ConocoPhillips — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. ConocoPhillips is an independent exploration and production company operating in 25 countries; Nigeria is reported as discontinued operations.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales and operating revenues | $8.293B | $13.821B | $16.009B | $29.236B |
| Income (loss) from continuing operations attributable to ConocoPhillips | $(179)M | $2.048B | $93M | $4.151B |
| Diluted EPS from continuing operations | $(0.15) | $1.64 | $0.07 | $3.34 |
| Operating cash flow | Not provided by quarter in the filing text | $4.042B | $9.757B |
- Q2 total production was 1.595 million barrels of oil equivalent per day (MBOED), up from 1.557 MBOED. Production excluding Libya, adjusted for downtime and dispositions, grew 4% year over year.
- Q2 total realized price fell 44% to $39.09/BOE; for the first half it fell 46% to $38.03/BOE. Brent averaged $61.92/barrel in Q2, down 44% year over year.
- Production and operating expense declined 11% in Q2, while depreciation, depletion and amortization increased 13%. The filing does not present a single consolidated operating-margin measure.
- First-half capital expenditures and investments were $5.739B. Operating cash flow less capital expenditures was approximately negative $1.697B; dividends paid were $1.819B. Cash declined $1.249B to $3.813B.
- At June 30, total debt was $24.925B, up $2.360B from year-end; debt to capital was 34%, versus 30%. Total equity was $48.969B. Current assets were $11.944B and current liabilities $8.734B.
Material changes versus prior periods
- Lower commodity prices drove the earnings decline: Q2 shifted from $2.048B of attributable continuing-operations income to a $179M loss; first-half income fell to $93M from $4.151B.
- First-half operating cash flow decreased 59%, reflecting lower commodity prices and the absence of a $1.3B FCCL distribution received in Q1 2014.
- May 2015 debt issuance raised $2.5B; proceeds were for general corporate purposes. Long-term debt increased to $24.787B from $22.383B at December 31, 2014.
- Q2 production increased despite substantial price declines. Lower 48 and Canada reported Q2 continuing-operations losses of $293M and $166M, respectively, versus profits in Q2 2014.
- Foreign currency translation reduced first-half other comprehensive income by $1.932B, principally reflecting the stronger U.S. dollar against the Canadian dollar, Australian dollar and Norwegian krone.
Outlook, commentary, risks and unusual items
- 2015 capital-spending guidance was reduced from $11.5B to $11.0B. Management expected 2015 production growth of 2%–3% excluding Libya, toward the higher end; Q3 guidance was 1.510–1.550 MBOED excluding Libya.
- Management targeted $1B of operating-cost reductions in 2016 versus 2014. The company’s earlier 2016–17 plan anticipated annual capital spending of $11.5B, but management said spending could change with commodity prices. It said 2017 cash-flow neutrality could be achieved at approximately $60 Brent through further capital flexibility.
- In July, the company announced reduced future deepwater exploration spending and terminated a planned Gulf of Mexico drillship contract. It expected Q3 2015 pretax charges of up to $400M for the termination fee and about $60M for capitalized-cost write-offs. Additional second-half restructuring charges were expected, potentially material, but not quantifiable at filing.
- Tax items materially affected results: a $555M U.K. deferred-tax benefit in Q1 and a $129M Canadian deferred-tax expense in Q2. Effective tax rates were negative 80% for Q2 and positive 127% for the first half.
- Exploration and impairment items included $94M of reported impairment charges in the first half and substantial exploration expense, including dry holes and leasehold write-offs. Management reported additional unproved-property impairment expense in Q2; figures in the filing’s notes distinguish these from the income-statement impairment line.
- Risks include volatile oil and gas prices, production and project execution, exploration outcomes, political disruption and Libya’s continued shut-in, environmental and regulatory obligations, and legal proceedings. Environmental remediation accruals were $306M. Venezuela and Ecuador expropriation arbitrations were ongoing; outcomes and potential recoveries were not stated.
- Guarantees include up to $3.1B of exposure under the APLNG project-completion guarantee at June 30 and a $1.7B maximum potential Phillips 66 supply-contract guarantee, with an indemnification asset recorded for approximately $100M. These are contingent exposures, not reported debt balances.
Important facts for investors to verify
- Whether commodity prices and realized margins support management’s production, capital-spending and cash-flow plans.
- Delivery of the 2015 production outlook, project start-ups, and the scale and timing of the targeted cost reductions.
- Final drillship termination costs and restructuring charges, including any effect on future capital plans.
- Liquidity and leverage trends, including cash use, debt issuance, dividend commitments and access to the revolving credit facility; $6.2B of facility capacity was available at June 30.
- Developments in APLNG completion-guarantee exposure, environmental and legal contingencies, and the Venezuela, Ecuador and Timor-Leste proceedings.