ConocoPhillips — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited interim results; comparisons are with the corresponding 2015 periods unless noted. ConocoPhillips is an independent global exploration and production company.
Key financial metrics
| Metric | Q3 2016 | 9M 2016 | Comparison / context |
|---|---|---|---|
| Sales and operating revenues | $6.415 billion | $16.884 billion | Down 12% and 27%, respectively |
| Net loss attributable to ConocoPhillips | $1.040 billion; $0.84 per share | $3.580 billion; $2.88 per share | Q3 loss narrowed from $1.071 billion; 9M loss widened from $978 million |
| Operating cash flow | Not separately stated for quarter | $2.960 billion | Down 50% from $5.976 billion |
| Capital expenditures and investments | Not separately stated for quarter | $3.870 billion | Down from $7.913 billion |
| Cash and short-term investments | $4.324 billion at September 30 | Cash alone was $4.090 billion, versus $2.368 billion at year-end 2015 | |
| Total debt | $28.689 billion at September 30 | Up $3.809 billion from year-end 2015; debt to capital was 44%, versus 38% | |
| Production | 1.557 million BOE/day | 1.560 million BOE/day | Q3 was up 3 MBOE/day year over year; 9M was down 2% |
Q3 realized price averaged $29.78 per BOE, down 9% year over year; the 9M average was $26.84 per BOE, down 26%. A simple operating-cash-flow less capital-expenditures calculation implies a $910 million outflow for the first nine months; this is not a company-defined cash-flow measure. The filing does not provide a clear consolidated operating margin.
Changes, outlook and management commentary
- Management cited persistent oversupply and weak commodity prices as the principal pressures on results and cash generation. The 9M loss increase primarily reflected lower commodity prices, alongside higher interest expense and DD&A and the absence of a large 2015 U.K. tax benefit.
- Q3 loss improved modestly year over year, helped by lower exploration and operating costs and a U.K. tax-rate-related benefit. Offsets included lower realized prices, a $174 million APLNG deferred tax charge, dry-hole costs and deepwater rig-cancellation costs.
- 2016 production guidance was raised to 1.560–1.570 million BOE/day, midpoint 1.565 million; Q4 guidance was 1.555–1.595 million BOE/day. Guidance excludes Libya. Full-year capital expenditure guidance was reduced to $5.2 billion from $5.5 billion, following an earlier reduction from $6.4 billion.
- The quarterly dividend had been cut 66% to $0.25 per share. Management said cash, operating cash flow and external funding access were expected to meet near- and long-term requirements, while emphasizing continued cost control, capital discipline and portfolio optimization. It expected about $1 billion of 2016 asset-sale proceeds.
- The company reported $6.75 billion of available revolving-credit capacity at quarter-end and no direct revolver borrowings or letters of credit under that facility. Ratings agencies had downgraded the company earlier in 2016; management stated there were no ratings triggers that would automatically cause debt default.
Material items, risks and contingencies
- Q3 included $123 million of impairment charges; 9M impairments were $321 million. Additional exploration-expense impairments included $203 million for Gulf of Mexico Gibson and Tiber leaseholds and $95 million for the Melmar prospect. A $134 million pretax charge related to terminating the final deepwater drillship contract was also recorded.
- Management estimated APLNG investment fair value at $9.906 billion, below its $10.178 billion book value, but concluded the decline was not other than temporary; the $272 million difference was therefore unrecognized at September 30. APLNG Train 1 completion in October was expected to reduce the company’s project-finance guarantee exposure from $3.2 billion to $1.3 billion.
- Environmental remediation accruals were $258 million. The company reported lawsuits and other claims, and stated known contingency costs were not expected to exceed current accruals by a material amount based on information available. Venezuela and Ecuador expropriation arbitrations remained unresolved; the Timor-Leste tax dispute had been settled.
- Other risks include volatile oil and gas prices, potential asset and reserve impairments, production and exploration uncertainty, political disruption, environmental and climate regulation, litigation, and access to capital. Management warned that 2016 prices could lead to significant year-end proved-reserve reductions, primarily for Canadian oil-sands proved undeveloped reserves, though it did not expect these revisions to materially affect current development plans.
- Subsequent events included repayment of $1.25 billion of notes on October 17, sale of Senegal exploration interests for approximately $440 million on October 28, and planned sale of the South Natuna Sea Block B interest. The Senegal sale included an indemnification for certain potential losses.
Important facts for investors to verify
- Whether commodity prices, realized pricing and production support the company’s 2016 production and cash-flow assumptions.
- Progress on asset sales and the expected timing and net proceeds, including South Natuna Block B and the completed Senegal sale.
- Debt, liquidity, ratings and refinancing needs after the October note repayment, and the company’s ability to maintain its dividend and capital program.
- Whether APLNG’s fair value recovers or an impairment becomes necessary, and how completion milestones reduce related guarantees.
- Potential effects of reserve revisions, impairments, environmental obligations and pending Venezuela and Ecuador proceedings.