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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Fourth Quarter 2017 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, VP, Investor Relations and Communications. You may begin.
Thanks, Christine, and hello everybody. Welcome to today’s earnings call. Our speakers today will be Ryan Lance, our Chairman and CEO; Don Wallette, our EVP of Finance, Commercial and our Chief Financial Officer and Al Hirshberg, our EVP of Production, Drilling and Projects.
Our cautionary statement is shown on Page 2 of today's presentation. We will make some forward-looking statements during this morning’s call that refer to estimates or plans. Actual results could differ due to the factors described on this slide as well as in our periodic SEC filings.
We will also refer to some non-GAAP financial measures today and as to facilitate comparisons across periods and with our energy and E&P company peers. Reconciliations of non-GAAP measures to the nearest corresponding GAAP measure can be found in this morning’s press release and on our website. Finally, during this morning’s Q&A just to be efficient with our time, we’re going to limit questions to one and a follow-up.
And now I’m happy to turn the call over to Ryan Lance.
Thank you, Ellen, and welcome everyone to today’s call. We’re excited about the release we issued this morning, in it we provided a summary of 2017 performance, but also announce several significant actions we’ve already taken in 2018, that should send a very strong message about our commitment to saying discipline and continue to deliver our returns focus value proposition.
For ConocoPhillips, our value proposition is an approach to the E&P business with same that delivering predictable performance and superior returns through cycles not chasing the cycles. Our strategy works when prices are below $50 per barrel like they were for much of 2017 or 60 plus per barrel like they are right now. The value proposition is focused on creating long-term value and winning back both energy and generalist investors to a sector that has underperform for far too long.
Industry is in the early innings of the earnings season, but what you’ll hear from ConocoPhillips today is that we’re not only sticking to our disciplined plan we’re building on it. And that’s what we’ll point out to you on slide number 4. In the middle column of this slide we’ve listed the things we’re focused on as a company namely having a low cost of supply portfolio, generating top tier free cash flow and returns, maintaining a strong balance sheet, distributing a differential payout to shareholders, growing cash flows via debt adjusted per share production growth and last but certainly not lease demonstrating leadership in ESG.
On the left side of this chart, we’ve listed some of the key 2017 achievements that allowed us to fully activate our value proposition across these focus areas, let me step through those now. As you know, we had a very significant portfolio reset in 2017. We substantially reduce our exposure to North American gas and oil sands with dispositions that generated about $16 billion of proceeds. Excluding disposition impacts we delivered organic reserve replacement 200%. Our lower sustaining capital and our pure leading sustaining price enabled us to deliver top tier free cash flow.
At 2017 average print prices of $54 per barrel, our cash flow from operations exceeded CapEx by $2.5 million. Return to corner on profitability with full year adjusted earnings of more than 700 million. And more importantly, we are in a much stronger position to deliver improved cash and financial returns even at crude prices of $50 per barrel or less.
We reduce our debt by almost 30% to less than 20 billion and improved our credit rating. We returned 61% of our cash flow from operations to shareholders via our dividend and buybacks. Last year, we grew the dividend 6% and repurchased 3 billion or about 5% of our shares. Underlying production grew on a per debt adjusted share basis by 19% and we continue to emphasize CFO expansion not production growth for growth's sake.
We delivered on our operational metrics, while achieving one of the best years ever on safety and I’m extremely proud of our organization for this, we can never take our eye of that ball. And in 2017, we announced a long-term target to reduce greenhouse gas emissions a significant step forward demonstrating our commitment to ESG. So fair to argue that 2017 wasn’t an exceptional year for ConocoPhillips, but we know that’s the past and what matters now is what's next.
We laid out a 2018 plan a few months ago that was based on $50 per barrel WTI prices. So, the prices have moved quite a bit higher since then. So, the obvious question is will our plan change. The answer is no, not with respect to our organic investment plan. Our 5.5 billion capital plan is unchanged from what we outlined in November. Of course, that excludes the bolt on transaction in Alaska we announced this morning for 400 million. This is a very a very attractive transaction that allows us to consolidate our existing position on the Western North Slope where we have an ongoing development activity and an exciting 2018 exploration program currently underway.
Even with the higher prices today we believe it's critical to maintain discipline on our capital program, why, because that’s the key to free cash flow generation and through cycle returns. While we would expect 2018 cash flows to be significantly higher at current prices we are not increasing capital activity.
Instead of increasing CapEx we are following our priorities by allocating excess cash flow toward our dividend, our balance sheet and our share buybacks. We have already paid down an additional 2.25 billion of debt this year, we just announced a 7.5% increase in our quarterly dividend and we are up sizing our plan to 2018 share re-purchases by over 30% to 2 billion. By the way this represents a total of 5 billion in buybacks when combined with our 2017 re-purchases.
We are on track to deliver 13% production growth on a per debt adjusted share basis largely from activating our high margin lower 48 plan. Again, our goal is cash flow expansion from high margin volumes not growth for say. And we will stay focused on our ESG leadership throughout the year.
So, while the outlook for the business looks better than it did just a few months ago we are not changing our plan. We are staying committed to our priorities and taking steps early in the year to deploy additional cash from the stronger outlook to our shareholders. 2017 was a very strong year for the company and we certainly intend to make 2018 another strong year by safely executing and delivering on our plans.
So, let me turn the call over to Don and he will discuss some of our financial highlights.
Before I recap the fourth quarter results I want to summarize some notable milestones since our November analyst and investor update. In December we reached the successful conclusion of our arbitration with Ecuador, allowing us to recover over $300 million. Also, in December we retired 1.3 billion of debt which took our yearend balance sheet debt to 19.7 billion. And as Ryan just mentioned we also front end loaded our 2018 debt reduction paying down a further 2.25 billion in January. Today our debt is about 17.5 billion.
In the fourth quarter we have re-purchased a $1 billion of stock and completed our 2017 buyback target of 3 billion. And finally, we have been evaluating the recent U.S. tax legislation and its overall impacts to the company. As you have seen in our news release we recognized a noncash benefit of approximately $850 million, primarily associated with revaluation of our U.S. deferred taxes to the lower rate. We’ll also see an improvement in our earnings going forward because of the lower effective tax rate.
With lower 48 unconventionals and Alaska development being core to our capital program, the lower U.S. tax rate and enhanced capital recovery will further enhance the attractiveness of those investment programs. So as an active finish to 2017 and we're entering 2018 with the same strong conviction about our value proposition.
If you turn to Slide to 6, I’ll cover adjusted earnings for the fourth quarter. 2017 full-year adjusted earnings were about $740 million. This was an increase of around $4 billion compared to 2016. Fourth quarter adjusted earnings were $540 million or $0.45 a share compared to the prior quarter, this was an improvement of about $350 million due to higher price realizations and higher volumes, partly offset by higher operating cost.
Compared to the fourth quarter of last year, adjusted earnings improved by about $850 million, driven by higher commodity prices, higher underlying production and lower depreciation expense. Fourth quarter adjusted earnings by segment are shown on the lower right. The supplemental data on our website provides additional financial detail on our segments.
If you turn now to Slide 7, I'll cover cash flow during the quarter. First, looking at the sources of cash shown in green, cash from operations excluding working capital was $2.5 billion. This includes a benefit of about $300 million associated with the Ecuador arbitration. Excluding this benefit, we were right in line with our published sensitivities.
The uses of cash are shown in red and we've already covered the debt reduction. On capital, I want to note that the $1.5 billion included about $230 million in land acquisition costs, which Al will cover in a few minutes. We also distributed $1.3 billion to shareholders through dividends and share buybacks. We ended the quarter with $8.2 billion of cash and short-term investments and we also hold 208 million shares of Cenovus.
Before leaving the quarter, I want to take a moment to make a few comments about realizations in the quarter and our leverage to price upside. We're not certain that the market fully appreciates our differential exposure to rent and similar premium markers. Partly due to our global diversification and partly due to the pricing of our U.S. production, our realizations correlate much closer to Brent than they do WTI.
If we look at fourth quarter about 83% of our global oil production was priced either on a Brent basis or a premium marker that’s closely correlated to Brent. The evidence of that pricing advantage is shown in our crude oil realizations. Brent increased by $9.13 a barrel from Q3 to Q4 and our U.S. oil realizations increased by slightly more $9.50 whereas WTI weakened relative to Brent by over $2 a barrel. You can see that we don't have the same exposure to relative WTI weakness that other AMPs do.
So, we are in a very strong financial position today, with significant leverage to rising commodity prices. We believe we have differential upside to prices because our portfolio is un-hedged, heavily weighted to Brent, and predominantly intact in royalty regimes, and we also benefit from contingent payments as a result of the recent transactions.
I want to leave the 2017 financial review with a slide that emphasizes our focus on free cash flow generation, and on our disciplined priorities. Slide 8, illustrates our priorities at work.
Starting with the first set of bars on the left with Brent averaging just over $54 a barrel in 2017 we generated 7.1 billion of cash from operations excluding working capital. We spent 4.6 billion of capital which resulted in $2.5 billion of free cash flow. Our free cash flow generation power is a result of our low capital intensity, low sustaining price, and leverage to price upside. Either have these things or you don't and we do.
The second set of bars shows the significant progress we made on our balance sheet and distribution priorities in a short period of time. In 2017 we generated 14 billion of cash in proceeds, cash proceeds. We used $11 billion of this cash to reduce debt and to fund buybacks. So, in the course of the year our portfolio and balance sheet were significantly transformed and our shareholders received more than 60% of cash from operations.
Lastly a reminder we provided 2018 guidance as well as earnings and cash sensitivities in the appendix of the deck. I want to draw your attention to two items that have positively impacted our income sensitivities. First, our 2018 DD&A guidance of 5.8 billion is improved by 1 billion versus 2017 actuals. The reduction is primarily the result of our 2017 dispositions and the reserve additions that Al will cover. Second our insensitivities also reflect the benefits of the new lower U.S. income tax rate.
With that I'll hand the call over to Al to discuss 2017 reserves and operational highlights.
Thanks Don. I'll begin on Slide 10 with a review of our preliminary 2017 reserves. Final reserve details will be published in our 10-K in late February. We started the year with 6.4 billion barrels of reserves. We sold 1.9 billion barrels of primarily North American gas and bitumen reserves in 2017.
Adjusted for dispositions our pro forma 2016 year-end reserves were 4.5 billion barrels. We produced 518,000 barrels and booked additions of 605,000 barrels. Excluding market factors this represents a replacement rate from net additions of 117% with an FND cost of less than $9 a barrel.
In addition, market factors increased year end reserves by 431 million barrels for a total reserves addition of over 1 billion barrels. This equates to a 200% organic reserve replacement ratio excluding disposition impacts. We exited 2017 with over 5 billion barrels of high quality reserves as part of our 15-billion-barrel resource base that has an average cost of supply below $35 a barrel. This was good performance in a year, when we did not have additions from any major project sanctions.
If you turn to slide 11, I’ll cover some 2017 highlights from our operations. 2017 was an exceptional year operationally. We had our best year ever on safety and environmental performance, while delivering 3% underlying production growth for $4.6 billion of capital. So, let me cover a few highlights.
In 2017, the Lower 48 Big Three unconventionals hit an inflection point and began growing again. In the fourth quarter of 2017 production from the Big Three averaged 236,000 barrels per day, a 10% increase from the fourth quarter of 2016. Also, in the fourth quarter, we acquired about 245,000 net acres of unconventional exploration leases and 3 different early stage Lower 48 plays for $235 million.
We’re still coming -- we’re still coring up these positions. So, we are going to say much more about them today. I’m mentioning it partly to make a point that our fourth quarter CapEx included this capital. So, don’t assume fourth quarter CapEx represents a run rate for 2018.
Across the portfolio, we advanced several major projects including Alaska’s 1H news that achieved first oil in November. In Norway, the first Aasta Hansteen well was spud in November, and the spud will be towed offshore in the second quarter of 2018. We’re still on track to achieve first production before the end of the year.
We also advanced our exploration efforts to two exciting areas Alaska and Canada. We completed the preparatory and permitting work to drill 5 exploration wells in Alaska this winter. In the Montney in Canada, we grew our 100% equity position in the liquids-rich part of the play to over 100,000 acres and achieved encouraging results in our early wells. And finally, we announced the target to reduce greenhouse gas emissions intensity by 5% to 15% by 2013. This is an important step in maintaining our ESG leadership.
So that was a very quick recap of 2017. If you turn to slide 12, I’ll cover the 2018 outlook outlining some key catalyst to watch for in the coming year. As Ryan said at the beginning of the call, we’re committed to keeping our discipline. We’re sticking with the $5.5 billion capital plan we announced in November, while keeping an eye on inflation and working hard to mitigate those pressures if they come. We expect to deliver about 5% underlying production growth or over 10% on a per debt-adjusted share basis.
The bar on the right shows the basis for underlying target as well as the expected range for full year 2018 of 1,195,000 to 1,235,000 barrels per day. Some of you may have notice that the midpoint of this range is 15,000 barrels per day higher than what we showed on our Analyst Day in November. That increase accounts for the fact that underlying 2017 production was 15,000 barrels per day higher than we had assumed at the Analyst day. We expect first quarter production to be between 1,180,000 and 1,220,000 barrels per day. I want to bring one item to your attention.
Early this year, our third-party pipeline outage in Malaysia caused the KBB field to be shut in. In the first quarter guidance range, we have assumed the KBB is offline for the remainder of the quarter. KBB's net gas production was about 25,000 oil equivalent barrels per day prior to the shut in, but we are not adjusting our full year production range for this outage.
A couple of quick comments on the production profile for the year. We will have the usual second and third quarter turnarounds in APME, Europe and Alaska so those segments will dip in the middle of the year and rebound in the fourth quarter. Meanwhile we expect our lower 48 big three volumes to ramp up to deliver the 22% production growth for this year that we showed you in November.
The capital and production guidance I just provided does not include the impact from the Alaska transaction that we announced this morning. As you saw on the release we paid $400 million to acquire the remaining 22% working interest in our Western North Slope assets that we already operate and the 1.2 million gross acres of expiration development leases in the area, including the Willow discovery. We now own a 100% of these assets containing about 200 million barrels of gross reserves and about 900 million barrels of risk gross resource with gross production of about 63,000 barrels per day in 2017. We will begin reporting capital and production from this asset once we get regulatory approval.
2018 will be another busy year and there are some important milestones ahead. Several projects are expected to come online before the end of the year including Bohai Phase 3 in China, Clair Ridge in the UK, Aasta Hansteen in Norway and GMT1 in Alaska. We will keep you informed on these throughout the year. We also expect to enter feed on the Darwin LNG backfill, which is an important step for production early next decade. We have several exploration programs underway and look forward to progressing those in Montney the low 48 and Alaska.
So, to close we remained focused on safely executing the disciplined plan we laid out in November delivering on our goals and keeping you informed during the year.
Now we will turn the call over for Q&A.
[Operator Instructions] And our first question is from Doug Terreson of Evercore ISI. Please go ahead.
During the past year or so ConocoPhillips and a few peers pledged to manage with value-based strategies and as returns on cash flow increased to return capital to shareholders, and this model is clearly being rewarded differently in the stock market. And on this point, I noticed that your spending rose in Q4 and you made a strategic acquisition in Alaska as well but based on Al's comment it sounds like which you consider these to be normal seasonal or maybe opportunistic type expenditures rather than an early-stage expansion of the spending program, is that the correct way to think about it?
Yes, Doug I think that’s exactly the right way to think about it. We are sticking with our base program. We had an opportunistic Bolton opportunity in Alaska that we can talk more about if people have questions. But really that is a separate item from the base $5.5 billion plan that we have.
In terms of the 4Q spending, we had the $235 million of land acquisition that we talked about in the quarter. And so that that brought the fourth quarter in hot, if you subtract back that out and take fourth quarter and multiply by four you get $5.1 billion. So, ex that, that was the pace we were on in the fourth quarter.
Our plan hasn’t changed Doug, we're sticking as we said in our release, we're sticking to our $5.5 billion.
Thank you. Our next question is from Neil Mehta of Goldman Sachs. Please go ahead.
I want you to talk a little bit about the Alaska opportunity set. From conversations with investors, whether it's your existing portfolio or these bolt-ons or will others still a level of skepticism around the cost to supply of Alaska? So, can you talk about how you think about Alaska in the context of your cost of supply curve? And then a little bit more detail about the asset that you've built into the portfolio a little bit more today?
Yeah. Thanks, Neil. Although, Alaska has been one of our legacy areas for a long time for the company. Similar to other parts of our portfolio, Alaska has made some tremendous progress in lowering the cost of supply for the base business up there as well as when we look at the opportunity set for investments to grow and develop.
So, despite us being in Alaska for forty years, the largest producer out there, we still see a lot of opportunity and in fact our production is flat to growing over the next five to 10 years, a lot of that's driven by things like the willow discovery and when we look at that it can piece very well in their portfolio, since that at a cost of supply that is very competitive to investments around the world and we have an opportunity. I think Anadarko was doing some things for their company to improve what they're doing. They had listed -- or expressed a desire to sell some assets and Alpine did one of those. I think we’re the natural buyer because we operate and we have the majority interest in the area. So, we were able to come to terms with them and we think it's attractive for both companies in terms of what they're -- what we're each trying to go do. So, make it made a heck of a lot of sense for us to pick up that interest and be in complete control, 100% owner and control the capital pace and destiny over there. So, yeah, it made a lot of sense for us and it was opportunistic. So, we took the chance and came in doing terms with them.
I appreciate the comments. The follow-up is just the production guidance raised 15,000 barrels a day. It sounds like that’s just rebasing off of a higher 2017 level. Where was the outperformance, was that lower 48, and if any comments there?
Yeah. So, you're right. That is just a rebase. There is a slide in the supplement that does the math for you, but of that 15 increase, 14 of it was delayed timing on asset sales that we assumed back at Analyst Day that were built in. And so, you just get a different base in the production that we had in 2017 and a little bit of it was a little bit higher performance as you saw on our fourth quarter volumes were a little bit above of what we'd assumed at the time of the Analyst Day. But it's mainly just rebasing off that higher underlying production in 2017.
Thank you. Our next question is from Phil Gresh of JPMorgan. Please go ahead.
First question is just on the capital allocation, this will be for Don. So, Don, at the analyst day you guys were based in everything on the $50 WTI scenario obviously WTI is well above that now. But even if you just going up call it $10 on that assumption that the 2 billion or so more of CFO and the amount is incremental, buyback here is about $500 million. So, it seems like there is still a lot of extra cash available particularly if you are not going to be increasing activity or CapEx. So, could you just talk about how you think about that flexibility? And why the decision to raise 500 million versus a different number?
I feel like its maybe the important thing is to note that we are not going to get overly excited about the highest commodity prices right now. I think it's only been about 50 or 60 trading days since Brent broke $60 a barrel so there is a lot of volatility in the market as you are seeing.
We are not changing our baseline; our plans are still based on the same plans that we showed you back in November with the $50 WTI type price. And I think even there we showed you that we had surplus cash bills at the end of the -- over the three-year period. So, we certainly have the capacity to increase the dividend as we announced this morning and also increased to 30% or have a 30% increase in our buybacks.
I would add Phil, that we recognize there's some cash flow generation potential above and beyond what we were showing you at the analyst meeting and I think we wanted to re-demonstrate our commitment to shareholders up top. So, you got the number right $2 billion of incremental cash flow as you go from 50 to 60 in our company and the shareholder got the first call on that through the dividend increase and the incremental $500 million of share buybacks. I'll just remind people follow our priorities. We are pretty clear as we outline then and that’s what we are doing.
Very fair about where we are in the year. I guess just to clarify there is no desire to put more cash in the balance sheet and reduce debt below 15 billion or anything like that, correct?
No, not really Phil we are pretty clear on the $15 billion target by the end of 2019. We do feel like that’s the sweet spot, you start going lower than that adjusting capital structure it really kind becomes inefficient I think and also expensive. So, we are pretty happy with the 15, kind of strikes the right balance for us.
And then my second question is just on the lower 48. If you could give the numbers for each of the three areas of unconventional and then as I look at that 2018 guidance is ramping through the year. Does that mean that you will have greater than 20% growth or you are ramping to a level of 20% growth through the year? I just wanted to clarify that.
We are going to ask Paul a question there for the first piece which is the by field breakdown so he will have something different. So, for first quarter -- I mentioned the 236 for the big three added together, Eagle Ford is 148, Bakken at 67 and Delaware was 21. So those together sequentially were up 25 over the third quarter or about 12% but that’s not a very good number to focus on because we had Harvey deficit in the third quarter. But I think it is relevant to notice that it was up 10% quarter-over-quarter, fourth quarter of ’17 versus ’16.
In terms of your question about how we’re going to move through this year, the 22% is a full year ’18 number versus a full year ’17 number, that’s what we were talking about at the Analyst Day.
The exit-to-exit will of course be higher than that. In fact, I really expect as I look at the timing and the shape of the curve, we were doing a lot of bigger pads now than we were say a year ago more 6 and greater than 6 per wells per pad that make the production lumpy. And so, I don’t expect to be ratable through the year.
But to give you an idea, I would expect our Big Three to exit the year at over 300,000 barrels a day. So, if you kind of eyeball that with where we just were at 236 in the fourth quarter of last year, you can see kind of the pace that will be on. Even though, I don’t expect that to be linear to the year. That kind of exit rate, you can do math and see that will be -- if you look exit-to-exit, it’s a considerably bigger number than 22%.
Why was Permian down in the quarter?
Permian is just lumpiness, it’s just the timing of -- as we’re doing this multi-well pads and when the different wells. When you’re doing a multi-well pad, you got to drill every one of those wells, so you got to come back to complete every one of those wells before you turning to those wells on and of course your other wells are declining while you’re doing. So, it was down 1,000 barrels a day, that’s just, just this kind of lumpiness that you’re going to see through the quarters I’m talking about. So, when first quarter comes along, I don’t expect over-interpret how that’s doing.
I know there has been a lot of -- in fact, one of the messages we heard from investors and analysts, since our Analyst Day some doubt about this 22% number. And I’ve been scratching my head trying to figure it out. So, I tried playing analyst for a day and look back at things as we’ve said before and did we give you some reason to doubt us? I would back and look at the script of the same call one year ago the 4Q ’16 call to see what I said then. And I said, I thought the fourth quarter of ’17 would be 5% to 10% than the fourth quarter of ’16, because we were going to go through a trough there in ’17 and then come up. And in fact, we hit the very high into that range 10% so that to give you confidence.
And then I went back and look at the public data. The public data that you can pull on Eagle Ford, Bakken and Delaware, and you can clearly see that the production rates, the per well production rates of our wells are considerably higher in ’17, they were in ’16 and continue to improve significantly. And so even our Dakota rig that’s moved up that we showed you at AIM has gotten even better since then. And so just, I’m okay, it’s good for you guys to be skeptical so we can prove you wrong later in the year. But there’s just not any data out there that says we’re not going to make it, I feel confident.
Our next question is from Doug Leggate of Bank of America. Please go ahead.
So, Ryan, obviously oil, where it’s standing right now, I don’t want to beat a dead horse here, but you know what's going to happen a year from now. I could still hear people are going to be asking why you’re not spending more money. So, I guess, can I ask you maybe put you on the spot a little bit and you led us through your plans just three months ago. Should we anticipate given what Don said about his comfort with the balance sheet? Should we continue to have these kinds of windfalls over the next two, three-year period but that would be an incremental share buyback? And if I may just go to on the backend where the acquisitions fit in opportunistically otherwise?
Well I think Don said that there is 69 trading days since we approached $60, so I think we are not going to get over our [skews] too much but we are going to follow the market and you should assume that our capital plan and the scope that we laid out and the plans we laid out at the Analyst Meeting are pretty firm and disciplined within the company. So, we are not planning to change that scope. So, we are going to look at incremental opportunities as they become available and that's exactly what we did on the Alaska opportunity. And of course, the $400 million isn't included in that $5.5 billion. So, we recognize that is we execute our plans, then look at our priorities you have to think about how we are delivering money back to the shareholder, what we are putting back into the company and how we are growing and developing the company is the priority as you guide when you go do that. With prices hanging there, we will continue to evaluate as we go through the course of the year, over the next two or three years depending on what prices may do and if you follow our priorities you will see how we will act.
My follow-up, I don't know if you will be able to answer this or if you would really like to answer this, but the $235 million land acquisition I guess has been described as an early stage so it doesn't sound like its Delaware. Can you offer any color as to what you are thinking there and as an add-on is this opportunistic or is this probably going to get some attention because it seems there is a lot of asset holders around the place whether it would be Delaware, Eagle Ford or whatever, they are likely to be asset sellers into this higher oil price environment? So, do you have a scale of where opportunistic acquisitions has kind of ceiling or you look at everything?
So, the acreage acquisition is early life exploration acreage in some unconventional plays around the U.S. We are still really actively trying to call that up, as I talked about. So, when I'm talking about -- because we are in a market today trying to build on some of those positions. So, we are just not going to speak to that today do that. On the opportunistic side we look at a lot, we look at a lot of assets, we look a lot of stuff on the M&A side and it just got to make sense and be creative in our portfolio and competitive on a full cycle basis. So, when we look at an acquisition we have -- we don't just look at the forward kind of spend that we think it's going to take and is that competitive. We look at that on a full cycle basis including what we have to pay for it. So, some of the hot stuff in the Permian Delaware basin that you know is expensive, and while we look at it, it's just not competitive in the portfolio at $30,000 an acre. But obviously we are not -- and some of these opportunities that we are buying there they are very competitive in the portfolio, make a lot of sense. We are [acquiring] up existing positions that we have and we look to do that more often if we got opportunities to do that.
Right we are able to do that if it's less than $1,000 an acre here when you divide the two numbers obviously.
Yes, so they make an incremental amount of sense for the long-term growth and development of the company.
I probably just stretched to get the location but we will wait for that in the future. Thanks, guys.
It will come, Doug, we are just -- we are out there competing and we want to maintain our competitive advantage.
Thank you. Our next question is from Paul Cheng of Barclays. Please go ahead.
Hey, guys, good morning.
Good morning, Paul.
Good morning, Paul.
Maybe, this is for Al. Al when we are looking at the U.S. onshore, the nominal pause is that we are seeing some inflation, but with the productivity gain, do you think that on a per unit basis that your unit costs you will be able to operate or that you are going to see maybe 2% or 3% increase?
Yeah. So…
And you can also maybe…
You are specifically asking about…
I was going to say, you can also comment on international, I think the spot cost is no longer dropping, but do you have any contract being rolled so that your international unit cost may actually be down.
Okay. So, you are really asking an inflation question I guess. Is that the main focus or are you interested in just Lower 48 onshore costs? I'm not sure where your focus was.
Yes, the combination. I mean we know that inflation in the onshore and I don't think we've seen any inflation in the international market, but…
Right. Okay.
But the productivity gain and also project [overall] just trying to understand, how that all ramp-up in terms of your own 2018 versus 2017-unit costs as a result?
Right. So just to remind as where we've kind of been with inflation and deflation, when you look back for the full year 2017, when we do that math it did -- in the year with some inflation Lower 48 and some deflation internationally and when we add all that it comes to a negative $29 million. So, it was a slight net deflation, but you compare it -- so basically about a wash, but compare that to the past two years and in 2015, we had over $1 billion of deflation versus 2014 and then even after that $1 billion we had another $900 million of deflation in 2016 versus 2015. So, this was quite a change from the last two years to come out roughly even. In 2018, in our plan we are assuming some level of inflation is built into that $5.5 billion. But remember as we said during the Analyst Day that $5.5 billon was the amount of inflation we built into that was set for a $50 WTI world, that's the inflation that we have built in there.
And you are talking about CapEx side but on the cash operating costs?
Okay. So, let me talk about our cash operating costs in 2018 versus 2017. Basically, what we're doing is after you adjust out for dispositions kind of one-time items and get to sort of our core pro-forma operating costs is 2017 and then take the unit costs of that with our volume excluding Libya and then what we're doing is holding our unit costs flat in 2018 to what we've accomplished in 2017. What that means is that we're going to have to offset any inflation versus 2017 ForEx pressures. Libya has been producing more and more and we're getting to where OpEx and Libya is alone is rounding to a tenth of $1 billion, it's getting to be significant and also, we have a heavy turnaround year in 2018 versus 2017. So, all of those are putting pressure on our unit costs and our plan is to offset all of those things with greater efficiencies in 2018 versus 2017 to hold our overall worldwide unit costs flat.
Okay. A quick follow-up, actually, no follow-up but a question on Alaska, the bolt-on acquisition if I look at the price you pay it seems like you pay for about $29,000 for daily bill of production capacity or maybe about $9 per barrel of the recovered book barrel if we are using 200 million gross. Those seems very low number. Is this any hidden cost in that that's why that Anadarko willing to sell at such a cheap price? I am trying to understand that is there any other thing that we need to consider when we are looking at those numbers? Those are great numbers.
No there is no hidden things in the deal, what you see is what you get. I think for us clearly this is a core strategic position for us in Alaska. We have got a lot of [Technical Difficulty] in drilling and exploration teams and the things are going to bring us in a Western North Slope going forward. Willow was early evidence of that, but with that over 1 million acres out there we have got a lot of prospectivity going forward. Remember I talked about our compressive seismic at analyst day we have got a compressive seismic shoot scheduled there this winter. So, there is a lot of interesting things that we see is upside that are core to us that I think for Anadarko it just wasn't a core asset for them. So, it's just a little different view of the property.
Our next question is from Paul Sankey of Wolfe Research. Please go ahead.
Al did I hear you say [approximately] in relation to the very strong reserves booking you had no major project expansions last year?
That's correct, yes. So, to come in over 100% excluding the market factors in a year when we didn't have any major projects sanctions is good performance. And it was really driven by the Lower 48. I think that the improved recoveries just talking about you go look in the public data and you will see how much our wells have improved particularly in the Eagle Ford since our latest completion design changes. And that's not only given us higher rates, it's given us improved recoveries. And that combined with getting more mature on these Lower 48 unconventionals, so we have got more well history allows us to book additional reserves and our continuing lowering of unit costs also takes out further in time the economic life of these wells and allows you to book a little more. So those increased bookings in Lower 48 is really what allowed us to do that when you wouldn't have thought we have been able to without any major project adds.
Yes, times have changed Al. So, the outlook for the CRMs of sanctioned maybe for the next two three I guess you may be able to give us just an update on if there is other stuff in the pipeline?
We showed you that pipeline at the analyst meeting that's pretty lumpy. And so, we will have some sanctions over the coming years, things like GMT2 that we would expect for next year. You have got the Darwin backfill that should come after that. And so, recall that what we said at the analyst meeting in November was that in any given year when you don't have any of those we might not make 100% but when you look at it over the next five years and average out those lumpy major projects adds that we will -- we would expect to be over 100%. In this case, I know we didn't have any -- we were over 100% for '17 anyhow.
And then if I could ask you a follow up. I don't want to be negative but there are fees of ForEx and higher oil price type effects in your OpEx cost gains if I understood your commentary on that. Could you just sort of try and give us a pro rata view of where you think that can get to let's say by 2019, I hope that makes sense? I mean you can keep driving it down without all the moving parts for the somewhat micro relative I guess.
Well, I mean my expectation is that as we continue to grow our production that we are going to maintain our unit costs flat as we experience ForEx pressures, inflationary pressures. That we are going to offset those with continued improved efficiency, our operating teams have demonstrated the ability to do that. So, my expectation is we continue to be able to do that. The Libya thing is a little bit of a tough deal, because we don't count the Libya barrels in the unit costs that I'm trying to hold flat. But as they get bigger and bigger Libya now is producing about 3% of our total corporate production. But I'm not using the barrels in my unit cost calculation, but I am including the costs in my costs. So, like I said, it's getting to be a tenth of a billion now so it's -- we may to think about how we are doing that calculation some point. But that's -- I don't see anything come in that's going to keep us from been able to continue to hold our unit production flat.
Our next question is from Alastair Syme of Citi. Please go ahead.
I absolutely agree with Paul, the underlying movement in reserves is a pretty impressive achievement in 2017. As the post, did you have a view on what would constitute an efficient reserve life for the business? Or do you think it's even realistic or right to measure efficiency around reserve loss as a metric?
Well, I mean, I guess, if you look at our RP now with this latest, its north of 10, 10 to 11 kind of range. We think that's a reasonable place to be, but it's not something we are aiming for one way or the other. By selling some of our SAGD assets, that tends to shorten your RP, because those were high RP assets. A lot of what drives that is more mix of the kind of assets that we are developing. So, I think that we don't take any grand meaning from that particular number, we are not trying to manage it in one direction or another.
Our next question is from Ryan Todd of Deutsche Bank. Please go ahead.
Maybe a point of clarification on the corporate tax reform stuff. Is there an impact to your effective tax rate and the -- is there use of the proceeds? Would you expect to repatriate foreign cash and if so will that just go into the mix in the balance sheet or whether there had be any use of those proceeds?
Ryan on the effective tax rate, sure, we'll see a lowering of the effective tax rate. The U.S. effective tax rate will go down about 12%, 14% or so. So, on a global basis that will probably push it down maybe 5% I would say.
Will that have any impact in 2017 on your actual taxes -- on your cash taxes [pays]?
Well as you may recall we are not in a tax paying position in the U.S. and probably won't be until early 2020, so it's dependent on price of course. So, we are not going to see any cash impacts or very small cash impacts until we recapture those historic losses.
And then…
Sorry the other question was on…
Repatriated cash?
Repatriation right, well there is two aspects of sort of repatriation of the cash. We don't expect to do -- to see that. We have always been able to access our foreign accounts without adverse tax consequences. So, there's really no change there. And then as far as the deemed repatriation on foreign earnings of course we have got a lot of historic foreign earnings but they will be deemed repatriation tax on that but we have ample foreign tax credits to offset any impact that would have. So, the net-net result is no impact from deemed repatriation.
And maybe can I just ask one on the Montney, I mean it's come up a few different times during the -- over the course of the presentation. I know at the analyst day you highlighted some of the incremental acres out there over 100,000 acres. Can you talk a little about what the plan looks like to the Montney over the course of this year? I know that there is a spacing test going on in 2018 what's the timing around that? And maybe just general thoughts on what you're looking at in the Montney [indiscernible] this year?
Right, okay, there is a lot of work going on there in '18 to '19 that I would characterize as appraisal work. The problem with these Montney wells is they are so great that if you want to do a spacing and stacking test where you have a handful of wells you got to build quite a bit infrastructure just to handle all the production that comes gushing out. So, to do a single pad spacing and stacking test which is where we're headed we have to -- we have got to build a gas plant, we have got to build a crude condensate processing plant, we got to build a water treatment plant and it's about 35,000 barrels a day worth of capacity on OEB basis, so about 110 million a day gas plant that kind of thing just to be able to hand the production from our appraisal testing. So that's really what we are focused on. We will start construction of those facilities this year and finish the construction next year. And so that will get us into the next round of really solid data on Montney too that will guide our development work, so there will be more to come on that.
Our next question is from Scott Hanold of RBC Capital Markets. Please go ahead.
I was wondering with APLNG in distribution, with where oil prices are, can you just talk through the process you and your partners are going to go through to decide if and when the timing is appropriate in 2018?
Sure, I can take that. I think we mentioned last quarter that APLNG at that time was continuing to build cash balances and they did through their quarter -- no distributions were made during the fourth quarter. But I would say that at current prices APLNG is in a position where they will consider distributions from the company and we would expect that prices whole where they are that we would have regular dividends through the year.
And when would we get better visibility on the timing of that? Is it the next quarter call or is this more of a back half of the year type of event?
I think we'll be prepared to discuss any action that's been taken at the next quarterly call.
Okay. I appreciate that. And my follow-up question. Obviously, you guys are pretty well positioned, especially if these oil prices hold firm, to have a lot of extra free cash flow this year. And it is a prior year priority obviously to invest organically at some point in time. And could your discus if say, circa $60 oil prices are here to say this year. Where would be that first lever as you look to add some organic activity?
Well, Scott, we're staying on our plan. So, you can think about that at least on a capital investment side independent of what happens this year on prices. We set our scope and we're executing that scope this year.
Our next question is from Roger Read of Wells Fargo. Please go ahead.
I was wondering, can we follow-up a little bit on the Barossa field development in Australia, just kind of where that is? There has been some chattering in the press about how that may move forward more aggressively here in '18 and whether or not that is accurate or how you're looking at it?
I think, I talked in the last call about the impressive results we got from the latest appraisal at Barossa and the progress we've been making. We're -- we've been in the marketplace, talking to the key contractors, getting ready to enter feed, front end engineering design on the project. And so, I expect by the time, we get to this, next -- to our next call that we will be -- we will have entered or we will be very close to it, so we're getting close to that point. And then of course we'll have to make our way through to the feed process. But it's continued to move on track on schedule.
And then the unrelated kind of follow-up, lot of talk about, how to keep your OpEx on a per unit basis flat. Let's maybe leave Libya out of it. I'm just sort of curious, it's not like everybody hasn't been focused on costs the last couple of years. What are the sort of identifiable let's say efficiencies or cost savings that you can pull out over the coming quarters and maybe next couple of years?
Yes. What we have in every one of our business units and regions doing is they've each got these kind of challenge processes going, they have got different names for them in each of the different countries. But it's really a ground up process where, we have an organized way of people suggesting ways to save money and sometimes that is our $20 million ideas and sometimes, they're $20,000 ideas. And we've been scooping them all up, and it's a very ground-up organic process. Data analytics has been a powerful course and helped us drive down our costs. And so, it's -- there is not someone silver bullet thing that's driven our costs down. It's been thousands of small things adding up and we're continuing to track, you might have thought that it would have been a low hanging fruit kind of process and there was some of that. But we found that really, we built as soon as a sustainable process now in our operating units going forward. So that's the tool that we are using to continue to offset the upward pressures.
In addition to the hard work of lowering costs that Al just referred to, we also kind of going back to the analyst day when we talked about cash margin expansion of 5% annually over the next three years, we noted that the single largest contributor to that was really the investments that we are making and where we are making them in places like Eagle Ford where the lifting costs are ultra-low. And so, the investments that we are making this year over the next three years are going into areas that are extremely accretive to our corporate unit cost. And so, there's also that investment effect as well.
Our next question is from John Herrlin of Societe Generale. Please go ahead.
Two for Al. Do you expect on this new shell acreage in the U.S. to clear it up this year completely?
Yes, I think so. I mean I think it's a fairly near-term sort of process. So, I think that's right this year.
Next one, could you give the percentage -- I know you don't have your supplemental disclosures out but what was the percentage of your proven reserves that were put as a percentage of total?
Yes, we will have to follow up with you on that to give you those detailed numbers.
And our last question is from Blake Fernandez of Howard Weil. Please go ahead.
Al just been listening to you put your analyst hat on and you made me realize you would be quite a sell side analyst, trust me you [indiscernible] corporate side though.
It's always good to have a backup plan.
I wanted to ask a couple of Don if I could. Just on the DD&A based on our numbers that's going to add just under $1 a share to EPS and I guess I was surprised with the magnitude. I think we had $7 billion post asset sales previously, so it seems to us like the whole move I guess would have just been reserve revisions. Could you just elaborate on that?
No. That's really is, it's the improvement in the reserves primarily in the Lower 48.
And then on the deferred tax I just wanted to confirm the revaluation, the negative $900 million or so it seems like that's fully aligned with basically the revaluation you took on U.S. tax reform. So, I just wanted to confirm going forward like that's a onetime event going forward do you expect that to be either flatter or positive is that the right way to think about that?
Yes, the tax reform and the deferred tax revaluation was a onetime event, I would say onetime but the SEC has given companies the ability to make adjustments to those provisional numbers because they realized the amount of work it takes to revalue company's assets and liabilities, so there might be minor tweaks as we go through the year but that's not really the point. So, if you strip that effect out of the fourth quarter then you would say deferred tax I believe a source of maybe $50 million in round terms slight sources so is basically balanced and kind of a wash.
Okay.
So, we would expect that to -- that's about where we would expect it to be.
Got it. Okay. Thank you very much.
Thank you. I will now turn the call back over to Ellen DeSanctis, VP, Investor Relations and Communications for closing remarks.
Thanks, Christine, and thanks to all of our listeners. We are obviously more than happy to answer any follow-up questions that you have. Thank you for staying over time a bit and we really appreciate your time and interest. Thanks again.
Thank you. And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.