ConocoPhillips 10-Q Summary: Period Ended September 30, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine-month period ended on that date. The reporting period is significantly impacted by the completion of the $33.9 billion acquisition of Burlington Resources Inc. on March 31, 2006. Burlington Resources' results of operations are included in ConocoPhillips' consolidated financial statements beginning April 1, 2006. The acquisition added approximately 2 billion barrels of oil equivalent to proved reserves.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Total Revenues and Other Income | $49,585 million | $145,988 million |
| Net Income | $3,876 million | $12,353 million |
| Diluted EPS (Net Income) | $2.31 | $7.78 |
| Operating Cash Flow | Not reported for quarter | $15,879 million |
| Total Debt | $27.8 billion | $27.8 billion |
| Cash and Cash Equivalents | $696 million | $696 million |
| Capital Expenditures (9 months) | N/A | $11,513 million |
Segment Performance (Net Income, 3 Months): Exploration & Production (E&P) contributed $1,904 million; Refining & Marketing (R&M) contributed $1,464 million; LUKOIL Investment contributed $487 million.
Material Changes vs. Prior Period
- Revenue and Income: Net income for the nine months ended September 30, 2006, increased to $12.353 billion from $9.850 billion in the prior year period. This improvement was driven by the inclusion of Burlington Resources, higher crude oil and natural gas liquids prices, and improved marketing margins.
- Costs and Expenses: Purchased crude oil, natural gas, and products decreased 11% in the third quarter compared to 2005, primarily due to the implementation of EITF Issue No. 04-13 (netting purchases and sales with the same counterparty). Depreciation, depletion, and amortization (DD&A) increased 104% in the third quarter due to the Burlington acquisition.
- Debt Levels: Total debt increased significantly to $27.8 billion from $12.5 billion at year-end 2005. This reflects $15.3 billion in debt issuances and the assumption of $4.3 billion in Burlington Resources debt to fund the acquisition.
- Impairments: The company recorded $267 million in impairments in the third quarter of 2006, compared to none in the same period of 2005. These were primarily related to assets held for sale in the R&M and E&P segments.
- Tax Rate: The effective tax rate for the third quarter was 51%, compared to 42% in the prior year, largely due to unfavorable tax law changes in the United Kingdom.
Guidance, Outlook, and Risks
- Capital Budget: The 2006 capital expenditures and investments budget was increased to $17 billion in the second quarter to include Burlington Resources' program and investments to increase LUKOIL ownership to 20%.
- Production Outlook: E&P production is expected to increase in the fourth quarter of 2006 due to the resumption of operations at Prudhoe Bay and normal seasonality. However, this is partially offset by a reduction in production from the Bayu-Undan project in the Timor Sea and potential cuts from OPEC production reductions affecting Venezuelan operations.
- Asset Rationalization: The company expects to generate $3 billion to $4 billion in proceeds from asset dispositions by the end of 2007 as part of an asset rationalization program.
- Joint Ventures: ConocoPhillips announced a venture with EnCana Corporation to create an integrated North American heavy-oil business, expected to close on January 2, 2007. ConocoPhillips expects to contribute $7.5 billion over 10 years.
- Risks: Key risks include fluctuations in commodity prices, refining margins, and political/regulatory changes (e.g., tax increases in Venezuela and the UK). The company also faces environmental remediation liabilities, with an accrual of $1.034 billion as of September 30, 2006.
Investor Verification Checklist
- Acquisition Integration: Verify the progress of integrating Burlington Resources operations and the realization of projected synergies.
- Debt Servicing: Monitor the company's ability to service the increased debt load ($27.8 billion) amidst potential commodity price volatility.
- Tax Impacts: Assess the long-term impact of the UK supplementary corporation tax increase and the Venezuelan extraction tax on future earnings.
- Asset Dispositions: Track the execution of the asset rationalization program and the actual proceeds realized versus the $3-$4 billion target.
- Prudhoe Bay Operations: Confirm the stability of production levels at the Prudhoe Bay field following the pipeline leak and corrosion concerns.
- Environmental Liabilities: Review updates on the $1.034 billion environmental accrual and potential for additional costs from Superfund sites.