Conocophillips

NYSE:COP

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and welcome to the Quarter 2, 2021 ConocoPhillips Earnings Conference Call. My name is Zanara and I'll be the operator for today's call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Ms. Ellen DeSanctis. Ellen, you may begin.

[Ellen DeSanctis, Senior Vice President, Corporate Relations]

Thanks, Zanara. Good morning and welcome to our listeners. We have the following executives on today's call: Ryan Lance, our Chairman and CEO, Bill Bullock, our Executive Vice President and Chief Financial Officer, Tim Leach, Executive Vice President of the Lower 48 Dominic Macklon, our Senior Vice President of Strategy and Technology,, Dominic Macklon, our Senior Vice President of Strategy and Technology, and Nick Olds, our Senior Vice President of Global Operations. Given our recent June 30 market update, we plan to keep our prepared remarks very short this morning, and then as Zanara mentioned, we'll begin our Q&A session.

To call-related logistics, some of today's speakers are participating virtually. We've done our best to ensure everything runs smoothly on the technology front. Also because we want to give as many people as possible a chance to ask questions during today's call, please don't get offended if you get cut off. You can jump back into the queue where you can reach out to Investor Relations anytime after the call. Finally, a few reminders in conjunction with this morning's press release, we posted a short deck of supplemental material that includes second-quarter earnings and cash flow summaries, some guidance items, and our cash flow sensitivities.

And then finally in today's call, we'll make some forward-looking statements based on current expectations. Actual results could differ due to the factors described in today's press release and our periodic SEC filings. We'll also refer to some non-GAAP financial measures today. And as usual, reconciliations to the nearest corresponding GAAP measure can be found again in this morning's press release and on our website. Thanks and now I'll turn the call over to Ryan.

[Ryan Lance, Chairman and Chief Executive Officer]

Thank you, Ellen. Today's quarterly results come right on the heels of our June 30 market update, during which we, again, laid out a compelling multi-year outlook for the Company. The update was widely followed and we received some pretty positive feedback. As you'd expect, given the recency of our update, there isn't much incremental news to share at this time, except to say we remain convinced it was timely and relevant given the ongoing volatility we're seeing in the sector.

And today, we're pleased to follow it up with the very strong quarterly results we announced this morning. As you recall, we kicked off our update by declaring that we believe we are at a defining moment for the E&P sector, and that persists today. Oil equities have been especially volatile recently, in part due to uncertainties in the macro and because we know investors need to see evidence that sector discipline will hold and returns on and of capital will follow. It's clear to us that long-term sector sponsorship requires leadership on the part of companies, as well as a conviction on the part of investors. Of course for investors, the case for these equities requires a reasonably constructive macro view. The case for equities also requires conviction around a micro view.

In other words, who is best positioned for the cyclical business realities and who has a track record of execution and performance, and who can truly lead in ESG. Both companies are espousing the virtues of discipline and everyone now looks better coming out of the 2020 downturn. The question investors need to consider is, who can deliver consistent returns-focused performance through thick and thin? That's where leadership matters. In June, we met this defining moment with a credible and highly investable plan that generates massive free cash flow and returns of capital with financial returns that are competitive with the S&P. The leadership requires more than setting expectations and plans, it also requires successfully executing them.

Execution is where the rubber meets the road. ConocoPhillips offers a unique combination of a credible and compelling investment plan, with a commitment to strong, ongoing execution. You saw that -- you saw the plan in June, and today you see the execution. In other words, you are seeing the June plan at work. This morning's release and supplementary information provided details on this quarter's performance, so I won't restate them. But here are a few key takeaways and themes that I want to underscore. During the second quarter, the business ran extremely well. Our plant turnaround activity went smoothly, as did our ongoing core programs across the Company.

These include activities in the North American shale plays as well as in the multiple programs in our Alaska and international regions. While we're talking about execution, I'll also mention that we continue to make good progress on more than 50 emission reduction projects that we have underway this year. Every part of our business has a role in delivering our results. And I'm proud of our team for their accomplishments during a very busy year. Overall for this Quarter's Financial results were quite straightforward.

The noise of 2020s market upheavals in most of the [Indiscernible] transaction adjustments is behind us. And the known deal integration synergies and streamlining impacts we discussed in June are showing up in our performance. We're on track to meet the updated 2021 guidance we issued a month ago. But we're not done. Not done with our efforts to continue driving the operational and underlying efficiencies the team has described in our June material.

We can't ignore that higher benchmark prices were a factor in this quarter's sector performance broadly and certainly ConocoPhillips specifically. However, what is somewhat unique to ConocoPhillips is that our results demonstrate the capacity of our Company to capture the benefit of higher prices when they do occur. That's because we're unhedged. We're diversified and we're almost entirely in tax and royalty regimes.

Now, a year ago, we demonstrated just how resilient we are too low prices. 12 months later and post-Concho transactions, this Quarter gives you a sense of the upside towards we can realize when prices exceed the reference prices, we showed you just 1 month ago. The clear bottom line, ConocoPhillips works differentially through the cycles. Cash from operations of 4 billion more than covered our capital expenditures of 1.3 billion and distributions of 1.2 billion in the quarter.

And importantly, we continue to meet and exceed our target of returning greater than 30% of our CFO to our shareholders. We announced another increase to our 2021 distributions in June, bringing our total planned returns of Capital to about 6 billion for the year, representing almost 8% of our market cap today, while other companies are only announcing or just reactivating such programs. And of course, as Bill described in our market update, if prices continue at current levels, we would expect to have additional cash that could go towards greater distributions.

And for reference, we estimate the full year 2021 CFO at $50 per barrel WTI would be about 11 billion after adjusting for the one-time Concho transaction-related impacts and you can do the math on our sensitivities, they're roughly 300 million for $1 per barrel change in prices. At this time, we still believe our distribution allocation of nearly 3% yielding ordinary dividend and share repurchases is a very sound mix, but we continue to evaluate the issue. and we want to engage with the market on alternative allocations. We know there isn't a perfect answer, but we know want matters.

And that's a credible commitment to return Capital and a solid track record of a reliable performance, which we certainly delivered now for multiple years. So to summarize, we have a great shareholder-friendly business model and plan. We're hitting our stride after a busy time and putting the execution runs on the board. We are maintaining our discipline. The Company is running extremely well, and we're not done with our work to improve underlying financial returns on capital employed. That's the goal. That's how we enlist long-term market sponsorship, and that's what ConocoPhillips is all about.

Now we're pleased to be where we're at here at midyear. But we recognize the year is still young. Looking forward to the second half of 2021, our priorities are squarely focused on executing our remaining plans and programs for this year. Meanwhile, we're closely watching how the macro evolves and beginning our internal process of setting our 2022 budget and capital plans.

We'll stay actively engaged with the market and look forward to an ongoing discussion about how our plans are progressing. So let me turn the call over to the Operator and we'll begin the Q&A portion of the call.

[Operator]

Absolutely. Thank you. We will now begin the question-and-answer session.

[Operator Instructions] Waiting on standby for any questions. And our first question comes from Neil Mehta from Goldman Sachs. Please go ahead. Your line is open.

[Neil Mehta, Goldman Sachs]

Good morning, team. Two quick questions for me. First one for you, Ryan, is just your perspective on M&A in this current market. You did a terrific transaction last year but how do you think about the opportunity set that's out there for either buying and selling?

And the other one this might be for Bill is just related to the Quarter itself. Was it a relatively clean Quarter?

Can we just simply say 4 billion of cash flow minus the CapEx and then Annualized that free cash flow, implies about a mid-teens type of free cash flow yield. But want to make sure that we weren't missing any pieces here to the positive or negative that would be more one-time in nature.

[Ryan Lance, Chairman and Chief Executive Officer]

Well, thanks, Phil. I'll start on the M&A side and let Bill chime in on your second question. When we -- when I -- we think about the market, our approach is to constantly know what assets that we like and we constantly reviewing the portfolio to look at the pieces inside the portfolio that are uncompetitive.

So we're constantly screening opportunities to both buy and sell assets and we're constantly trying to high-grade the portfolio.

I think the environment that we see today certainly feels like more assets tend to come to the market, But I don't think that makes it -- makes it necessarily a buyer's or a seller's market today.

I think what matters to us is just to keep at the rigor and the discipline that we've described back in 2019, we continue through today and continue through the Concho transaction that we did earlier or back in January.

And that's just the rigor of our disciplined framework around cost of supply and value and simply being patient, Neil. I think the market may require that even now more than ever. So I think that's a bit about how we think about the inorganic side of the business. And I'll maybe turn it over to Bill and let him comment on the cash flow.

[Bill Bullock]

Sure, good morning, Neal. This is Bill. It was a very clean quarter on a cash basis. It was clean for both cash and it was clean for both earnings. As you're looking at your run rates, I point you to just 2 items to consider though.

The first one and we mentioned this in the press release is that we did make a $200 million discretionary pension plan contribution in the second quarter that reduced our second quarter CFO. And the contribution increased the pension plans funding status above 90% and that eliminates the need to [Indiscernible] to pay the PBGC premium payments.

Also leads to reduce financial statement volatility for the pension, and reduces some of our go-forward funding requirements. So that really did make good sense for use of cash to us in the Quarter. And so I draw that's your attention as a reduction in run rate.

And the other one that I point out as you're thinking about run rates would be our APLNG distributions. We received distributions of 250 million from APLNG in the second quarter. That brings year-to-date to about 350 million, and we anticipate about 100 million in the third quarter and 700 million for the year.

So just as a reminder, we typically receive lower distributions in the first and third quarters and higher distributions in the second and fourth quarters as you're thinking about the run rates on that. And that -- those APLNG distributions are pretty locked in for the year because long-term LNG sales at break LNG or price lag, and there's -- so there's very little sensitivity to that for the remainder of the year.

And so as you're thinking about how to look at run rates for the rest of the year, I direct you to our sensitivities that we provide, those still hold. And a good rule of thumb is about $300 million annualized cash flow for every $1 million change in WTI. And with those, you ought to be pretty bang on with CFOs sensitivities.

[Neil Mehta, Goldman Sachs]

All right, it makes it easy. Thanks, guys.

[Operator]

Thank you. Our next question is from Roger Read from Wells Fargo, Please go ahead, your line is open.

[Roger Read, Wells Fargo]

Thank you. Good morning and congratulations on the quarter. It's interesting, Ryan, you kind of mentioned looking across at the industry overall an easier quarter for companies to do well. So let's maybe ask the question, what are some of the things that may become Headwinds as we think about some of the inflationary issues that may be creeping up out there.

What you would do to offset that and what you think maybe will allow you to continue to separate from some of those companies. We look over the next several quarters.

[Ryan Lance, Chairman and Chief Executive Officer]

Yeah, thanks. Roger, I can provide some comments, maybe Dominic can add a little bit of color to that as well. I think if you're -- you're a pure-play one base and kind of Operator, you're probably going to experience certain categories of spend that are inflating.

I think the advantages ConocoPhillips has right now, is we're still capturing a lot of the best practices and the synergies from the Concho transaction plus the fact that we're global diversified companies, so other areas around the world are not inflating.

Maybe like some of the economies that are leading the recovery from the COVID pandemic. So think we're able to differentiate ourselves in that regard pretty clearly. We think it's eminently manageable this year and as we go into next year, and I would add one other thing that, seems to be missing a little bit from the conversation and I mentioned it in my opening remarks and that's the unhedged nature of our portfolio.

I'm just surprised a few of the analysts aren't asking the question to the DNP s that are hedged. Do you know what -- you know what happened, there could even been more cash flow if you haven't hedged your position, you shouldn't expect that from ConocoPhillips will get the torque from the upside on the prices as we described in my opening comments, but Dominic, I don't know if you have any more, you can add to the inflation part of Roger's question.

[Dominic Macklon, Senior Vice President of Strategy and Technology]

Thanks. Ryan. Roger, I think Ryan's covered it very well. I mean -- I think the important point is that we still have the wind in our sails from the transaction. I mean, we did give our last synergy updates on the market update of over a billion dollars and we said, well that will be the last time we will give that scorecard, but that does not mean we are done with sourcing supply chain efficiencies and operational efficiencies.

So we really still have the wind in our sails on that. Of course, we are seeing some inflation in tubular cement in the Lower 48, some pressure on frac crews, but like Ryan said, being a global Company really helps because we're still seeing deflation in certain categories internationally.

I think that's an interesting question and I think it really is because we still have the momentum coming out of the transaction. We do think we're well-placed to manage inflationary effects.

[Roger Read, Wells Fargo]

I appreciate that. And I imagine the hedging and the un hedging comes back to the balance sheet strength that you've been able to maintain. So congratulations on that, and thank you.

[Operator]

Thank you. Our next question comes from Ryan Todd from Piper Sandler. Please go ahead, next question.

[Ryan Todd, Piper Sandler]

Great. Thanks. Good morning, everybody. Maybe a couple of ones here. I know that we've discussed this frequently on past quarters and on the recent Analysts Day, but obviously, you continue to generate far more free cash than you're targeting to return to Shareholders via Dividends and buyback.

Should the environment remain supportive, can you talk a little bit about the potential impact to a pace of debt reductions versus share buybacks as you look forward, would you pay down debt just far more quickly than the 5 years resemble target that you have given or ramp up the buyback more aggressively?

Any thoughts there and then maybe, a second follow-up. This is the First Quarter that we saw the combined performance of the legacy Conoco Portfolio on the acquired Concho assets without some of the one-off noise that we saw during the First Quarter.

And the outcome was outstanding, and I think your Lower 48 business certainly exceeded our estimates quite materially. I know it may be hard at this point, but can you talk to some of the things that may be exceeding expectations, either in terms of costs, well performance, capital efficiencies, or marketing efforts.

[Ryan Lance, Chairman and Chief Executive Officer]

Sure. Thanks, Ryan, I'll maybe some comments. Second, I'll let Bill and Tim [Indiscernible] he can chime in on the Lower 48 a little bit. I'd say at a high level, the debt reduction plan that we announced at our June market update of trying to take the gross debt off over the next 5 years, still remains our target and our goal, and it shouldn't -- we were not, right at this point, trying to increase that or necessarily accelerate that.

We're going to have some natural maturities that will retire and then we'll do some optimization of the debt. Bill can provide a few more details about that, but I think it's predicted through the commodity tailwinds that are in there right now.

But beyond the plans that we talked about to the balance sheet, we feel pretty comfortable that those are in place. So any incremental ought to be returns of capital back to the shareholder. Maybe Bill, if you want to add anything to that and then I can let Tim chime in about the performance in the Lower 48.

[Bill Bullock]

Sure Ryan. So we do have about a billion dollars in debt maturities that will be coming due before the end of 2022, you should expect us to retire that debt as it comes due. And as we previously said, any potential debt refinancing and reduction were to depend on multiple factors, including the cost to retire debt, cost issue debt, and how we decide to approach that broader debt reduction target.

But we're in a really strong position with the balance sheet right now. And so I think you should expect us to be patient in evaluating market conditions as we continue to consider transactions to reduce our debt portfolio.

[Tim Leach, Executive Vice President of the Lower 48]

I think the only thing I'd have to add to that is as we communicated in the market update, my excitement about the performance of the Lower 48 couldn't be higher. When you take the different levels of technology that we're applying to a broader set of really, really good assets, my expectation is that the efficiencies we're getting out of our business, the performance of our business would discontinue. So it's a real driver of cash flow and value creation.

[Operator]

Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead. Your line is open.

[Unidentified Analyst, Bank of America]

Hey, good morning, guys. This is Clay on for Doug. A couple of questions from me, maybe first off on M&A evidenced by the Concho acquisition, obviously Conoco has an affection for Permian assets at the right price and the right locations, etc.

So there are no holes in Conoco's Permian position today. So there is no need to fill but the question is, whether you would consider a large bolt-on acquisition at the right price? And if you would, what would that bring to the table for ConocoPhillips?

[Ryan Lance, Chairman and Chief Executive Officer]

So I think as we, I think I answered earlier, we have a pretty rigorous disciplined kind of framework on how we think about acquisitions. We know the assets in the areas that we really like and you shouldn't be surprised if we're looking at opportunities that are consistent with that framework and contiguous to where we operate.

But they have to compete within our costs to supply framework and the discipline that we've brought to that in the patience that we've done both on the buying and the selling side. So I would look at our history or performance, what we've done, not just in the Permian, but Alaska, Canada, and elsewhere around the portfolio. So we're pretty -- we think about it pretty consistently and that's how we look at those kinds of inorganic opportunities.

[Operator]

Thank you. Our next question comes from Phil Gresh from JP Morgan. Please go ahead, your line is open.

[Phil Gresh, JP Morgan]

Yes. Hi, good afternoon. Two questions for me. One, I guess a bit of a follow-up just on uses of cash. You have nearly $9 billion of cash and short-term equivalents on the balance sheet right now, as you said, that Ryan's answer, you aren't really looking at reduced data at this point in time. So how do you think about this optionality?

Is there a trigger you're looking for to return even more cash back to shareholders or would you rather be linear and just have the optionality of the cash in the balance sheet. And then the second question just on big 3, could you give us your latest update of where you stand with rig counts and frac crews by basin and how you're thinking about activity levels for the second half of the year? Thanks.

[Ryan Lance, Chairman and Chief Executive Officer]

All right, thanks, Phil, I'll let Tim kind of chime in on the big 3. Yeah. As far as uses of cash, we've communicated before and broadly, we like carry some of the cash on the balance sheet for strategic and reserve, and operating purposes.

And we've described that in quite a lot of detail in the past. I think with the commodity price environment that we're seeing today, the balance sheet is in great shape, as Bill described earlier on the last question. So I think as we get incremental free cash flow above and beyond our means, we're not necessarily looking to continue to build a lot of cash on the balance sheet.

Shareholders should expect that they'll start getting incremental returns if these -- if our view of the commodity prices continues to hold. We've seen how volatile that can be and the fact that the market is still pretty imbalanced.

The demand is yet to recover to pre-pandemic levels and you got arguably 5 million or more barrels a day of spare supply sitting in the market. So we still expect quite a lot of volatility, which is why we like the strength of the balance sheet that we have today and holding some cash on that balance sheet.

And we'll continue to watch that macro market, which will inform our distribution strategy going forward. Maybe, Tim, you could comment on the details around the Lower 48 rigs and frac spreads.

[Tim Leach, Executive Vice President of the Lower 48]

Sure. Just as a reminder, in the Lower 48, we invested about 1.5 billion so far in the first half of the year, we expect that investment rate to stay steady throughout the remainder of the year. We're currently running 15 rigs in the Lower 48, 11 in the Permian, 4 in the Eagle Ford.

And we're running seven frac spreads, 4 in the Permian and 3 in the Eagle Ford. And we expect those levels of activity to remain pretty constant throughout the rest of the year. One of the big benefits of the size and scope that we have.

We also have various rigs running with our other operating partners in the big 3 and we're keeping a close eye on that to see and try to model what that activity is doing.

[Ellen DeSanctis, Senior Vice President, Corporate Relations]

Zanara, we'll take the next question.

[Operator]

Thank you. Our next question comes from Paul Cheng from Scotiabank. Please go ahead. Your line is open.

[Paul Cheng, Scotiabank]

Hey, guys. Good morning.

[Ryan Lance, Chairman and Chief Executive Officer]

Hi, Paul.

[Paul Cheng, Scotiabank]

Two questions. First, the [Indiscernible] can you discuss about how that is a potential source of fund in your cash flow statement over the next several years. How's that progression is going to look like even the current commodity price are normal.

The second question is, Ryan, I don't know if you can give us some, maybe share some, market insight that -- what do you see from the [Indiscernible] producer, they operate at there. I think the publicly trade Company, the Capital discipline are pretty good. But we are concerned about the activity liable in the private side, what are you seeing there?

[Ryan Lance, Chairman and Chief Executive Officer]

Let me -- you broke up there a little bit, Paul. I think that your first question is around debt and the last question around private operators I think.

[Paul Cheng, Scotiabank]

The first question just relates to that the deferred tax and how that as a source of cash flow for you guys over the next several years given the current commodity prices.

[Ryan Lance, Chairman and Chief Executive Officer]

Okay. Thank you. Sorry. Thanks for the clarification, Paul. I can let Bill talk about the way we view deferred taxes over the course of the plan that you're referring to. But I guess in general to your second one, on the private side, they are representing about 45 or so percent of the rigs that are running in the tidal place in the Lower 48 today.

But they only account for about 22% of the current production of about roughly 7 million barrels a day. It probably increases a bit because they are pretty active to your point. I think generally as we think about it going forward, they run out of some of their best acreage over the next couple of years.

So we don't see them having an outsized impact on the growth coming from the tidal and being a dominant driver to U.S. production growth. That's really going to depend on the strong public companies like ConocoPhillips to have the best rocks and the higher quality rock versus the private companies.

I think that's really the area they continue to focus on although we see as well as you do in the short-term, some of the incremental production that's coming out of the private operators. We're certainly taking advantage of the commodity price environment that don't have maybe the investor pressure on disciplined and returns of capital back to their shareholders while they are trying to increase the value their properties as they go forward.

So, ell our short-term thing, we don't think it will be a long-term driver to what the U.S. title play looks like. So let me ask Bill to chime in on the -- for the next question.

[Paul Cheng, Scotiabank]

Before that one, can I just ask that there's some industry consultant is forecasting the [Indiscernible] operator. They may be able to grow production by 0.5 million barrels per day, next year or the next year, the next couple of years. Do you believe that?

[Ryan Lance, Chairman and Chief Executive Officer]

That would probably be way at the upper end of our estimate Paul I don't think we would view that much, we would probably be half or so of that kind of an estimate that their current kind of rig load.

[Operator]

Thank you. Our next question comes from Neal Dingmann from [Indiscernible]. Please go ahead. Your line is open.

[Ryan Lance, Chairman and Chief Executive Officer]

Probably have one follow-up with Paul that Bill can answer. Maybe if I could add just [Indiscernible] Bill can address Paul's other question.

[Ellen DeSanctis, Senior Vice President, Corporate Relations]

Yes. Zanara, hang on a second. We're going to break in with the answer to Paul's second question. Sorry, Neal, we'll get right back to you.

[Bill Bullock]

All right. Paul, it's Bill. On deferred taxes, if you look at -- for this quarter, we had about $360 million deferred taxes as a source of cash this quarter. That's primarily due to utilizing our U.S. tax loss carryforwards this quarter.

But if you look back to what we showed at the market update in June, the deferred tax is really not a material component of that $70 billion worth of free cash flow we showed at reference prices at $50 WTI.

And we would expect that all of our significant businesses would be in a tax-paying position at that reference price by about 2024. Now, should the current prices continue, we'd expect to move into a tax-paying position a bit earlier, maybe late 2022 or 2023 at current prices compared to 2024. But under normalized $50 barrel prices, deferred taxes really aren't a source of tailwinds force.

[Ryan Lance, Chairman and Chief Executive Officer]

Thank you Zanara. now we go to Neal. Sorry, Neal, thank you.

[Operator]

Thank you. My apologies. Neal, please go ahead, your line is open.

[Neal Dingmann, Qwest]

Sure, thank you. The two I had was just first on in the marketing, you guys have done a great job continuing the marketing just wondering the opportunities you see there either to export oil or other market opportunities you would see to potentially see higher differentials and then just as a second, a lot has been talked about of this year, your great debt repayment.

I'm sorry, I would say your share repurchase, is that the primary free cash flow now, item over debt repayment or they sort of co-exist? Those are the two I have. Thank you.

[Ryan Lance, Chairman and Chief Executive Officer]

Thanks, Neal. On your first one, we've got export capacity for some of our oil coming out of the U.S. Lower 48. And in fact, we're doing some direct marketing with our commercial organization that has been an uplift to our margins and netback prices.

We continue to see that as an opportunity and have a longer-term goal to continue to grow that capacity and to be able to access some of those unique opportunities in the export market. And in fact, not even going to traders that pick it up at the shoreline but going direct customer to customer, given some of our relations primarily in Asia and in Southern South America as well.

That's an opportunity for us as well. On your second question, we announced our gross debt reduction plan, and that's consistent and equally important to the share repurchases that we're doing today.

Once we obviously get through that debt optimization plan that we're doing, then returns of capital back to the shareholder would dominate. But right now it's we are in a dual-track of looking at, as Bill described, retiring some of our near-term debt maturities and then doing some optimization of our debt in the balance sheet as market conditions continue to provide the right opportunity to do that.

[Neal Dingmann, Qwest]

Thanks. Great way to look at it.

[Operator]

Thank you. Our next question comes from Jeoffrey Lambujon from Tudor, Pickering, Holt. Please go ahead, your line is open.

[Jeoffrey Lambujon]

Good morning. Thanks for taking my question. Just one for me on return of capital, which you've been very clear about in terms of plans and very consistent about in terms of exceeding those plans.

As you think about the multi-year outlook and the target that you've put out for aggregate cash returns, can you just remind us what some of the guideposts are as you think internally about nailing down forms for that capital return in a given year, whether that's an optimal level for the dividend that you and the board consider or if it's free cash flow metrics above a certain threshold that keeps buybacks even further in front and center over any consideration of a variable?

Just trying to look for any parameters that can help us understand the thought process and how discussions have been with shareholders.

[Ryan Lance, Chairman and Chief Executive Officer]

Thanks, Jeff, I think I'd go back to our original sideboards of the fairway that we've described to our shareholders, to our owners is that you should expect greater than 30% of our cash returned back to our shareholders.

That's on a quarterly and an annual basis and you look back at our history, the last 5 years, that's averaged over 40%. That's really the differentiation between our models for return of capital back to shareholders and maybe some of the others that we've been reading about and that we've been hearing about because it's not free cash flow base. It is CFO base.

So as CFO grows because commodity prices are up, the shareholder should expect to get more distribution. Now we've chosen the -- in our ordinary dividend, we've said we want to be competitive. We want to grow that competitively with the S&P, that's how we're measuring ourselves. That's how we're measuring our performance of return, on capital.

And that's how we're measuring our performance of return of capital with the respect to the ordinary dividend. And then -- but we want that ordinary dividend to be resilient through the cycles. So we don't want -- we want to be able to afford it.

At the low end of the cycle, which we demonstrated last year through the pandemic. And then we recognized as we get additional torque that we described with higher prices that our cash flow is going to grow and our returns to our shareholders should grow as well. You should expect that to come and at a minimum, it's going to be 30%. So it's not a free cash flow-based model, we think about it as a CFO-based model.

And as I said in my opening remarks, we continue to watch what the best distribution channel maybe it's a combination, maybe it's a hybrid down the road. Well, we'll continue to watch that, but today, we feel like our shares are a great buy in the market.

the channel that we've chosen right now at this 10 seconds is to -- the strong ordinary dividend is yielding what it is today, combined with returning -- meeting our threshold with greater than 30% through the share buyback channel.

[Jeoffrey Lambujon]

Got it. Thank you.

[Operator]

Thank you. We have another question from Doug Leggate. Please go ahead, your line is open.

[Doug Leggate]

Thank you. I apologize, folks.

[Ryan Lance, Chairman and Chief Executive Officer]

The real Doug.

[Doug Leggate]

There's enough -- there's a number of calls going on, Ryan.

[Ryan Lance, Chairman and Chief Executive Officer]

I understand Doug.

[Doug Leggate]

I hate -- we need to get you guys to coordinate a little better. I'm kidding. Their fault, not yours. So joking aside Ryan, forgive me, I'm going to hit on the dividend question again. I want a pre-phase a couple of examples.

So BP announced a dividend increase, their shares are up 6%. Shell announced a dividend increase. Their shares, on the day, were up fairly significantly. I guess my point is that it seems to us at least, that market recognition of value tends to be through, the dividend channel more than the buyback channel.

You guys have done a phenomenal job of resetting your portfolio. You were spending $15 billion prior to the dividend cut and today you've got better free cash flow on 1/3 of the spending. Why not go back to a bigger dividend that the market will pay you for?

[Ryan Lance, Chairman and Chief Executive Officer]

Well, Doug, I think we've learned through the past history, and you referenced it, the reductions that we made coming out of the downturn in 2014 and 2015, and that experience is there and we got to make sure the ordinary dividend is reliable, it's consistent, it's predictable, it's transparent, it's growable over time and it works through the cycles and through the cycles there's an important distinction here so a lot of the people that you've talked about raising the dividend have come out of the period where they cut it pretty dramatically and maybe growing it back to a place that works through the cycles.

We feel like we've done that heavy lifting over the course of the last 4 to 5 years. And we're the place now where we are comfortable with the ordinary dividend. And like I said, we want to be competitive with the S&P 500 as we go forward but I pivot back to you, what's important is the shareholder is going to get 30% of our cash flow or more on an ongoing basis.

So you will get it and maybe today, cash return is to your point a little bit more in favor than buybacks, I could point to a couple of years ago where that wasn't the case. I don't know what that case will be 6 or 12 months from now, but we're open to it and we're looking at it. We're evaluating it. And you'll hear more from us about that particular piece of it as well, but today, I think our shares are a pretty good buy.

[Doug Leggate]

Forgive me if I keep pounding on this issue but I think your portfolio in capital efficiency can support it in our view and I don't think you're getting rewarded for it. So I'll keep pounding on that Ryan if that's okay, but thanks so much for taking my question.

[Ryan Lance, Chairman and Chief Executive Officer]

And I hear you Doug, thank you.

[Operator]

Thank you. And we have no further questions at this time. I would like to turn the call back over to Ellen.

[Ellen DeSanctis, Senior Vice President, Corporate Relations]

Thanks, Zanara. Thanks to all of our participants this morning. Really appreciate the questions, and you're more than welcome to check in with us at any point after the call. And look forward to engaging with you over the next few months. Be safe.

[Operator]

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