ConocoPhillips — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 31, 2019. Unaudited interim financial statements. ConocoPhillips is an independent exploration and production company operating in 17 countries.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Sales and other operating revenues | $7.756bn | $9.449bn | $24.859bn | $26.751bn |
| Net income attributable to ConocoPhillips | $3.056bn | $1.861bn | $6.469bn | $4.389bn |
| Diluted EPS | $2.74 | $1.59 | $5.72 | $3.72 |
| Net cash provided by operating activities | $2.3bn, per management | Not stated here | $8.122bn | $9.151bn |
| Capital expenditures and investments | $1.7bn, per management | Not stated here | $5.041bn | $5.133bn |
- Q3 total production was 1.366 million BOE per day, up 8%; production excluding Libya was 1.322 million BOE per day. Underlying production excluding Libya and acquisition/disposition impacts grew 7% year over year.
- Q3 average realized price was $47.07 per BOE versus $57.71 a year earlier. Brent averaged $61.94 per barrel, down 18% year over year; Henry Hub gas averaged $2.23 per MMBTU, down 23%.
- At September 30, cash and cash equivalents were $7.193bn, short-term investments $0.908bn, and cash, cash equivalents and restricted cash $7.458bn. Total debt was $14.920bn; debt-to-capital was 30%. The $6.0bn revolving credit facility was undrawn and available.
- Total assets were $70.340bn, total liabilities $35.101bn and total equity $35.239bn. Current assets were $15.217bn and current liabilities $5.942bn.
- The effective tax rate was 12% for Q3 and 21% for the nine-month period, versus 36% and 39%, respectively, in 2018.
Material changes versus the prior comparable period
- Reported earnings rose despite lower prices, largely because of the U.K. subsidiary sale: Q3 included a $1.8bn after-tax gain, and the nine-month period included a $2.1bn after-tax gain. The Q3 gain materially elevates reported profit relative to underlying operations.
- Revenue fell 18% in Q3 and 7% year to date, mainly from lower realized commodity prices, partly offset by higher crude volumes. Lower prices also weighed on earnings.
- Operating cash flow fell $1.029bn year to date, primarily due to lower prices and a pension contribution associated with the U.K. sale, partly offset by higher volumes.
- Lower 48 Q3 net income fell to $26m from $513m, reflecting lower realized prices and $186m after-tax of Austin Chalk exploration and leasehold charges. Production growth in the Lower 48 and Alaska helped support volumes.
- Share repurchases were $2.751bn year to date, compared with $2.073bn in 2018; dividends paid were $1.037bn versus $1.009bn. Debt was broadly unchanged from year-end 2018.
Outlook, commentary, risks and unusual items
- Management expects Q4 2019 production of 1.265–1.305 million BOE per day, excluding Libya and reflecting the U.K. disposition.
- 2019 capital expenditures were forecast at $6.3bn, above the original $6.1bn budget, due to additional Alaska appraisal drilling and an Eagle Ford rig. Including about $0.3bn of opportunistic acquisitions, expected total capital expenditures and investments were $6.6bn. Indonesia PSC extension obligations were excluded.
- In October, the company announced a sale of its Australia-West assets to Santos for $1.39bn plus customary adjustments and a potential $75m payment upon Barossa final investment decision. Closing was expected in Q1 2020, subject to approvals. The company said it would retain its Australia Pacific LNG interest and facility operatorship.
- In October, management announced a 38% quarterly dividend increase to $0.42 per share and planned 2020 buybacks of $3bn; both are forward-looking and subject to relevant conditions.
- Management described commodity-price volatility as a central business risk. Other stated risks include production and reserve uncertainty, exploration outcomes, operating disruption, regulation and climate-related measures, litigation, political events, access to capital, and counterparty performance.
- ConocoPhillips reported an $8.5bn-plus-interest ICSID award against Venezuela after correction of the award; Venezuela said it intended to seek annulment. Separately, the company reported receiving about $754m under its PDVSA settlement and said about $12m of an initial payment remained outstanding.
- Environmental remediation accruals were $163m. The company said it considered it remote that known contingencies would exceed existing accruals by an amount materially adverse to its financial statements, while noting estimates may change.
- Unusual items also included a $164m Malaysia deepwater tax-credit benefit, $186m after-tax of Central Louisiana Austin Chalk exploration and leasehold charges in Q3, and a $95m pre-tax impairment of the MWCC investment earlier in 2019. The company adopted lease accounting standards in 2019, initially recognizing $998m of operating lease liabilities and corresponding right-of-use assets.
Important facts for investors to verify
- How much of earnings and cash generation is sustainable excluding the U.K. disposal gain and other tax or investment-related items.
- Delivery against Q4 production guidance and the $6.6bn 2019 capital-spending outlook, including the excluded Indonesia PSC obligations.
- Completion, proceeds and operating impacts of the planned Australia-West sale, and how disposal proceeds are deployed.
- Commodity-price sensitivity, production trends and the effect of lower realized prices on cash flow and Lower 48 profitability.
- Progress collecting Venezuela-related awards and settlement amounts, including the risk of annulment, collection delays and applicable sanctions.
- Whether planned dividends and repurchases remain consistent with cash generation, capital needs and maintaining investment-grade financial strength.