ConocoPhillips’ (NYSE: COP) farewell to deep water coupled with a selloff of noncore, including natural gas assets, is expected to help provide flexibility the E&P needs in 2016 to continue weathering the downturn.

Top executives for the top U.S. oil independent that holds assets worldwide shared details Dec. 10 about its $7.7 billion capital budget for 2016, down $2.5 billion from this year. The company still plans to grow production by 1% to 3% to between 1,530 Mboe/d and 1,560 Mboe/d. The news was delivered as commodity prices below $40/bbl force companies to streamline portfolios and cut costs further.

The company is among several that have announced lower spending plans for next year. Chevron chopped its 2016 budget by 24%. More of the same news could be on the horizon from others.

“We don’t have a crystal ball to predict where oil prices are going, but we have the next best thing: a set of characteristics that we believe work across a broad range of price scenarios,” ConocoPhillips CEO Ryan Lance said during a conference call. “We also believe they are unique among E&Ps.”

As oil prices tumbled, the company has found operational cost savings and reduced its global employee and contractor headcount by 15%. Lance pointed out the company also exercised capital flexibility, captured deflation across the supply chain, deferred projects and strengthened its balance sheet with noncore asset sales—including natural gas producing assets in North America along with a phased exit from deepwater exploration.

ConocoPhillips said it has raised $600 million from asset sales earlier this year. But agreements in place are expected to bump the total up to $2.3 billion when deals close by year-end or in first-quarter 2016. The asset sales include infrastructure stake in Europe, Asia and south Texas as well as North American assets that produced about 70,000 boe/d in 2015, about 80% of which is natural gas.

It became clear during the downturn that these assets were not going to compete for funding in the future, Lance said.

But as the company works toward its deepwater exit some exploration and appraisal (E&A) activity remains in 2016.

Plans for 2016, which ConocoPhillips called a transition year for deep water, includes drilling two exploration wells in Nova Scotia (Cheshire and Monterrey Jack); high-grading prospects in the Gulf of Mexico with drilling at the Melmar, Gibson, Horus and Socorro wells along with appraisals at Gila, Shenandoan and Tiber. Action also continues offshore Senegal where a six-well E&A program is underway.

Next year’s capital budget includes $800,000 for deepwater E&A work with operating costs at about $400 million, all of which the company said provides additional capital flexibility considering the funds can be reallocated. No reserves are associated with the deepwater assets that are being divested, said Matt Fox, executive vice president of E&P.

The company continues to “pursue ongoing, noncore asset sales across the portfolio” as capital spending falls.

Spending has dropped by 55% from $17.1 billion in 2014 to $10.2 billion in 2015. Capital from major projects rolled off along with billions of dollars achieved in scope and efficiency improvements in the Lower 48 and Canada, Fox said.

The coming year is expected to bring another reduction in major project capex, mainly from Australia Pacific LNG and Surmont, and continued efficiency gains in the Lower 48 and supply chain savings, leading to a capital budget of $7.7 billion.

Operating costs are expected to fall from about $8.2 billion in 2015 to $7.7 billion next year.

“We are decreasing capex across every region,” Fox said, noting the company is growing volumes in three of its five regions—Alaska, Asia-Pacific/Middle East and Canada—with slight declines in Europe and the Lower 48 where ConocoPhillip’s main focus remains.

ConocoPhillips said its 2016 budget allocates about:

  • $2.6 billion for the Lower 48, down 30% from 2015;
  • $800 million for Canada, down 30%;
  • $1.3 billion for Alaska, down 5%;
  • $1.3 billion for Europe, down 30%;
  • $1.4 billion for the Asia-Pacific and Middle East, down 30% and
  • $300 million for other programs.

“The majority of our capital is going to go to conventional and low cost of supply unconventional investments reflecting the fact that our megaprojects in oil sands and LNG are largely behind us,” Fox said. “Regionally, about two-thirds of the capital is allocated to North America. About 30 percent is earmarked for flexible programs. That means we retain the ability to reduce capital in lower price environments but also means we can flex up in higher prices.”

About 20 percent of the capital budget will go toward base maintenance, Fox said, while some capital is being directed to projects that provide medium- and longer-term growth.

Nearly 85% of the capital targets resources with a cost of supply below $50/bbl Brent, including core unconventionals and conventional legacy fields, he added.

“We believe diversification is an important feature of our strategy,” he added.

If commodity prices turn out to be different, ConocoPhillips has a plan for that.

With a further fall in prices, expect the company to lower production growth, capture more deflation and efficiencies, exercise capital flexibility and use its balance sheet capacity, CFO Jeff Sheets said.

On the flip side, higher prices could bring a “disciplined increase in flexible programs” and higher production growth. But don’t expect the company to ditch its structured cost reductions.

“We believe prices will eventually move higher, but we don’t know when,” Lance added. “We could drive capital expenditure growth and raise production, but I don’t think that would make sense in this current oversupplied market.”

Velda Addison can be reached at vaddison@hartenergy.com.