CONOCOPHILLIPS annual report, FY2016

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ConocoPhillips — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. ConocoPhillips is an independent exploration and production company operating in 17 countries.

Financial and operating performance

  • Revenue: Sales and other operating revenues were $23.7 billion, down 20% from $29.6 billion in 2015, principally reflecting lower commodity prices.
  • Profitability: Loss from continuing operations was $3.56 billion, versus a $4.37 billion loss in 2015; loss attributable to ConocoPhillips was $3.62 billion, or $2.91 per share. Lower exploration costs, operating expenses and impairments helped, while weaker prices, lower sales volumes and higher interest expense offset some improvement. The filing does not provide a single clearly defined operating-margin measure.
  • Cash flow and investment: Operating cash flow was $4.40 billion, down 42% year over year. Capital expenditures and investments were $4.87 billion, down 52%. Asset-sale proceeds were $1.29 billion. Cash increased to $3.61 billion.
  • Liquidity and debt: Total debt was $27.28 billion, up from $24.88 billion; debt-to-capital rose to 44% from 38%. Cash plus $6.75 billion of available revolving-credit capacity supported liquidity. Current assets were $8.61 billion and current liabilities $6.91 billion.
  • Production and prices: Average production was 1.569 million BOE per day, down 1%. Worldwide realized price fell 17% to $28.35 per BOE. Average crude oil price was $40.86 per barrel, natural gas $3.00 per MCF, NGLs $16.68 per barrel and bitumen $15.27 per barrel.
  • Reserves: Year-end proved reserves were 6.424 billion BOE, down from 8.180 billion BOE. Negative reserve replacement was 194% for 2016; management attributed reserve reductions chiefly to lower prices and asset dispositions, including significant bitumen revisions.

Changes from the prior comparable period

  • Revenue and operating cash flow declined substantially as oil, gas, NGL and bitumen prices remained weak, although prices strengthened in the fourth quarter.
  • The continuing-operations loss narrowed by about $812 million. Exploration expense fell 54%, production and operating expense fell 19%, and reported impairments fell markedly versus 2015, which included a $1.5 billion APLNG investment impairment.
  • Production edged lower overall, but excluding Libya and adjusted for downtime and dispositions, management reported 3% growth. New project production, including APLNG and Canadian oil sands, partly offset field decline and sold volumes.
  • Debt increased and debt-to-capital rose despite approximately $2.3 billion of debt repayment in the second half. Dividends paid fell to $1.25 billion from $3.66 billion after the quarterly rate was cut from $0.74 to $0.25 per share.

Outlook, commentary and key risks

  • 2017 outlook: Production guidance is 1.540–1.570 million BOE per day, excluding Libya and future dispositions. The company set a $5 billion capital budget, targeting investment to maintain production and fund the existing dividend. Its 2017–2019 plan assumes Brent at or above $50 per barrel and $5–$8 billion of asset-sale proceeds.
  • Capital allocation: Management prioritized maintaining production and the existing dividend, then dividend growth and debt reduction, followed by share repurchases and production growth. The company announced a three-year, up-to-$3 billion repurchase program and a 6% quarterly dividend increase to $0.265 beginning in 2017. It targeted debt of $20 billion by year-end 2019.
  • Portfolio and unusual items: The company continued a planned $5–$8 billion asset-disposition program, primarily involving North American natural gas assets. APLNG’s estimated fair value exceeded book value at year-end, but management said it could fall below book value by March 31, 2017 if then-current price and currency outlooks persisted. The filing also reports an $88 million gain from mineral properties received from a trust and a $76 million pretax damage-settlement benefit.
  • Risks: Results, cash flow, reserve economics and asset values remain highly exposed to commodity prices. Other material risks include reserve replacement, impairment, access to capital and credit-rating changes, execution and pricing of planned asset sales, environmental and climate regulation, operational and cyber incidents, geopolitical instability, joint-venture performance and counterparty credit.
  • Contingencies and subsequent developments: Venezuela expropriation damages remained in arbitration. In February 2017, an Ecuador tribunal awarded Burlington $380 million, while separately awarding Ecuador $42 million for specified impacts; Ecuador sought annulment. A $43 million pretax Angola rig-cancellation charge was expected in first-quarter 2017. The company said known contingencies were not expected to materially affect consolidated financial position.
  • Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified. The company expected the new lease standard to have a material financial-statement impact.

Investor verification priorities

  1. Reconcile reported production figures, especially the distinction between 1.569 million BOE per day including Libya and the adjusted 2017 comparison base.
  2. Review the causes and sustainability of the 1.756 billion BOE proved-reserve decline, including oil-sands price revisions and future reserve replacement.
  3. Assess the assumptions, timing and net proceeds behind the $5–$8 billion asset-sale plan and the related production impact.
  4. Verify debt maturities, available liquidity, the $20 billion debt target and the capacity to fund capital spending, dividends and buybacks under lower-price scenarios.
  5. Monitor APLNG valuation, project-finance guarantees and operating performance, together with the Ecuador and Venezuela arbitration outcomes.