ConocoPhillips — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. ConocoPhillips is an independent exploration and production company operating in 16 countries. The period was marked by the COVID-19 demand shock and oil-market supply disruption, sharply lower commodity prices, and production curtailments.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales and operating revenues | $2.749B | $7.953B | $8.907B | $17.103B |
| Net income (loss) attributable to ConocoPhillips | $260M | $1.580B | ($1.479B) | $3.413B |
| Diluted earnings (loss) per share | $0.24 | $1.40 | ($1.37) | $3.00 |
| Cash provided by operating activities | Filing text does not provide a clear quarterly value | Filing text does not provide a clear quarterly value | $2.262B | $5.785B |
Q2 pretax income was $21M, while the income-tax benefit was $257M. The six-month loss included a $1.14B unrealized loss on the Cenovus Energy investment and substantial impairment charges. The filing does not present a single explicit consolidated margin figure.
- Cash, investments and liquidity: At June 30, cash and cash equivalents were $2.907B, short-term investments $3.985B, and available capacity under the undrawn revolving credit facility $6.0B, for reported liquidity of $12.9B. Cash, cash equivalents and restricted cash totaled $3.190B.
- Debt and equity: Total debt was $14.998B, versus $14.895B at year-end 2019; total equity was $31.493B, versus $35.050B. Debt to capital was 32%, compared with 30% at year-end.
- Cash uses, first half: Capital expenditures and investments were $2.525B; dividends paid were $913M; share repurchases were $726M, all in Q1 before the program was suspended.
- Operations and prices: Q2 production was 981 thousand barrels of oil equivalent per day (MBOED). Brent averaged $29.20/barrel, WTI $27.85/barrel, and Henry Hub gas $1.71/MMBtu. Average realized price was $23.09/BOE; realized bitumen price was negative $23.11/barrel.
Material changes versus prior comparable periods
- Q2 revenue fell $5.204B year over year; six-month revenue fell $8.196B. Management attributed the decline primarily to lower realized prices and lower sales volumes, including curtailments and asset divestitures.
- Q2 attributable earnings fell $1.320B year over year. Lower prices and volumes, and the absence of prior-year tax and settlement benefits, outweighed the Australia-West disposition gain and a Q2 unrealized gain on Cenovus shares.
- Six-month attributable results shifted from $3.413B income to a $1.479B loss. Lower prices and volumes, a $1.14B unrealized Cenovus loss and impairments were major factors.
- Six-month operating cash flow declined $3.523B year over year, primarily reflecting weaker prices, curtailments and divestitures.
- Production declined 26% year over year in Q2, to 981 MBOED. The company estimated Q2 curtailments of about 225 MBOED; after adjusting for dispositions, Libya and curtailments, production was slightly above the prior-year quarter.
Outlook, management commentary, risks and unusual items
- Guidance and spending: The company reduced its 2020 operating-plan capital by $2.3B, approximately 35% of its original $6.5–$6.7B plan, and targeted $600M of operating-cost reductions. It suspended share repurchases. Due to continuing uncertainty and volatility, it suspended all further 2020 guidance; prior 2020 guidance should not be relied upon.
- Production outlook: Management estimated Q3 2020 curtailments of 115 MBOED. Alaska curtailments were restored during July; some Lower 48 volumes were restored, with full restoration expected by September. Surmont restoration began in July but was expected to be slower. Curtailments remained subject to monthly review.
- Portfolio transactions: The Australia-West divestiture closed in May, generating $765M in proceeds, with a further $200M due upon final investment decision on the proposed Barossa project. It generated a reported $587M pretax gain. Niobrara and Waddell Ranch interests were also sold. In July, the company agreed to acquire Montney acreage for about $375M plus approximately $30M of assumed financing obligations, subject to approval.
- Impairments and valuation: The company recorded $519M of impairment charges in the income-statement impairment line, including $511M for Lower 48 natural-gas assets; it also recorded a separate $31M exploration expense for Malaysia leasehold costs. Management warned that sustained low prices could trigger further impairments and increase DD&A rates through lower reserve estimates.
- COVID-19 and market risks: The filing cites uncertain pandemic effects on demand, operations, supply chains and counterparties, along with volatile commodity prices, storage constraints, geopolitical disruptions and possible further curtailments. Management said workforce health and safety measures had so far limited operating disruption.
- Credit and contingencies: S&P affirmed the company’s A rating but changed its outlook to negative; Moody’s affirmed A3 with a stable outlook, and Fitch was A with a stable outlook. Environmental remediation accruals were $171M. The company disclosed climate-related and other litigation, and an $8.5B Venezuela ICSID award plus interest subject to ongoing annulment proceedings and a stay of enforcement. In a separate PDVSA settlement, the company reported approximately $754M received and said it had resumed enforcement after alleged defaults.
- Other unusual items: The Cenovus share investment was valued at $971M at June 30, down $1.14B from year-end 2019; its quarterly fair-value movement materially affected reported earnings. The company reported no commercial paper outstanding and had the full $6.0B revolver available.
Important facts for investors to verify
- Whether commodity prices and demand recover, and how that affects realized prices, cash generation, reserves and potential additional impairments.
- Actual production restoration and Q3 curtailments compared with management’s estimates, including Libya’s uncertain restart.
- Execution and final proceeds for the Australia-West and Montney transactions, including the Barossa contingent payment and Montney regulatory approval.
- The sustainability of dividends and liquidity under continued weak prices, given reduced capital spending, suspended repurchases and lower operating cash flow.
- Future Cenovus share values and the resulting earnings volatility, as well as the collectability and enforcement status of Venezuela-related awards and settlement payments.