ConocoPhillips — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. ConocoPhillips is a global exploration and production company operating in 17 countries. Amounts below are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Sales and other operating revenues | $8,798 | $7,518; up 17% |
| Income before income taxes | $1,776 | Loss of $232 |
| Net income attributable to ConocoPhillips | $888 | $586; up 52% |
| Diluted earnings per share | $0.75 | $0.47 |
| Effective income tax rate | 49% | 358%; affected by significant 2017 tax benefits |
| Cash from operating activities | $2,399 | $1,790 |
| Capital expenditures and investments | $1,535 | $966 |
| Total production | 1,269 MBOED | 1,593 MBOED; down 20% |
| Debt at period end | $17,046 | $19,703 at December 31, 2017 |
Operating cash flow exceeded capital expenditures, dividends and share repurchases. Operating cash flow less capital expenditures was $864 million. Cash, cash equivalents and restricted cash ended the quarter at $5,206 million; balance-sheet cash and cash equivalents were $4,984 million, with $288 million of short-term investments. Current assets were $13,187 million and current liabilities $7,109 million. The company reported $6.75 billion of undrawn revolving credit capacity and no commercial paper outstanding.
Q1 cash uses included $2,888 million of debt repayment, $500 million of share repurchases and $338 million of dividends. Capital expenditures rose to $1,535 million from $966 million. The dividend was raised to $0.285 per share; the income statement reports dividends paid per share rounded to $0.29.
Material changes versus the prior comparable period
- Higher realized commodity prices were a key earnings driver: average realized price was $50.49/BOE, up 40% year over year. Brent averaged $66.76/barrel, up 24%; WTI averaged $62.88/barrel, up 21%.
- Reported production declined mainly because of 2017 asset dispositions and field decline. Excluding Libya and adjusting for the first-quarter impact of 2017 dispositions, underlying production increased 42 MBOED, or 4%; production per debt-adjusted share grew 26%.
- Lower DD&A, exploration expense, impairments, production costs and interest expense supported earnings. Exploration expense fell to $95 million from $550 million, while DD&A declined to $1,412 million from $1,979 million.
- Offsets included $193 million of after-tax debt-retirement premiums, a $123 million unrealized loss on Cenovus shares, lower volumes, and the absence of $996 million of deferred tax benefits recorded in Q1 2017.
- Segment earnings improved substantially in Alaska and Lower 48, while Canada moved to a $65 million loss from $948 million of income, primarily reflecting the 2017 Canada asset sale and related tax benefit in the prior-year period.
Outlook, management commentary and significant items
Management raised full-year 2018 production guidance to 1,200–1,240 MBOED, excluding Libya, citing Q1 outperformance and changed disposition assumptions. The outlook also assumes a third-party Malaysian gas pipeline remains out of service for the full year. Q2 production guidance is 1,170–1,210 MBOED, reflecting seasonal turnarounds. Full-year capital expenditure guidance remained $5.5 billion, excluding specified Alaska and Montney acquisitions.
Management said the global oil market was rebalancing and prices had improved, but emphasized that prices remain cyclical and volatile. Capital priorities are to fund sustaining investment and the existing dividend, grow the dividend, reduce debt, repurchase shares and pursue strategic growth. The company accelerated its target to reduce debt to $15 billion from year-end 2019 to year-end 2018; it planned $2 billion of 2018 share repurchases and reported $500 million repurchased in Q1.
- Acquisitions and dispositions: The company agreed to acquire Anadarko’s nonoperated Western North Slope Alaska and Alpine pipeline interests for $400 million, subject to regulatory approval. It acquired Montney acreage for about $120 million. Certain Lower 48 properties were sold for $112 million; Barnett marketing efforts ceased in April and the assets were reclassified as held for use.
- Debt actions: The company redeemed or repurchased $2.65 billion of debt and incurred $206 million of pretax premiums. Fitch and Moody’s affirmed ratings and revised outlooks to positive.
- Legal and contingent matters: In April 2018, an ICC tribunal ruled that PDVSA and subsidiaries owed approximately $2.04 billion in connection with expropriation and related measures; collection efforts were underway. A separate Ecuador settlement’s $262 million second installment was received in April 2018. These are subsequent developments, not Q1 operating cash receipts.
- Environmental and other exposures: Environmental accruals were $173 million at quarter-end. Guarantees include APLNG-related exposures and a $1.27 billion maximum potential Phillips 66 supply-agreement guarantee, partly offset by an indemnification asset. The company said known contingencies were not expected to have a material adverse financial impact, while noting estimation uncertainty.
- Other risks: Commodity price volatility, production and transportation disruptions, political and regulatory developments, environmental and climate-related requirements and litigation could affect results. The filing reported no material changes to the risk factors in the 2017 Form 10-K.
- Accounting and unusual items: Adoption of ASC 606 had no material overall financial statement impact; ASU 2016-01 moved Cenovus equity fair-value changes into earnings. The company expects lease accounting changes effective January 1, 2019 to have a material impact on statements and disclosures.
Important facts for investors to verify
- Whether production guidance is achieved, especially given Malaysian pipeline downtime, seasonal turnarounds and the distinction between reported and underlying production.
- Progress toward the $15 billion year-end 2018 debt target, and the balance among debt reduction, dividends, repurchases and investment.
- Commodity prices, realized prices and Canadian bitumen differentials, which management identified as important drivers of cash flow and earnings.
- Regulatory approval and completion of the Alaska acquisition, and execution of the $5.5 billion capital program.
- Collection and timing of the Venezuela award, and any material developments in environmental, tax or other legal contingencies.
- Comparability of reported results given prior-year Canadian tax benefits, accounting presentation changes and the Cenovus unrealized loss recognized in Q1 2018.