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ConocoPhillips Co  (NYSE:COP)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 12:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to the Fourth Quarter 2018 ConocoPhillips Earnings Conference Call. My name is Paulette, 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. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Ellen DeSanctis, Vice President, Investor Relations and Communications. You may begin.

Ellen DeSanctis -- Senior Vice President, Corporate Relations

Thanks, Paulette, and thanks to our listeners for joining us today. Our speakers will be Ryan Lance, our Chairman and CEO; Don Wallette, our Executive Vice President and CFO; and Matt Fox, our Executive Vice President and Chief Operating Officer. Ryan will deliver some brief remarks, and then today we're going to go straight to Q&A to make time for your questions.

Our cautionary statements is shown on page 2 of today's presentation materials. We will make some forward-looking statements during today's call that refer to future estimates and plans. Actual results could differ due to the factors described on this page and in our periodic SEC filings.

And then finally, we'll refer to some non-GAAP financial measures today, and that's to facilitate comparisons across periods and with our peers. We provided reconciliations of non-GAAP measures to the nearest corresponding GAAP measure in our press release this morning, and also on our website.

And now, I'll turn the call over to Ryan.

Ryan Lance -- Chairman and Chief Exective Officer

Thanks Ellen, and welcome everyone to today's call. In a moment, I will recap our 2018 highlights, but before I do, I'll first want to put those results, and in fact our results of 2017 in context. We're on a path to manage this Company for the business we're in, one that's mature, capital intensive and cyclical. We've embraced this view of the business with a value proposition that we believe should be the new order for E&P companies. Now what do we mean by the new order? We mean a value proposition that repeats our returns and doesn't change cycles up or down.

The market has clearly spoken that it expects behaviors in this business to change and we've led the E&P industry in an approach that can, and we believe, will attract investors back to the sector. Our value proposition now more than two years old, is fundamentally structured to offer this. Over this period, we've driven our sustaining price lower and made our balance sheet stronger. We've simultaneously grown our resource base, while lowering its overall cost of supply. We've achieved competitive per share growth, not chasing absolutely growth and we returned a distinctive payout of cash flows to shareholders, kept our costs in check and generated among the most competitive financing returns in the business. We're encouraged that our value proposition is clearly resonating with the margin. For us the value proposition is a mindset and a commitment that began in late '16, worked in 2017 and worked again in 2018.

So with that, let me summarize our 2018 results on slide 4. Starting with the strategy column on the left, we held firm on our priorities. During this year, Brent prices touched $80, but also $50 a barrel. But our priorities didn't change and this consistent approach allowed us to generate a return on capital employed of 12.6%, that's nearly a 20% improvement over our ROCE, when Brent was $109 per barrel just a few years ago. We increased our dividend, we accelerated our debt reduction to achieve our $15 billion target 18 months ahead of plan, and we repurchased $3 billion of shares. We've executed just over $6 billion of buyback since our program began in late 2016, with about $9 billion remaining on our existing authorization. Including our dividends and buybacks, we returned about 35% of our CFO to our owners. All this was funded organically from free cash flow.

We have $5.3 billion of adjusted earnings, $12.3 billion of cash from operations and $5.5 billion of free cash flow. We ended the year with $6.4 billion in cash and short-term investments on the balance sheet. To review cash is an effective means to ensure that we can -- can execute our consistent programs of our buybacks and CapEx through the cycles. Our financial position is very strong and we execute -- exited 2018 A rated by all three major credit rating agencies. And we achieved a settlement agreement in our ICC proceedings with PDVSA to fully recover an arbitration award of about $2 billion, of which we recognized over $400 million in 2018.

Operationally, I'm proud of the way our organization performed. We safely executed our capital program and achieved underlying production growth of 18% on a per-debt adjusted share basis. We got help and strong performance on our Lower 48 business and from project start-ups across our regions. Finally, we made great progress on our continuing efforts to add to our low cost of supply resource base and optimize our asset portfolio.

We completed the high- value asset acquisitions and achieved significant exploration success in Alaska. We progressed our Montney appraisal program in Canada and began exploring on our new Louisiana Austin Chalk play. Our portfolio high grading continued in 2018. We generated about $1.1 billion of disposition proceeds and we grew preliminary year-end reserves to $5.3 billion barrels of oil equivalent. The total reserve replacement rate was 147% and our organic reserve replacement rate was 109%. Our year-end resource base now contains roughly 16 billion barrels of oil equivalent with an average cost of supply of less than $30 a barrel. This is the fuel for our continued success in our approach to the business.

So in summary 2018 was another exceptional year for ConocoPhillips . But again, 2018 is behind us. What matters now is what's next. And that's a great segue into 2019. So in December, we laid out an operating plan that we believe can and will sustain our success. It's a plan that's resilient to lower prices, while offering investors virtually uncapped upsides to higher prices. This is an intentional and sometimes overlooked aspect of how we've positioned ConocoPhillips. We play all time to the field (inaudible).

Our 2019 operating plan is summarized on the next slide. You'll see in the upper right that we're sticking with the core elements on our value proposition; discipline, our focus on free cash flow generation, investing to grow cash flows and distinctive returns to shareholders. We've already announced the 2019 capital budget of $6.1 billion, plant production growth of 5% to 10% on a per-debt adjusted share basis and buybacks $3 billion for the third year in a row. This is consistent with our dollar-cost average approach to repurchases. Our 2019 capital plans had good activity and some potentially impactful operating milestones, several of which are shown on this page.

I'll make a quick tour of the items starting with Alaska. In 2019, we will advance construction at GMT-2 and conduct another season of exploration and appraisal drilling. In December, even before our ice road campaign began, we drilled two exploration wells from existing pads. Our Montney 14-well pad program is in full swing in Canada. And in the Lower 48 Big 3, we expect to grow production by about 19%. We're focusing our activities in the early part of the year on testing potential resource enhancing programs such as multi-well pilots of our Vintage 5 completion techniques, EOR pilots and refracs. Given these activities, we expect volumes in the Big 3 to be relatively flat in the first half and ramped in the second half of the year. In the Louisiana Austin Chalk, we've already started our four-well exploration program and I expect to have results later this year. And we expect to advance discussions and decisions on a few major projects in Asia, including Bohai Phase IV in China and the North Field expansion in Qatar and Barrosa in Australia.

Guidance on this page represent opportunities to have low cost to supply resource, strength in our portfolio and create optionality for the future. Importantly, as we see results from these opportunities, we will retain flexibility on how and when we invest in most of these projects. You should expect us to prioritize and phase these investments in a way that it's aligned with our value proposition.

As the year plays out, we will update you on our results across each of these fronts, and we anticipate providing a comprehensive, multi-year update to the market in November. We're excited to get another year out of the way. We believe our 2019 operating plan reflects what you've come to expect from us. It's consistent with our priorities focused on growing long-term value and underpinned by our commitment to strong execution. This is our formula for delivering superior returns to shareholders through the cycles, and for many years. It's a formula we believe works and we're sticking to it.

So with that, let me turn the call over to your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instruction). And our first question comes from Paul Cheng from Barclays. Please go ahead.

Paul Cheng -- Barclays Capital -- Analyst

Hey guys, good morning.

Ryan Lance -- Chairman and Chief Exective Officer

Good morning, Paul.

Paul Cheng -- Barclays Capital -- Analyst

Ryan, just curious that it seems like that you still have running room in Eagle Ford and probably -- I knew it would less than in Bakken I presume. Based on what you see today on the business, I don't know whether -- you can actually -- you are saying that, oh, this is what I planned. Is the plateau one way going to be on those two basins? And once you get there and how fast you can get there, and once you get there, what kind of rig program you need to sustain in and how long that you can sustain at that peak production?

And second question is real short one whether you receive any payment from APLNG?

Ryan Lance -- Chairman and Chief Exective Officer

Yeah, let me -- I think Matt could probably a little bit of color. Paul and Don can cover the APLNG question as well. But I would just say at a high level, we continue to find new technologies and new approaches. We talked a little bit about testing our Vintage 5 completions in the Eagle Ford. And what we see is continuing lowering cost of supply and opportunities to continue to grow that opportunity. And in fact Bakken had an outstanding year into 2018. We reached some plateau and suggested that to the marketplace and we outperformed in 2018 and we see some similar opportunities there as we go forward. Matt can maybe provide a little bit extra color for you there.

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah. Paul, we were running six rigs in the Eagle Ford just now. We actually dropped a rig at the beginning of the year in Eagle Ford to optimize the ratio of our rigs to completion crews. And we're running three in the Bakken and two in the Permian. They -- those are sort of rig levels we would be at continuing to grow in the Eagle Ford. But if we run those rigs continuously, we'd ultimately reach a plateau and we'd be able to hold that plateau for well over a decade, maybe two decades. In the Bakken we -- as Ryan said, we thought we were at plateau, but we've had some improved results from our drilling and completions there and we had more partner-operated activity. And so, we're now at higher rate than we anticipated and that can probably be sustained close to that rate for a decade and more. And then of course, in the Permian, we're very early in the life cycle there, so that's several years of growth ahead of it before it reaches a plateau.

Paul Cheng -- Barclays Capital -- Analyst

Matt, do you have a number you might add on in Eagle Ford that where is the plateau maybe for you guys? And also that if you guys don't mind give me the production number for the Big 3 in the quarter?

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah, we -- no, we don't have a number that we're ready to share on the plateau rig because as a function, the number of rigs that we run over the long term. So that will be -- what we are trying to do (inaudible) is optimize the rig count, so that we optimize the infrastructure costs. And this is all of them maximizing the NPV as we learn more about -- of our new completion designs. For example in Eagle Ford that may change how we view that. So it's premature to go there. In terms of the rates for the Big 3 in the fourth quarter, yeah, I can give you the list -- we -- I don't have them off top my head here just now, we can get those for you.

Paul Cheng -- Barclays Capital -- Analyst

Okay, thank you.

Ellen DeSanctis -- Senior Vice President, Corporate Relations

Paul, I'll come back to in a moment. Ryan want to answer the...?

Ryan Lance -- Chairman and Chief Exective Officer

Yeah. Paul, with respect to APLNG payments, I'm sure you're referring to the distribution. So in 2018, we had total of $480 million of distributions from APLNG and you'll recall, we had $200 million in the first half. I believe that I had probably guided that the second half would look similar to the first half and we ended up with a larger dividend distribution payment in the fourth quarter of $280 million, and that's really a reflection of a number of things, but probably mostly the high realizations -- the LNG prices on a three months lag. So fourth quarter LNG pricing or realizations really reflect third quarter oil prices. So really good revenues at APLNG and of course, they've made good progress on reducing costs, both on the operating side and on refinancing opportunities on the project financing. While I'm here, I know that you'll be curious about expectations for 2019 looking forward, and I would say that you've got to pick a price point because it is going to be very much influenced by actual realizations during the year, of course. But if they around say $65 a Brent then I'd probably expect distributions to be in the $500 million to $550 million range.

Matt Fox -- Executive Vice President and Chief Operating Officer

And Paul, I have the fourth quarter average rates for the Big 3. It was 200 and the Eagle Ford, 101 in the Bakken and 34 in the Permian.

Operator

And our next question comes from Doug Terreson from Evercore ISI. Please go ahead.

Doug Terreson -- Evercore ISI -- Analyst

Hi, everybody. Congratulations on your results.

Ryan Lance -- Chairman and Chief Exective Officer

Thanks, Doug.

Matt Fox -- Executive Vice President and Chief Operating Officer

Thank you, Doug.

Doug Terreson -- Evercore ISI -- Analyst

I have a financial, and a strategic question today. First, return on capital appears to be rising even after normalizing for changes in oil and gas prices, especially in the US business. And on this point, I want to see if you guys could provide some color on the drivers of this dynamic, meaning, is it gains and capital efficiency, the technology, is it costs or is it something else driving these improvements? So just some color on this improvement in this area.

Don Wallette -- Executive Vice President and Chief Financial Officer

Well, Doug, this is Don. I would say yeah, it's all of the above. If you look at the transformation that we've undergone in the last two to three years, certainly more capital efficient, more disciplined, a greater focus on returns and less of the priority now, of course. And so, you can go back to a lot of the portfolio changes that we've done to lower our cost of supply and our sustaining price. I think all of these things, reducing the debt and our operating costs, I think we're from like $10 billion to $6 billion, taking capital down from $17 billion I believe, in 2014 down to the current level around $6 billion. It's just efficiency on all fronts.

Doug Terreson -- Evercore ISI -- Analyst

Okay. And then also strategically, Ryan, you reiterated your pledge to your new order value proposition, which has obviously served shareholders and that COP has been the best stock in S&P Energy since you've implemented the plan two years ago. Simultaneously, companies with past success in this industry often mission drift and that often results in strategic activity. So while most E&P acquisitions were done at about half of a quarter or capital cost over the past couple of years and were therefore doing pretty negatively in the market, valuations have fallen further and I wanted to see how you guys were thinking about strategic activity these days and if there are areas of interest, why and what are they?

Ryan Lance -- Chairman and Chief Exective Officer

Yes, Doug, we do get quite a lot of questions. I appreciate your (inaudible) sort of articulate our views a little bit about the M&A side. Really for us, it's about strategic portfolio of choices and we've been pretty deliberate in that space over the last couple of years and since the spin of the Company, it's also been on the disposition side with $30 billion and I would also remind everybody half of that went to the shareholders and half went to reduce the debt on the balance sheet. But we have been involved in some more strategic and smaller-scale acquisitions like adding acreage opportunities in the Montney and the Austin Chalk and where we think we have a clear competitive advantage like the asset deals we did last year up in Alaska. So when we think about that, we consider our asset quality diversity, resource debt and operating cost. So we think about do we add in -- and adding those four categories around the portfolio, but our portfolio is in pretty good shape, 16 billion barrels of low cost high resource base that's Brent weighted. It's diverse, it's deep, it's material. So we are not feeling any pressure to do anything. It just has to be value-adding and substitutive in the portfolio. That's kind of where we stand out in the Company.

Now broadly within the sector, consolidation should result in more disciplined capital allocation, slower growth and ultimately strengthening oil prices and help investors back into our sectors. When you consider, I think that on a sector basis, you have to consider things like the value that you pointed out, synergies, the timing, the market reaction to it. And what we find it's tough on a valuation perspective. If you are going to implement a disciplined capital allocation program like we have in place, you really need to slow down the growth rate for any acquisition target that you look at, but that growth rate is built into their valuation and then you usually have to pay us a premium on top of it. That makes it extremely difficult.

Synergies, tough to realize with some of the pure plays than the private equity companies that are out there. They just -- unless you have adjacent acreage and infrastructure, there's just typically not many synergies. Timing is tough at the low point of the cycle, Board rooms are reluctant to sell and obviously (inaudible) shares, to got to go do something. And then you touched on as well, what's the market reaction? It has not been good. So people have been punished because they seem to be overpaid. So, we pay attention to it, in which we -- we looked at it, we watch it, we see all the opportunities, got to be competitive in the portfolio. We understand what we like and what might fit, but it takes a real special deal to where we feel like it's a good use of a shareholder capital.

Paul Cheng -- Barclays Capital -- Analyst

Thanks for the comprehensive answer, Ryan.

Operator

Our next question comes from Phil Gresh from JPMorgan. Please go ahead.

Phil Gresh -- J.P. Morgan -- Analyst

Hi. Good morning. First question, I guess would be for Don. You're at your $15 billion gross debt target, but you have over $6 billion of cash, so your net debt is now below $9 billion. Wondering how you're thinking about that today in terms of willingness to take the gross debt down more or -- obviously, it provides you a lot of flexibility in a downside price case, but in an upside price case, you'd be building even more cash. So how are you thinking about what you want to do with that?

Don Wallette -- Executive Vice President and Chief Financial Officer

Yeah. I think Phil, we're still at the same place we were as far as capital structure of the Company and as far as gross debt. So, we're really not contemplating anything to further reduce the balance sheet debt. I think this is more of a cash utilization-type question and the reasons why we would maintain levels of cash -- high levels of cash in a positive price environment -- and that's going to speak to a number of things. But obviously, being able to withstand volatile price cycles and being able to run the steady programs and keep our strategy on pace on all fronts as far as buybacks, as far as the base capital program and so forth, gives us the opportunity to take advantage of strategic opportunities, investments that come around that are kind of one-time deals and maybe the potential Qatar expansion is part of that. So it can help kind of refund some of those potential opportunities going forward.

Ryan Lance -- Chairman and Chief Exective Officer

Yes, I'd say -- so Phil, it's not burning a hole in our pocket and remind everybody less than a month ago, people were panicking with $40 crude prices. So we're not doing that, we're staying with our program as Don said, with -- that allows the consistency through the cycles on both the buybacks and the capital invested and follow our priorities.

Phil Gresh -- J.P. Morgan -- Analyst

Yeah. That makes lot of sense. And I guess, the follow-up is to your -- to your last comment there, Don. I feel like one of the most frequently asked questions, I've been getting about ConocoPhillips is the level of capital spending there might be moving forward. You could include Qatar in there, you could include Barossa or a well or so. How do you guys think about the levels of capital spending that might be needed moving forward? I realize you're not going to have an Analyst Day for a while, but any color you might be able to give I think it would be helpful.

Ryan Lance -- Chairman and Chief Exective Officer

Yeah, Phil. Let me -- let take that one on. I know we've gotten a fair number of questions about them. I appreciate you asking about it. Yeah, we're probably not going to provide the clarity that you may want in terms of absolute numbers going forward, we will update the market if some of this resolves, but I think we've been pretty transparent about the opportunities you mentioned in the new field -- in the North Field expansion in Qatar. So we tried to show those beyond your base programs. I just reviewed in my prepared remarks some of the higher impact activities we have under way in 2019.

Now we expect to resolve a lot of the uncertainties and most of it, if not all of those projects as we go through the course of the year. Then we'll take stock of what and when and how we might invest in those opportunities. But I'd tell you I think from our past activity and reputation, we've been intentional about retaining flexibility in many of the projects and we really have the discussion to face the capital investments over time. I think we've also had a pretty successful track record of disbursing assets that don't compete in the portfolio, they are high graded. And that provides another means of flexibility as well. So our goal really is to create the highest returns to our shareholders, while preserving our higher proposition that we're committed to including a focus on free cash flow. So that means we'll be setting and be thoughtful about setting our future plans according to those kinds of premises. So -- and then again, we'll lay that out in a lot more detail are you later in November. We're not going to lose our way by ourselves.

Phil Gresh -- J.P. Morgan -- Analyst

Okay, thanks Ryan.

Operator

Our next question comes from Doug Leggate from Bank of America Merrill Lynch. Please go ahead.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Thanks. Good morning, everybody. Ryan, you guys have set the bar pretty high for the industry in terms of capital discipline. So I think questions that are on the longer-term CapEx are obviously relevant, but I think in the confines of how you've allocated capital, I am curious however, if you see a kind of upside limit on the level of reinvestment as a percentage of cash flow to kind of put it simplistically. I realize you might talk about this a bit more in November, but when you look at the list of opportunities, if you did get Qatar or Barossa or Bohai sanction this year, would your aim be to hold the CapEx within a range or this is the upside (ph) versus the longer-term CapEx?

Ryan Lance -- Chairman and Chief Exective Officer

Well, again as I was trying to say we'll see where the commodity price for the market is at. I think first and foremost, we're committed to giving a high percentage of our cash flow back to the shareholders. So we start by as you've all sort of noticed that 30% is kind of our forward. We're committed to giving 30% of the cash back to the shareholders. So we will fund the Company and will allocate capital to the programs with the remaining amount of cash that we have in the business. But we're going to look at it annually and make sure that we still continue to deliver free cash flow from the business. And as we think about the opportunities that you mentioned, the North Field expansion, Barossa, and somehow we will manage that. We've got control over pace, we've got control over timing, we've got control over what our interest level is, and we've got other ways to control the capital program, and we'll do that. And we'll take that into account as we did. We've got a rich set of opportunities coming our way, and we've got capacity and we've got cash on the balance sheet, but we also know any given year, we're committed to our value proposition and we're going to stay the course.

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

Perhaps just a quick follow-up to that, Ryan. There has been some speculation in the press that you were pursuing our North Sea sale and that sale may have -- not be going forward. Now I wonder if you could offer any color on, on just that specific issue, but also the general portfolio management in terms of non-core assets as they stand today, because I'm guessing that would also factor into the flywheel for your ability to return cash and I'll leave it there. Thanks.

Ryan Lance -- Chairman and Chief Exective Officer

Yeah, you bet Doug. I think Matt's been kind of managing that, the UK process for us. I'll let him kind of provide a little bit of color on that for you.

Matt Fox -- Executive Vice President and Chief Operating Officer

Yes, Doug, we -- our process to market with UK assets continues. But we are no longer on an exclusive arrangement to do that. So we've brought in the process to include several parties and that really has very strong interest in properties. I don't want to comment any further on that, unless there's a material change to report, then we'll turn the line. But we are actively marketing those assets. And in terms of other assets that we might market, we've expressed consistently, and consistently executed on the fact that we will look at the lower end of the portfolio and dispose of assets as they -- as the -- from the timing is right. We did $1.1 billion this year. And so you should expect to see is continue to work on the assets now. We'd say that the major portfolio restructuring is essentially behind us. But that's not to say that there aren't other changes that we've made to the portfolio. And just to be clear, I think you maybe said the North Sea assets. The assets that we are marketing are the UK assets. So I think that's the best way to describe what the state of players are on the disposition front.

Operator

And our next question comes from John Herrlin from Societe Generale. Please go ahead.

John Herrlin -- Societe Generale Cross Asset Research -- Analyst

Yeah, hi. I've got a question on reserve replacement in the US. You had asset sales this year, you've changed the way you allocate capital, reserves declined. What should we think about in terms of your reserve replacement in the US on kind of a going-forward basis, just low nominal growth?

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah. So -- we'll start by explaining what happens to their overall reserve base there. There's a slide in the appendix that we had -- that we posted I think in slide 9, that describes the overall sources of reserve replacement. So we started the year with $5.38 billion and ended with $5.263 billion, that's a lot of decimal places. We produced 483 million barrels. We added 474 million through extensions and discoveries and another 52 million and -- through revisions and improved recovery. So that's where we get to the 109% organic reserve replacement ratio that Ryan mentioned. And then if you look at the acquisitions and dispositions, the net effect of that was 182 million barrels. We added close to 300 million in Alaska through the acquisitions and that was offset by $38 million reduction in the clear disposition and $68 million from Lower 48. So we feel all that together the net effect is we get 147 million -- 147% total reserves replacement.

John Herrlin -- Societe Generale Cross Asset Research -- Analyst

No, I got (multiple speakers) to the Lower 48, Matt.

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah, the Lower 48, I think the best way to think of that is to think about in the context of the resource base the -- because the Lower 48, obviously the booking schedule there is based on SEC rules, is limited to what you're anticipating in your five-year drilling schedule. So when we look at the Eagle Ford, for example, we booked about 500 million barrels of the 2.5 billion barrels of central resource base. And if you look at the other place, we're about 50% booked in the Bakken, 20% in the Eagle Ford, less than 15% booked in the Permian and less than 1% booked in the Montney. So there's a long period ahead of us of continuing to add SEC reserves as we work through this resource base.

So the that we -- what we tend to focus on frankly rather than the reserves is that resource base and then if you look at -- if you look at that from -- for this year, we went from 15 billion barrels last year with the cost of supply of less than $50 (ph) to 16 billion barrels this year with the cost of supply less than $40 (ph). So because we produced about 0.5 billion barrels, that's a resource replacement ratio of 300% and the -- and that's what we are -- that's what we are really focused on. And I think both from a reserves and a resource perspective, we're in really good shape and specifically to your question, we're in really good shape in the Lower 48 because of the way those reserves will be booked over time.

John Herrlin -- Societe Generale Cross Asset Research -- Analyst

Great, thanks Matt. My next one is regarding some of the larger projects that could be approved (inaudible) and I guess, this is more toward Ryan. Are you at all worried about E&C capacity in terms of delivery? I mean obviously, the industry doesn't have the frenzied activity that it did in past cycles, but are you at all concerned about the industry being able to deliver as you commit to these kinds of projects?

Ryan Lance -- Chairman and Chief Exective Officer

Not necessarily, John. I think when you look at the location you look at Barossa where -- out for competitive bid on FPSOs and the market is pretty light right now in Asia-Pacific. So the opportunity itself is out there. Not too worried about that. The subsea equipment associated with that is highly competitive and not real stressed out in the system today. Qatar is going through -- a large expansion in Qatar Ras Laffan. That will probably have its challenges. But I think they've managed it well in the past, and we'll expect them to manage it well going forward. So while it's always a risk, I think we've got the team in place, we've got the capability as a large company like we are and the functional excellence around managing these projects. We haven't lost that as a company. So we'll bring all that excellence to bear on all of these major projects going forward.

Operator

And our next question comes from Roger Read from Wells Fargo. Please go ahead.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah, thank you. Good morning.

Ryan Lance -- Chairman and Chief Exective Officer

Good morning, Roger.

Don Wallette -- Executive Vice President and Chief Financial Officer

Good morning, Roger.

Roger Read -- Wells Fargo Securities -- Analyst

Could you just maybe come back around one of the -- and, Don, you talked about it a little bit, the decline in OpEx, the Company has been able to achieve kind of broader productivity and efficiencies. Wrapping what you can do going forward on that front and maybe if you would, or if you can disclose the underlying decline rate, just kind of want to understand, maybe some of the more -- I guess I'd describe as increasing challenges on being able to deliver continued improvement just from internal things as opposed to maybe some of these future projects that everybody has been more focused on, on the call?

Matt Fox -- Executive Vice President and Chief Operating Officer

And maybe I'll take that one, Roger, this is Matt. If you look at our OpEx, we're still completely committed to the discipline and their OpEx. If you look at what's happening from last year to this year, for example, last year, operating costs, was $5.8 billion, but if you put on a pro forma basis and reflecting the acquisitions and dispositions most notably, they compare it and clear transactions, their OpEx would have been of $6 billion on a pro forma basis. This year we're moving to $6.1 billion, but when you look at the underlying production growth, our OpEx per barrel is going from $12.6 -- it is $12.6 rather and that's $0.20 (ph) less than last year. So the absolute numbers are a bit higher than 2018, but the unit cost is lower and that's pretty impressive when you consider that the acquisition in Alaska are relatively high cost barrels. Of course, they are very high value barrel because it's all oil in the sales of Brent.

And so the fact that we -- that they -- that we added those higher cost barrels and still see a reduction in operating cost per barrel, I mean it's the same that we've -- we're certainly not -- haven't lost the discipline on the cost front and we can see that, that focus is going to remain in the Company from -- over the next several years and we're going to continue to make sure that we're driving our unit costs down over time.

Roger Read -- Wells Fargo Securities -- Analyst

Yeah. Thanks for that. That's actually very helpful. And anything on the underlying decline rate, I can't remember if you've talked about that or not, just wanted to ask.

Ryan Lance -- Chairman and Chief Exective Officer

The underlying decline rate on aggregate is about 10% and (multiple speakers). Yeah, that's how you (inaudible). That takes all the wells that were online at the end of last year, and what would they be producing at the end of the next year. So of course, because we have the and production in LNG and oil sands, which is essentially zero decline, and a very large conventional base that has a modest decline, when we put together that with our unconventionals which of course, decline more quickly, the aggregate effect is about 10% decline.

Roger Read -- Wells Fargo Securities -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta -- Goldman Sachs -- Analyst

Good morning -- good morning, and thanks again for the question -- letting us ask question here. The first one for you is just on Venezuela. Obviously very fluid situation out there and just your thoughts on the ability to collect the capital that's owed to the Company and just some thoughts on the ground of how that plays out from here.

Don Wallette -- Executive Vice President and Chief Financial Officer

Yeah, Neil, this is Don. I'll address that question. With respect to the recent events in Venezuela, we -- a couple of things. I guess one on the Venezuela side and one on -- with respect to the US sanctions, the new US sanctions. I mean as far as PDVSA, today they have fully complied with the settlement agreement that we entered into late last summer as far as making cash payments and providing the inventories that -- what we were entitled to. We are in very regular contact with the officials at PDVSA and they continue to assure us that their intention is to continue to comply with the obligations under the settlement agreement. And I think that their actions over the past seven months or eight months have indicated that ConocoPhillips is currently high on their priority list of creditors.

So we expect that they will continue to comply. Of course, we don't know, nobody knows how things are going to change in the Venezuela and what that may entail. Their next -- they're now on a quarterly payment schedule for the recovery of the ICC settlement and the next quarterly installment is due next month. And we expect to receive it and it appears that they're making plans to satisfy that obligation.

The other part of it is the -- on the US side, related to the US government's recent actions and we are operating under a license from OFAC the Office of Foreign Assets Control that we obtained before we entered into the settlement agreement. We have been in contact with OFAC officials as recently as earlier this week and they have assured us that our license is valid, that we have -- we are strictly complying with that license and they've given us very good guidance on how to go forward. They don't anticipate any issues related to our settlement agreement and so we don't see any complications on that front.

Neil Mehta -- Goldman Sachs -- Analyst

Thanks, Don and then the follow-up question is, is just on Qatar LNG. The timing of that sounds like it's going to be mid 2019. We expect to get a decision about the project partners. How do you see ConocoPhillips position for potential project win there, any thoughts on the latest in terms of returns? And I guess one of the market concerns around Qatar LNG has been around financing the capital spend. It strikes us that you guys have a substantial amount of free cash flow coming up over the next couple of years that shall lame market concerns, even after the dividend and the buyback. But any comments about how you think about financing that capital outlay if the project materializes would be great.

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah, Neil. I'll take that one. The timeline is just as you laid out.Wwe expect decisions to be made by the middle of this year. And the underlying process to achieve that is sort of under way. We think we're very well positioned competitively to participate in the project. And in terms of financing it, we have cash available to finance it, we have a very high free cash flows, I mean -- we're recognizing even this year, we generate free cash flow, any price above $40 a barrel WTI. And so we're not concerned about our ability to finance that. So we are bring -- we're fully engaged in the process with Qatar Petroleum and we'll see how that plays out as we go through the year.

Operator

And our next question comes from Blake Fernandez from Simmons Energy. Please go ahead.

Blake Fernandez -- Simmons Energy -- Analyst

Good morning folks. Matt, on that last point, could you just remind me when if you did go forward with Qatar, when we could expect first production roughly?

Matt Fox -- Executive Vice President and Chief Operating Officer

I think the timeline would be first production between 2024 and 2025, it is when the expectations are. Engineering design is already under way and it is not being slowed down for they are waiting for the final participants to be agreed. So it will be the -- sometime late '24 or early '25 is when we expect that to come to market.

Blake Fernandez -- Simmons Energy -- Analyst

That's great. Thank you. The second question, I suspect you guys aren't as exposed to this. But the feedback we're getting from our E&P team that's covering some of the smaller companies in the space and maybe some of the privates, we're looking at CapEx budgets being ratcheted back and rig count potentially coming down and all of a sudden now we are hearing commentary regarding potential cost deflation in the Lower 48. I know it's early days in the '19 but I just didn't know if you're beginning to witness anything or if you think there's potentially some downward pressure on spending based on kind of peers cutting -- cutting activity levels.

Matt Fox -- Executive Vice President and Chief Operating Officer

Yes, I think last year we saw about $100 million of escalation in the Lower 48 and -- but we are seeing some -- we had some deflationary pressures. For example, the -- in the frac fleet, activity in the low 40s than about 10% just in the last couple of months. So our view is that the frac fleet is about 65% utilization just now. And if you put that together with the big reductions in sand prices because of new main sites opening, we are actually seeing quite a healthy reduction on our completion costs from '18 to '19 and we've built that into our budget. Those were contracts that we renewed toward the end of the year. So yeah, we are seeing some cost reductions on completions. On the high spec rig, on the rig side of it, we're -- higher utilization, about 92% on rigs. And we have options on our rigs through the end of 2019. So I think that -- yeah, there could be some deflation going to show open in 2019 and we already saw some of that showing up toward the end of '18.

Blake Fernandez -- Simmons Energy -- Analyst

That's great, I appreciate the color, Matt. Thank you.

Operator

Our next question comes from Scott Hanold from RBC Capital Markets. Please go ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

Thanks. I had a couple of quick ones. First, you all have somewhere around $7 billion of cash right now, and obviously positioned well to generate more free cash flow. But considering the opportunities that you have in front of you that was discussed quite a bit today, and obviously, our buyback program that's in force right now as well, is there an optimal amount of cash you guys would like to have as a cushion? And so where I'm going with this is, if a number of these large projects do come to fruition, is there a chance you guys can look at saying adding debt to the portfolio to help fund those projects or is that where you come back and say, that's where you look at monetization opportunities and other things?

Matt Fox -- Executive Vice President and Chief Operating Officer

Scott, yeah, I think we've been pretty clear that we're not looking to either raise or lower debt from its current level and I don't know if there's an optimal -- there is not an optimal point of cash balance that we're aiming for on the balance sheet. There -- it's a pretty wide range given the volatile business that we're in and the host of opportunities that we hope to have that are investable in the future. So, now there's really not -- there's not an optimal level of cash.

Don Wallette -- Executive Vice President and Chief Financial Officer

I think I would add them Scott, that you again follow our priorities. We feel comfortable with the capital that we're investing right now. We'll grow the Company, grow margins, grow cash flows for the Company we -- at the kind of level that we're funding today. Given where the portfolio stands, we're going to fully fund our $3 billion (ph) of share repurchases. And above that, to the extent we have additional cash there, we're OK putting it on the balance sheet for now, because we see opportunities that might present themselves in a down market. And also we ask ourselves what the future holds for us, what our commodity price is going to do and that gives us a level of comfort when we have that cash on the balance sheet to know that we can fund the opportunities that we have and we can stand the downturns in receivables.

Scott Hanold -- RBC Capital Markets -- Analyst

Okay appreciate, understood. And as a follow-up. Touching based on sort of the Big 3 unconventionals in the Lower 48, is there an appetite to look at some point to put those more on, hey, we've hit the plateau and they're going to be more on maintenance more. Are we near that point for those say, the Eagle Ford and Bakken or are you still kind of building up to that? And then as you look at the Permian Basin, with your position in the Delaware, what do you see as sort of the optimal kind of pace that you guys can develop that at?

Matt Fox -- Executive Vice President and Chief Operating Officer

So I would say Scott, in the Bakken, we were essentially at plateau. it means, (inaudible). That is not our ambition to grow Bakken further. We can sustain level around where we are just now for a long time. But we don't -- we're used in running two or three rigs and we're comfortable with that in the Bakken. In the Eagle Ford, we're still growing. This year, we're running six rigs and we'll continue to see growth from that and we are, as Ryan said, testing some new technology in the completion designs there, what we called Vintage 5. Once we understand how those new completion design works, we might revisit what the right piece and moderate plateau we have and so on, but there's a few more years of growth for sure left in the Eagle Ford before we get to plateau.

And then the Permian is a long way from plateau. We're running two rigs. just -- maybe you remember last year, but we took a rig out of the Permian as the differentials blew out. I suspect something over the next year or two, we'll put that -- the third rig back to work again there. And but the -- and that will continue to grow for several years before we reach its plateau. You are asking the good fundamental question here for the industry as a whole is, is how do we -- how does the industry think about where the optimum plateau is. And the optimum plateau is certainly not just a year or two, you know you're overbuilding infrastructure if you go there and then the optimum plateau (inaudible) your time value of money. Certainly, we think of this very carefully as we consider the rig -- the pace of rig activity and the piece of infrastructure build and the pace of technology change. So I think we have a good handle on how we should be managing these assets to optimize the value from a plateau perspective and rig count perspective.

Operator

Our next question comes from Jeffrey LeBlanc from Tudor, Pickering, Holt. Please go ahead.

Jeffrey LeBlanc -- Tudor, Pickering, Holt & C -- Analyst

Good morning, thanks for taking my questions. First one's on the upsides for the Lower 48. I was just hoping you could talk a bit more about Vintage 5 testing that you've mentioned a few times now that's going on in the Eagle Ford in terms of both variables that you may be tweaking and then also just a timeline for when we may see some data around at all. And then in the Permian, specifically was hoping you could talk a bit about capital allocation within an asset for you all, just toward getting a sense of operational objectives there in the near term?

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah, I mean the Vintage 5, basically what they are -- we have the sayings to intensify the stimulative drop volume to improve recovery factor, that's the essence behind the Vintage 5, it's the same. We haven't really disclosed that, it's the same, but that's the underlying parameter that we're trying to improve as the recovery factor and improving the intensity and regularity of the stimulative drop volume. So we completed the single well pilot last year and we got really encouraging results there. So what we're doing now is we're going to do three multi-well pilots at different locations and at different spacings within Eagle Ford in 2019. And then two more we have planned for 2020.

So we'll get initial results from that late this year and then more results into 2020. We are also advancing the multi-well pilot Vintage 5 test in the Delaware too, that will be later this year. So results there won't come until 2020. So the --and it's a very interesting technology angle to be pursuing here and we're looking forward to seeing those results.

In terms of the Permian capital allocation specifically, really it is driven, of course, by the rig count and two this year and then sometime over the next year or two growing to -- growing to three rigs.

Jeffrey LeBlanc -- Tudor, Pickering, Holt & C -- Analyst

Great and then my second one is on acquisitions and maybe this is a bit nuance and maybe impossibly rounding air, but you saw in the disclosure with earnings today $0.6 billion for acquisitions for the year last year, which compares $0.5 billion for Q3 earnings. I know that as a bolt-on, the Alaskan Montney has been listed pretty consistently throughout the year. So just wondering if there is any color you can give there on the nature of that incremental $100 million or so that might be implied just for Q4's activity?

Matt Fox -- Executive Vice President and Chief Operating Officer

Yeah. So the acquisition in the Western North Slope is $400 million and Montney acquisition was $120 million. The balance of that is really some additional smaller acquisitions to core up in places like the Louisiana Austin Chalk. So it is -- this way, I can't point to one big one that makes up the difference there. It's several smaller-scale acquisitions and the portfolio that takes us to the $600 million.

Jeffrey LeBlanc -- Tudor, Pickering, Holt & C -- Analyst

I appreciate it.

Ellen DeSanctis -- Senior Vice President, Corporate Relations

Thanks. Paulette, we're getting close to the top of the hour. So we'll take our last question please.

Operator

Thank you. And our last question comes from Michael Hall from Heikkinen Energy Advisors. Please go ahead.

Michael Anthony Hall -- Heikkinen Energy Advisors LLC -- Analyst

Thanks. Appreciate the time. And (inaudible) you kind of alluded to one in the last question, but I was curious, in the context of -- of kind of the Vintage 5 completions in the Eagle Ford. I mean if you look at your prior disclosures, you had pretty big step changes along the way as you've moved up the Vintage cycle, I guess. Do you still see that sort of potential rate of change, I guess, as you move from Vintage 4 to Vintage 5 to or is this something that's more on the margin. And then, where would you say you're at in terms of Vintaging in the other plays like the (inaudible) in Permian?

Matt Fox -- Executive Vice President and Chief Operating Officer

So Vintage 5 really isn't focused on trying to improve IP. It's really focused on trying to improve recovery factor. So they -- the big increases in commercial production that we've disclosed from Vintage 1 through Vintage 4 is really not what we are targeting here. This is a more fundamental improvement in the EUR across any given dropped volume. So that's what Vintage 5 is about. That's why it's going to take several months after these wells were brought online to truly understand how the type curve is evolving and how interference with other wells is behaving. And so -- it will have a different characteristic of improvement than Vintage 1 through Vintage 4. So far across the rest of our plays, Bakken, Permian and Montney, we're really implementing completion techniques similar to Vintage 4. Just now we're testing Vintage 5 in the Eagle Ford and a civil test in the Permian also. And we'll then -- we're pretty good at transferring these learnings across the organization quickly, so we don't have to pilot test everything everywhere before we can put it to work in other plays.

Michael Anthony Hall -- Heikkinen Energy Advisors LLC -- Analyst

Great, that's super helpful. And I guess last one on my end would just be, just curious if you'd be willing to possibly provide exit rate thoughts for the Big 3 in aggregate or individually for 2019?

Matt Fox -- Executive Vice President and Chief Operating Officer

Well, I mean I gave the exit rates earlier for the Big 3 individually for the -- really for the fourth quarter average rates, which is really in my view, the best way to think about the above the exit rate because of the movement here. But what we -- what we've said we're going to do in the -- in 2019 is we're going to produce $350,000 on average through 2019. So that's about 20% growth from '18 and that's going to come through over the first quarter.

So -- and I think Ryan mentioned this in his prepared remarks, the first half is going to be relatively flat. We had really great exceptional outperformance in 2018 as we went through the year. In particular toward the end of the year, we had, you know, how these programs work. You have -- you are drilling multi-well pads, so you get lumpiness within each of the individual plays. Towards the end 2018 we had multi-well pads coming on essentially simultaneously across the Big 3. So we saw a big jump there and -- so now we'll be moving toward more of a momentum and we will be experimenting with these -- the Vintage 5 completions, which take a little bit longer to pump. So that's why we expect them to be flat through the first half of the year and then we'll jump up in the second half of the year as we increase the number of completions.

Ellen DeSanctis -- Senior Vice President, Corporate Relations

Thanks. I think that's going to wrap it up to the day everybody. We really appreciate your interest, by all means call us back if you have any other follow ups. And thanks again for joining us. Paulette, that (multiple speakers).

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.

Duration: 58 minutes

Call participants:

Ellen DeSanctis -- Senior Vice President, Corporate Relations

Ryan Lance -- Chairman and Chief Exective Officer

Paul Cheng -- Barclays Capital -- Analyst

Matt Fox -- Executive Vice President and Chief Operating Officer

Doug Terreson -- Evercore ISI -- Analyst

Don Wallette -- Executive Vice President and Chief Financial Officer

Phil Gresh -- J.P. Morgan -- Analyst

Doug Leggate -- Bank of America Merrill Lynch -- Analyst

John Herrlin -- Societe Generale Cross Asset Research -- Analyst

Roger Read -- Wells Fargo Securities -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Blake Fernandez -- Simmons Energy -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

Jeffrey LeBlanc -- Tudor, Pickering, Holt & C -- Analyst

Michael Anthony Hall -- Heikkinen Energy Advisors LLC -- Analyst

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