prospects look like over the long haul. You talked about the catalyst moment, it’s really focused in what we want to convey today is every aspect of the business. So we talked about the balance sheet. We talked about returns back to the shareholder. We talked about the efficiencies that we’re gaining in the system post the Concho acquisition.
So we’re working really on every part trying to lower the breakeven of the company and still be the best company in this business that can operate in a very volatile environment. And you can still count on the returns back to the shareholder. And you can count on us hyper-focused and disciplined on returns, not only on capital but off capital, both. So I think that’s what you’ll here in June. A lot more on that work on the portfolio, work on what we’re doing across the whole company on every lever. We know what the investors want, it’s free cash flow and returns and that’s where we’re hyper-focused on.
Operator
Thank you. Our next question comes from Doug Leggate from Bank of America Merrill Lynch.
Ryan Lance — Chairman and Chief Executive Officer
Hello, Doug.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Doug are you there?
Doug Leggate — Bank of America Merrill Lynch — Analyst
Can you hear me now, Ryan?
Ryan Lance — Chairman and Chief Executive Officer
Yes, yes. Now we’ve got you, Doug. Thanks.
Doug Leggate — Bank of America Merrill Lynch — Analyst
So it seems I’ve got a dodgy head. I apologize for that. So Ryan, I’d like to — I’m afraid going to be up a little bit on the free cash story here a bit also. I’d like to kind of frame a little bit because much noise here to defend themselves, but if you think about value essentially you’re unlevered free cash flow, the decision is ultimately between the balance sheet and equity to transfer value between those two. And then a buyback implicitly highs some view on the value of your company. So I’m kind of curious how will you be prepared to take the debt, the full year step up of the buybacks again, because clearly you could do a lot more if you wanted to of $1.5 billion and where variable dividend potential fits into that story?
W. L. (Bill) Bullock, Jr. — Executive Vice President and Chief Financial Officer
Yes, hi. Sorry, you were breaking up there a little bit Doug. If I understand your question right. How do we make all those balances? I think we’re walking in June [Indecipherable] at the same time here a little bit. So we’re working on all aspects of the portfolio. I think our focus is on trying to lower the breakeven and lower the sustaining capital, so work on the operating side of the business. Lower the breakeven, which is reducing our interest expense by taking some of those high coupon debt and bring it forward, giving us options to take that callable and reduce that in addition to what’s coming out over time. So I think we’re trying to do all things and I think the basic commitment that we made to the shareholders is we’re going to return 30% of our cash or greater back to you over time. So we will do that.
Now the vehicle and I think part of your question was what’s the right vehicle to do that in? That’s I guess — we hold it a little bit there’s not unanimity around what’s the right way to do that is we like the shares given the reduction that based on the absolute dividend, the per share metrics that it creates and the balance in accepted way that it’s done. But with that said, we’ve studied variable dividends and CBDs whatever you want to call them going forward. We spent a lot of time thinking about it, mathematically it really doesn’t matter. At the end of the day, the commitment is to return more than 30%, if there is a hybrid in our future that could be, we’ll keep looking at it and we’re not committed to one path to deliver returns back to the shareholders.
But today we think our shares are a great value. So — and we think this conversion from CVE to ConocoPhillips shares is an elegant solution to give more back to the shareholder. So we’re pretty, pretty committed to that.
Operator
Thank you. Our next question comes from Bob Brackett from Bernstein Research.
Bob Brackett — Bernstein Research — Analyst
Thanks for that. Most of my intelligent questions have been asked, but I’d like to at least chime in and congratulate Matt as well on his retirement. And maybe ask a question around the June 30 Virtual Meeting. Should we expect something like the 2019 meeting hundred plus slides, a 10-year plan or should we expect more of a modest update?
Ryan Lance — Chairman and Chief Executive Officer
Modest update, Bob.
Bob Brackett — Bernstein Research — Analyst
It felt there was a lot of questions and putting a bit of burden on you all but glad for that clarification.
Ryan Lance — Chairman and Chief Executive Officer
Yes. Appreciate the question Bob. We get the clarity out there.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Go ahead, Hilda.
Operator
Thank you. The next question comes from Paul Cheng from Scotiabank.
Paul Cheng — Scotiabank — Analyst
Hey guys, good morning.
Ryan Lance — Chairman and Chief Executive Officer
Good morning Paul.
Paul Cheng — Scotiabank — Analyst
Team just curious that, when do you think that you will — at the stage you believe you’re fully integrate the Concho asset and that ready to take on this other M&A opportunity wise that you would be at a position to say, okay, the organization is capable and ready to take on new asset? And also that — on that basis, that when you’re talking to your peers with the commodity price as much stronger and the share performance much better today compared to a year ago, how is that conversation on the consolidation trend that in the industry has changed. Do you think that the consolidation trend are essentially over by now or that, that’s still have opportunity? The second question is that when I look at the full-year production guidance of 1.5 million barrel per day, your first half is roughly 1.5 based on the midpoint of the second quarter, but when we think that second quarter probably have some maintenance downtime perhaps that will be a little higher than the second half. So is there any reason why the full year, or that the second half production will not be higher than the 1.5 million barrels per day imply that estimate that you gave? Thank you.
Ryan Lance — Chairman and Chief Executive Officer
Thanks, Paul. I think if I understand your question. The first one was around consolidation and M&A. I think you referred to the integration activities going on with Concho and we’re pretty hyper-focused on that right now in trying to deliver all those efficiencies in the synergy and the story is pretty good there. We updated the synergies to 750 million kind of earlier this year and we still see more opportunity and most of that’s focused in the best practices and capital avoidance and commercial and in supply chain, so we’re really focused on that and we’ll give an update in June. So we are pretty — folks are making sure we get the Concho assets integrated in. Tim is doing a great job with his team in the Lower 48 on the efficiency side. I think it manifests itself on the performance of the company in the first quarter, in the production performance despite having the impacts from winter storm Uri. So maybe I’ll have — Nick can comment a little bit, we do for the rest of the year and profile we do have some turnarounds coming, so I can let Nick for that, I think, which is the second part of your question around what does that profile look like. And in the last half or last three quarters of the year.
Nick Olds — Senior Vice President, Global Operations
Okay. Yes. Thanks, Ryan. Paul, yes, just quickly the turnaround impacts are very consistent with the prior years. Our heavy turnaround season is in 2Q, but even more so in 3Q. So if you look at 2Q, you got about 15,000 barrels a day in 2Q that’s mainly Norway maintenance work. And then if you look at 3Q it is about 25,000 barrels a day. So see higher downtime and that’s mainly in our Western North Slope Alpine assets as well as Greater Prudhoe Bay. Again this maintenance crossed, so 15,000 barrels and 25,000 barrels in 2Q, 3Q respectively. And that has been included in our guidance.
Ryan Lance — Chairman and Chief Executive Officer
And if I didn’t fully answer your question, Paul, sorry, but I don’t think M&A is done in our business, I still think there is consolidation that will occur and needs to occur. There’s too many players and it’s more difficult with these kinds of prices clearly, but don’t be surprised if you see more of it in our industry because I think it still needs to take place.
Operator
Thank you. Our next question comes from John Freeman from Raymond James.
John Freeman — Raymond James — Analyst
Good afternoon. Just a follow-up on Stephen’s question earlier, where following the Concho merger, Lower 48 makes up half the company’s production and again realizing that your primary focus is just on low-cost supply, but just sort of how you think of kind of the long-term balance, you’re kind of striving forward with the short cycle versus long cycle production, obviously you’re benefiting tremendously with the uptick in the short cycle production just with the oil prices, it’s had a big move up. Just maybe longer term, how you think about the balance and does it — does the answer change at all based on the commodity environment?
Ryan Lance — Chairman and Chief Executive Officer
No, not really. I think we’re hyper-focused on cost of supply. We’re pretty agnostic to gas-oil short, long, which is why we’re interested in the North Field Expansion in Qatar and continue to have interest in that and continuing to add to — and improve our Lower 48 operations. So I’d say we are really — we don’t really have a ideal blend in mind and we’re trying to drive to over time, we’re pretty agnostic and just focused on the best rocks. They deliver the best returns. That’s the competitive advantage in this business.
Operator
Thank you. Our next question comes from Leo Mariani from KeyBanc.
Leo Mariani — KeyBanc Capital Markets — Analyst
Hey guys. A couple of quick questions here for you. Certainly just noticed that your first quarter of ’21 Permian production was very strong. I did the math right, looks like it was up about 317,000 barrels a day versus the fourth quarter of ’20, which looked to be well in excess of the contribution from Concho, which I think closed kind of mid-January here. Just trying to get a sense of what kind of drove that strong performance? Was there maybe like a larger group of wells that maybe came on in such a fashion that you saw a bunch of upside? On the production is it stronger well performance, kind of what drove that here in the first quarter?
Tim Leach — Executive Vice President, Lower 48
Yes, Leo, this is Tim. We were projecting entering the first quarter, at a pretty high rate coming out of last year. And then with the storm slowed the capital down but didn’t really slow too much of production that was coming in from our carry-on activity. And so I think as Ryan said, you’ll see kind of more steady approach throughout the rest of the year, but it was an excellent quarter. Everybody is in all the regions are hitting on all cylinders. I’m really pleased with the performance.
Operator
Thank you. Our next question comes from Raphael Dubois from Societe Generale.
Raphael Dubois — Societe Generale — Analyst
Hello. Thank you very much for taking my questions. The first one is on the North Field Expansion. With so many players earmarked with interest, can you tell us a bit more about how you can get involved in this project? It cannot just be about the price tag you’re willing to accept I guess. So what are you going to bring to Qatar that will make them except to work with you? That will be my first question, please.
Ryan Lance — Chairman and Chief Executive Officer
Yes, Raphael. I think it’s — it goes back to our long-standing commitment to Qatar and we’re in Train 6 Qatargas 3 project, been there for a long time and I think we’ve demonstrated the value. We have a water center in Qatar. So we’ve had strong relationships with the Qataris and to your point it’s not only about sort of the bid level, it’s about the long-term relationship and the past relationship the historic relationship that we’ve had. So they’ve been a great partner. A great honor to deal with. So I think just like anybody in our competitors, we rely on the history that we’ve got in the country and the opportunity that sits there. And then we’ll have to be competitive in our bid and — but it has to work for us. So it has to be competitive in our financial framework. So it cuts both ways.
Raphael Dubois — Societe Generale — Analyst
Great. And I have to ask you an ESG question. I understand you have this net zero emission target by 2050. You gave an intermediate target for 2030. Can you without preempting too much with what you will tell us in June, how to bridge the gap between 2030 and 2050? Do you already have an idea of what will be another layer of absolute reductions and what will be the offset — the use of offsets that you will be contemplating?
Dominic E. Macklon — Senior Vice President, Strategy and Technology
Yes, Raphael, it’s Dominic here. So I mean I think the — there’s really two main trust there. The first is that we have a tremendous amount of work around the business units around reducing emissions. This year we have about 50 projects, reducing our scope one and two emissions by $80 million, some great examples across Lower 48 and around the world. But in addition to that sort of incremental gains each year. We have launched our low carbon technologies team and that’s very much in support of our Paris aligned climate risk strategy. Their primary focus is on those opportunities most relevant to our core business to support this. And also to our core competencies. So areas of focus include renewable power sources to further reduce the emissions intensity of our operations that’s scope one and two, carbon capture use and storage and also carbon offsets are areas of the initial focus. So I think these are the areas that we’re looking at right now and we expect to develop those very much through the coming years.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Hilda this is Ellen, we’ll take one final question, if you don’t mind.
Operator
Thank you. The question comes from Neal Dingmann from Truist Securities.
Neal Dingmann — Truist Securities — Analyst
Thanks for squeezing me in. Maybe a question for you or Tim just given, you’ve talked about all the debt repayment you’re doing and I was looking obviously you’ve still got a massive Lower 48 portfolio. My question is and thirdly, even to that we’ve seen some very outstanding sales most recent was a smaller Bakken one just the last [Phonetic] there. So, my thought is pertaining to your Bakken, I noticed to mention I don’t think any rigs running in that area. Would you think about bringing forward either value from that or any other assets forward given the large size of your entire international portfolio?
Tim Leach — Executive Vice President, Lower 48
Well, I mean we are looking over everything Neal. So it globally and here in the US I think post transaction with Concho, we want to make sure that every assets competitive in the portfolio and we’re not lost on the fact that it’s a reasonable market right now for sales, so you’ll hear more about that in June.
Ellen DeSanctis — Senior Vice President, Corporate Relations
Hilda, I think we’ll go ahead and wrap up if you don’t mind, give our listeners any closing instructions. I appreciate everybody’s time and attention. I will see you in June.
Operator
[Operator Closing Remarks]