Executive Summary / Key Takeaways

• ConocoPhillips is executing a resilient, returns-focused strategy centered on a deep, low-cost of supply portfolio, enhanced significantly by the integration of Marathon Oil assets and disciplined capital allocation through commodity cycles.
• First quarter 2025 results demonstrated strong operational performance and financial growth, driven by higher volumes (including the Marathon acquisition), improved gas/bitumen/NGL prices, and ongoing cost optimization efforts, resulting in increased net income and operating cash flow.
• The company is on track to capture over $1 billion in run-rate synergies from the Marathon integration within the first year, primarily through capital optimization and cost reductions, enabling lowered full-year 2025 capital and operating cost guidance while maintaining production outlook.
• Strategic long-cycle investments like the Willow project in Alaska and global LNG developments are progressing on schedule, expected to drive a compelling multi-year free cash flow growth trajectory, structurally lowering the corporate breakeven and enhancing future shareholder return capacity.
• ConocoPhillips maintains a strong balance sheet and is committed to providing peer-leading distributions, including a growing ordinary dividend and significant share repurchases, leveraging its robust cash flow generation and portfolio flexibility to return capital through cycles.

A Foundation Built for Cycles: Strategy, Portfolio, and Competitive Edge

ConocoPhillips (NYSE:COP) stands as a leading independent exploration and production (E&P) company, operating across 15 countries with a diverse portfolio spanning unconventional plays in North America, conventional assets globally, LNG developments, and oil sands. The company's strategic direction, fundamentally reset in 2016, is built on the premise that success in the cyclical and volatile commodity market requires resilience in lower price environments while retaining upside during periods of higher prices. This "Triple Mandate" – responsibly meeting global energy demand, delivering competitive returns, and working towards emissions reduction targets – is underpinned by foundational principles: maintaining balance sheet strength, providing peer-leading distributions, making disciplined investments, and demonstrating responsible ESG performance.

At the heart of ConocoPhillips' competitive positioning is its deep, durable, and diverse low-cost of supply portfolio. The company boasts decades of inventory below a $40 per barrel WTI cost of supply threshold, a critical differentiator in an industry prone to price swings. This advantaged inventory, particularly in the U.S. Lower 48, is expected to become increasingly evident as the market differentiates between companies with robust, low-cost resources and those without. Management views ConocoPhillips as a clear leader among the "haves." This cost leadership translates into a competitive moat, enabling the company to generate returns even when prices soften and providing operational flexibility that many peers lack.

The competitive landscape for ConocoPhillips includes major integrated players like Exxon Mobil (XOM) and Chevron (CVX), as well as other E&P-focused companies such as Occidental Petroleum (OXY) and, historically, Marathon Oil (MRO) prior to its acquisition by COP. While integrated majors benefit from scale and downstream synergies, ConocoPhillips focuses on E&P efficiency. Its operational metrics, such as lower operating costs per barrel in North American shale compared to some peers, highlight this focus. The company benchmarks its operations and general and administrative (G&A) expenses constantly against competitors to ensure it is not disadvantaged. Unlike some operators who may need to ramp activity up and down based on short-term price signals or balance sheet constraints, ConocoPhillips' scale and inventory depth allow it to pursue a more steady-state operating program, which management believes drives greater efficiency and cost capture, particularly in softer markets. This strategic approach to operations and portfolio management is a key factor in its ability to deliver competitive returns through cycles.

Leveraging Technology for Efficiency and Advantage

Technology plays a crucial role in enhancing ConocoPhillips' operational efficiency, reducing costs, and maintaining its competitive edge across its diverse asset base. While specific, quantifiable performance metrics for all proprietary technologies were not detailed, the company emphasizes leveraging technology to drive tangible benefits.

In the Lower 48, the integration of Marathon Oil assets has allowed teams to leverage combined best practices, leading to achievements like record drilling performance in the Eagle Ford. The company utilizes technologies such as the Drilling Intelligence Group for 24/7 monitoring, troubleshooting, and optimizing drilling plans, enabling faster feet per day and more stages per day, which directly contributes to increased production and capital efficiency.

In Alaska, wells in the Western North Slope/Alpine area (Brookie, Topsets) are being used to advance technology and capital efficiency, serving as valuable analogs for the large-scale Willow project. This application of technology helps de-risk the execution of major developments. In oil sands, technology is applied to optimize bitumen price realizations through enhanced diluent recovery unit operations, blending, and transportation strategies.

ConocoPhillips also invests in technology related to low-carbon initiatives, new energy businesses, and licensing revenues, focusing on areas like conventional and tight oil reservoirs, shale gas, oil sands, enhanced oil recovery, and LNG. While specific targets or timelines for all R&D initiatives were not provided, the strategic intent is clear: to improve operational performance, reduce environmental impact, and explore new opportunities that fit the company's low-cost supply framework.

The "so what" for investors is that this focus on technology, both in core operations and emerging areas, is not merely about innovation for its own sake. It directly contributes to the company's cost leadership, improves the efficiency and predictability of its development programs, helps de-risk major projects like Willow, and supports its long-term strategy of delivering competitive returns by producing energy at a lower cost than many competitors. This technological edge is an integral part of the company's competitive moat.

Performance Reflecting Strategy: Q1 2025 and Beyond

ConocoPhillips delivered a strong operational and financial performance in the first quarter of 2025, demonstrating the effectiveness of its strategy and the initial benefits of the Marathon Oil integration. Net income for the quarter was $2.85 billion, an increase from $2.55 billion in the first quarter of 2024. This improvement was primarily driven by a significant increase in sales and other operating revenues, which rose to $16.52 billion from $13.85 billion year-over-year. The revenue growth was largely attributed to higher sales volumes, including those from the Marathon Oil acquisition, as well as favorable realized prices for natural gas, bitumen, and NGLs, partly offset by lower crude oil prices.

Total production in Q1 2025 reached 2,389 thousand barrels of oil equivalent per day (MBOED), a substantial increase of 487 MBOED or 26% from the same period a year ago. Adjusting for closed acquisitions and dispositions, underlying production still increased by 115 MBOED or 5%. This growth was fueled by new wells coming online across various segments, particularly in the Lower 48 (Delaware Basin, Eagle Ford, Midland Basin, Bakken) and Alaska, as well as contributions from acquired Marathon assets and less downtime in some areas.

Operational expenses also saw increases, with purchased commodities rising to $6.19 billion (from $5.33 billion) and production and operating expenses increasing to $2.51 billion (from $2.02 billion), primarily due to the higher volumes and the impact of the Marathon acquisition. Depreciation, depletion, and amortization (DDA) expenses also rose to $2.75 billion (from $2.21 billion) for similar reasons.

Despite the increase in costs, the higher revenue and volumes translated into robust cash flow generation. Cash provided by operating activities was $6.12 billion in the first quarter of 2025, up from $4.99 billion in the prior-year period. This increase was significantly influenced by favorable changes in operational working capital, driven by invoice and tax payment timing, in addition to the higher sales volumes from the Marathon acquisition.

Segment performance in Q1 2025 reflected these trends:

• Lower 48: Net income increased significantly to $1,790 million (from $1,381 million), benefiting from higher volumes (including Marathon) and improved gas/NGL prices, despite lower crude prices and higher operating/DDA costs from the acquisition.
• Alaska: Net income decreased slightly to $327 million (from $346 million), impacted by lower realized prices but partly offset by higher volumes and lower taxes/exploration expenses.
• Canada: Net income rose to $256 million (from $180 million), driven by higher volumes and lower operating/DDA costs.
• EMENA: Net income increased to $419 million (from $304 million), benefiting from higher volumes (including Marathon) and higher gas prices.
• Asia Pacific: Net income decreased to $311 million (from $512 million), primarily due to lower realized prices, the absence of a prior-year tax benefit, and lower equity affiliate earnings.

The company's liquidity position remains strong, with cash and cash equivalents totaling $6.31 billion and short-term investments of $0.93 billion at March 31, 2025. Total debt stood at $23.78 billion, a slight decrease from year-end 2024 due to debt retirements. The company maintains access to $5.50 billion in available borrowing capacity under its refinanced revolving credit facility, providing ample financial flexibility.

Strategic Initiatives Driving Future Value

ConocoPhillips is actively pursuing several key strategic initiatives designed to enhance its portfolio, drive efficiency, and secure long-term value creation.

The integration of Marathon Oil is a major focus, progressing ahead of schedule. The company expects to capture over $1 billion in run-rate synergies within the first full year post-close, significantly exceeding the initial $500 million target. These synergies are being realized through capital optimization (reducing the combined Lower 48 program by at least $500 million in 2025, primarily in the Eagle Ford and Bakken by needing fewer rigs and frac crews), G&A reductions, and operating cost efficiencies. Additional opportunities are being found on the commercial side. The tax benefits from the acquisition, including NOLs and foreign tax credits, are expected to provide approximately $1 billion in incremental value.

Portfolio optimization continues alongside integration. The company has a target of $2 billion in non-core asset dispositions across the portfolio post-Marathon acquisition, with approximately $1.3 billion achieved through May 2025 from Lower 48 sales, including the Ursa/Europa/Ursa Oil Pipeline assets. This high-grading process aims to focus the portfolio on the most competitive, low-cost assets.

Major long-cycle projects are progressing as planned. The Willow project in Alaska completed its peak winter construction season in Q1 2025, achieving critical milestones like setting operation center pad modules and installing significant pipeline mileage. Procurement activities are well underway, with 90-95% of engineered equipment expected to be sourced by year-end. The project remains on track for first oil in 2029. In Canada, the company became the sole operator of the KBBC PSC in Malaysia in January 2025, extending its term to 2050, and achieved first oil at the partner-operated Gumusut Phase 4 in February 2025. The Surmont oil sands development continues to add new pads, with the next (104 West A) planned for drilling in 2026.

The global LNG strategy is expanding, targeting a commercial portfolio of 10-15 MTPA. The company is securing offtake and regasification capacity, having recently signed agreements to deliver volumes into Europe and Asia starting in 2027. Investments in liquefaction projects like Port Arthur LNG and QatarEnergy LNG ventures are proceeding, although some projects face regulatory hurdles like the U.S. LNG pause.

Operationally, the focus remains on driving efficiency. The company is advocating for permitting reform to improve the timeliness of approvals for infrastructure and drilling on federal lands, which management sees as crucial for sustained production plateaus and efficient operations in the U.S. They are also exploring potential opportunities in the U.S. data center power demand space, leveraging their natural gas production and land position.

Outlook, Guidance, and Shareholder Returns

ConocoPhillips' outlook for 2025 reflects confidence in its operational execution and the benefits of its strategic initiatives, even within a volatile commodity price environment.

Second-quarter 2025 production is expected to be between 2.34 and 2.38 MMBOED, including approximately 40,000 barrels per day of planned turnarounds, representing the peak turnaround activity for the year. Third-quarter turnarounds are expected to be lower, around 25,000 barrels per day.

Full-year 2025 capital expenditure guidance has been lowered to a range of $12.30 billion to $12.60 billion, down from the prior guidance of approximately $12.90 billion. This reduction is attributed to continued capital efficiency improvements and plan optimization, demonstrating the ability to deliver the same volume for less capital. Full-year production guidance remains unchanged, still expecting low single-digit growth. Second-quarter capital spending is expected to be similar to the first quarter, with a material decline anticipated in the back half of the year.

Full-year adjusted operating costs guidance has also been lowered by $200 million to a range of $10.7 billion to $10.9 billion, primarily due to ongoing cost optimization efforts, including synergies from the Marathon integration.

The effective corporate tax rate for the full year is expected to be slightly higher than prior guidance (36-37%), excluding one-time items, due to a shift in the mix of income among taxing jurisdictions. The effective cash tax rate is expected to be roughly in line with the book tax rate.

Full-year APLNG distributions are now expected to be $800 million, primarily due to lower pricing, with the majority ($600 million) anticipated in the third quarter. The company expects a modest use of cash on a full-year basis for working capital, including an $800 million outflow in Q2 related to tax payment timing and the unwinding of Q1 investing working capital tailwinds.

The company's commitment to shareholder returns remains a cornerstone of its value proposition. The framework targets returning greater than 30% of cash from operating activities through cycles. In Q1 2025, the company returned $2.5 billion to shareholders, consisting of $1.5 billion through share repurchases and $1.0 billion through its ordinary dividend ($0.78 per share). The share repurchase authorization was increased in October 2024, providing significant capacity for future buybacks. Management believes its shares are attractive at current prices and is willing to use cash on the balance sheet to support distributions if needed, emphasizing that they do not intend to borrow gross debt for this purpose. The long-term track record of distributing approximately 45% of annual CFO serves as a guide for future distributions.

Risks and Challenges

While ConocoPhillips is well-positioned, it faces inherent risks and challenges common to the E&P industry and specific to its operations and strategic initiatives. Commodity price volatility remains the most significant factor impacting profitability and cash flows, influenced by unpredictable global economic health, geopolitical tensions, OPEC+ actions, and governmental policies like tariffs. The ultimate impact of the current macroeconomic environment remains uncertain.

Operational risks include potential failures or delays in achieving expected production levels due to hazards, drilling risks, reservoir performance uncertainties, timing of startups/turnarounds, and weather-related disruptions. Maintaining or growing production requires continually adding to the proved reserve base through exploration and development.

Regulatory and environmental risks are significant. The company is subject to extensive environmental laws and regulations, with potential liabilities for remediation costs (often joint and several). Estimated future environmental costs are subject to change. Litigation is ongoing, including lawsuits alleging climate change impacts and environmental damages from historical operations, with unprecedented legal issues and uncertain outcomes. The company is also evaluating exposure related to decommissioning obligations for a legacy OCS lease.

Strategic execution risks include challenges or delays in fully integrating Marathon Oil and realizing the targeted synergies and cost savings. While integration is ahead of schedule, unforeseen difficulties could arise. The ability to deploy asset sale proceeds as anticipated is also a factor. Major project execution, particularly for complex developments like Willow, carries risks related to costs, inflation, technical issues, and permitting delays, although the company is focused on de-risking these.

Competition for resources, services, personnel, and equipment is constant. While COP's cost structure is advantageous, technological gaps relative to some peers could impact efficiency and market positioning over time. The ability of customers and counterparties to satisfy obligations, including collection of arbitration awards from Venezuela/PDVSA, also presents a risk.

Conclusion

ConocoPhillips is executing a clear, returns-focused strategy designed for resilience and value creation across commodity cycles. Its core investment thesis is grounded in a deep, diverse, and low-cost of supply portfolio, significantly enhanced by the strategic acquisition and ongoing integration of Marathon Oil, which is expected to yield over $1 billion in synergies. The company's operational excellence, demonstrated by strong Q1 2025 results and lowered cost/capital guidance while maintaining production, underscores its focus on efficiency.

Looking ahead, investments in long-cycle projects like Willow and expanding global LNG capacity are poised to drive substantial free cash flow growth, structurally lowering the corporate breakeven and increasing the capacity for shareholder returns. Coupled with a strong balance sheet and a commitment to peer-leading distributions, ConocoPhillips offers a compelling value proposition. While exposed to inherent industry risks, particularly commodity price volatility and regulatory challenges, the company's strategic positioning, operational discipline, and financial flexibility position it to navigate these factors and continue delivering competitive returns to investors. The successful realization of integration synergies and the execution of major projects remain key indicators for the continued strength of the investment narrative.