Business context and reporting period
ConocoPhillips’ Form 10-K covers the fiscal year ended December 31, 2017. The company is a global exploration and production company operating in 17 countries, organized across six geographic segments. Its 2017 strategy emphasized financial strength, shareholder distributions, disciplined investment in low-cost-of-supply assets and portfolio optimization.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Sales and other operating revenues | $29.106 billion | $23.693 billion |
| Net loss attributable to ConocoPhillips | $855 million; $(0.70) per share | $3.615 billion; $(2.91) per share |
| Net cash provided by operating activities | $7.077 billion | $4.403 billion |
| Capital expenditures and investments | $4.591 billion | $4.869 billion |
| Total debt | $19.703 billion | $27.275 billion |
| Cash and cash equivalents | $6.325 billion | $3.610 billion |
| Total proved reserves | 5.038 billion BOE | 6.424 billion BOE |
- Revenue rose 23%, principally from higher realized commodity prices. The worldwide average realized price increased 38% to $39.19 per BOE; average crude oil, natural gas liquids, bitumen and natural gas prices all increased.
- Total production, including Libya, declined 12% to 1.377 million BOE per day, mainly due to asset sales and field decline. Excluding Libya and adjusting for closed and planned dispositions, underlying production increased 3% to 1.356 million BOE per day.
- The company reported a loss despite higher prices, including $6.601 billion of impairment expense. Net loss attributable to the company was about 2.9% of revenue; the filing does not present this margin as a reported measure.
- Cash from operations exceeded capital expenditures by $2.5 billion and capital expenditures plus dividends by $1.2 billion. Cash dividends were $1.06 per share, or $1.305 billion in total; share repurchases totaled $3 billion.
- Cash plus short-term investments was $8.198 billion at year-end. Current assets were $16.512 billion and current liabilities $9.397 billion. The company also had $6.75 billion of undrawn revolving-credit capacity and no commercial paper outstanding.
Material changes versus the prior comparable period
- The attributable net loss narrowed by $2.760 billion from 2016, supported by higher commodity prices, lower DD&A and operating costs, disposition gains, tax benefits and the Ecuador arbitration award. These improvements were partly offset by impairments, lower sales volumes after divestitures and a $238 million after-tax charge for early debt retirements.
- Impairments increased to $6.601 billion from $139 million in 2016. Major items included a $3.3 billion pre-tax write-down of San Juan Basin assets before their sale and a $2.384 billion impairment of the APLNG equity investment.
- Asset disposition proceeds were $13.860 billion in the cash-flow statement; total transaction consideration was approximately $16 billion, including Cenovus shares and contingent payments. The Cenovus transaction included the sale of the FCCL interest and most western Canada gas assets; the company also sold San Juan Basin and Panhandle interests.
- Debt fell $7.6 billion during 2017, and the debt-to-capital ratio declined to 39% from 44%. Proved reserves fell about 22%, with dispositions a major factor; organic reserve replacement was 200%, while total reserve replacement was negative 168%.
Outlook, commentary and risks
- Management forecast 2018 production of 1.195–1.235 million BOE per day, excluding Libya, representing approximately 5% growth over 2017 underlying production. First-quarter 2018 guidance was 1.180–1.220 million BOE per day.
- The 2018 capital budget was $5.5 billion, including $3.5 billion of sustaining capital and $2 billion for short-cycle unconventional programs, future major projects and exploration. Management targeted $15 billion of debt by year-end 2019.
- After year-end, the board raised the quarterly dividend to $0.285 per share and accelerated planned 2018 repurchases from $1.5 billion to $2 billion. These plans remain subject to board discretion, market conditions and financial needs.
- The Tax Cuts and Jobs Act produced a provisional $852 million noncash tax benefit from remeasurement of deferred taxes. Management said it did not expect a tax cost from the one-time foreign-earnings transition tax, but noted the tax accounting remained provisional.
- Key risks include volatile oil and gas prices, further impairments, reserve replacement and production declines, political and regulatory changes, environmental and climate-related obligations, operational and cybersecurity incidents, joint-venture and counterparty risks, and the ability to execute dispositions and realize value from the Cenovus shares.
- Environmental remediation costs and asset retirement obligations are significant: year-end accrued environmental costs were $180 million and asset retirement obligations were $7.798 billion. The company reported that known contingencies were not expected to have a material adverse effect based on currently available information.
- The company received a $337 million Ecuador arbitration settlement; $75 million was paid in December 2017 and the remaining $262 million was due by April 2018. Venezuela expropriation arbitrations and climate-related lawsuits remained pending. Management did not expect the reported legal proceedings to materially affect consolidated financial position.
Important facts for investors to verify
- Whether the 2018 production range and underlying growth assumptions were achieved, including the effects of further dispositions and Libya.
- How much of the 2017 loss reduction depended on nonrecurring gains, tax benefits and asset sales, versus recurring operating performance.
- Whether impairment assumptions for APLNG and Lower 48 assets, and the value and monetization of the Cenovus shares, remain supportable.
- Progress toward the $15 billion debt target, and whether operating cash flow can fund capital spending, dividends and repurchases through commodity-price volatility.
- Reserve replacement and development execution, given the decline in reported proved reserves and the effect of dispositions on future production and cash flows.
- Collection of the remaining Ecuador settlement payment and developments in Venezuela, climate litigation and other disclosed contingencies.