Much of the company's cost-cutting efforts next year will be focused on downsizing its scale by selling non-core assets, reducing the workforce, and other efficiencies. This is somewhat different from 2015 cost cuts, which focused more on reducing the cost of its operations, essentially capturing some of the deflationary pressure from falling oil prices.
Do note that ConocoPhillips is largely leaving the deepwater exploration business, with $400 million in costs associated with that move. Without this expense, its year-over-year cost estimates would be down much more.
Cash flow neutrality and the dividend policy
Perhaps the most contentious issue for ConocoPhillips is its dividend. Simply put, the company is not generating enough operating cash flow to both pay the dividend and fund the capital budget. For 2016, it plans to borrow $2 billion to help fund its spending.
ConocoPhillips aims to achieve cash flow neutrality by 2017. To get there, the company would need a modest increase in the price of oil. Most estimates I have read have ConocoPhillips covering its cash flow shortfall at between $60 and $70 per bbl. This does not seem like much of a hurdle given that oil was near $60 a few months ago and strip prices are hovering near $50.
Nevertheless, there are some out there calling for ConocoPhillips to review its dividend policy. For its part, the company is clear that paying dividends is the highest-priority use of cash.
Though, ConocoPhillips also wants to maintain its single A credit rating. As noted earlier, the company plans to fund part of its budget next year with debt. The credit agencies typically do not like companies spending more in cash than they bring in.
What may force the issue is a credit downgrade. Quite worrying on this front was a recent Moody's note, which placed ConocoPhillips, along with 28 other US E&Ps, on review for downgrades.