ConocoPhillips — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited interim results; amounts are in U.S. dollars, millions, unless otherwise noted. ConocoPhillips is a global exploration and production company. Nigeria upstream operations, Algeria and Kashagan are presented as discontinued operations.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales and operating revenues | $13,821 | $13,350 | $29,236 | $27,516 |
| Income from continuing operations | $2,065 | $2,066 | $4,182 | $4,090 |
| Net income attributable to ConocoPhillips | $2,081 | $2,050 | $4,204 | $4,189 |
| Diluted earnings per share | $1.67 | $1.65 | $3.38 | $3.38 |
| Dividends per share | $0.69 | $0.66 | $1.38 | $1.32 |
- Q2 revenue increased 4%, while continuing-operations income was essentially flat. First-half revenue rose 6% and continuing-operations income rose 2%.
- Continuing-operations income as a percentage of sales and operating revenues was approximately 14.9% in Q2 2014 versus 15.5% in Q2 2013, and 14.3% versus 14.9% for the first half. These are calculated ratios, not company-reported margin measures.
- Q2 continuing-operations earnings reflected higher prices, volumes and liquids mix, offset by increased operating costs, exploration expense and depreciation, and fewer gains from asset sales and claims. Exploration expense included a $145 million pretax impairment related to offshore Canada properties.
- Operating cash flow was $9,958 for the first half ($9,841 from continuing operations), up from $8,471 a year earlier. The 2014 result included a $1.3 billion FCCL Partnership distribution, which management said was not expected to recur under then-current conditions. Capital expenditures and investments were $8,141; dividends paid were $1,711.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $6,142, short-term investments $288, total assets $121,648 and equity $55,686. Current assets of $18,836 compared with current liabilities of $16,191.
- Total debt was $21,234, down from $21,662 at year-end 2013; debt to total capital was 28%, versus 29%. Short-term debt rose to $1,664 from $589, primarily reflecting the timing of maturities.
- The company had $912 million of commercial paper outstanding under its Qatar funding program, no direct revolving-facility borrowings, and $6.1 billion of available borrowing capacity. Its refinanced $7.0 billion revolving facility expires in June 2019.
- Cash and cash equivalents declined by $104 during the first half. Net cash used in investing activities was $7,963 and net cash used in financing activities was $2,143.
Operating trends and changes versus prior periods
- Q2 production was 1,594 thousand barrels of oil equivalent per day (MBOED), including 37 MBOED from discontinued operations. Continuing-operations production excluding Libya was 1,556 MBOED; adjusted for Libya and downtime, it increased 4% from Q2 2013.
- Lower 48 production grew 10% in Q2, with crude production up 30%; Eagle Ford and Bakken combined production increased 38%. Canada earnings improved substantially, supported by higher bitumen and natural-gas prices and volumes. Asia Pacific and Middle East earnings fell 16%, in part because Q2 2013 included a $146 million after-tax insurance settlement.
- Brent averaged $109.63 per barrel in Q2, up 7% year over year; Henry Hub natural gas averaged $4.68 per thousand cubic feet, up 14%. The company’s total average realized price rose 5% to $70.17 per BOE.
- Higher costs and expenses included a 21% Q2 increase in production and operating expenses and a 61% increase in exploration expenses. Lower asset-sale gains also weighed on comparisons: Q2 after-tax gains were $5 million versus $71 million in 2013.
Outlook, unusual items and risks
- Management maintained its 2014 target of 3%–5% volume and margin growth and raised the midpoint of full-year continuing-operations production guidance, excluding Libya, to approximately 1,525–1,550 MBOED. Q3 guidance was 1,435–1,485 MBOED, reflecting planned maintenance; Q4 guidance was 1,590–1,640 MBOED, anticipating project startups.
- 2014 capital guidance remained $16.7 billion. Depreciation guidance was $8.5 billion, corporate expense $950 million and exploration expense $1.5 billion; production and SG&A expense outlook was $8.7–$8.9 billion.
- The Nigeria upstream sale closed July 30, 2014, after quarter-end, for approximately $1.4 billion in net proceeds, including previously received deposits. The company also transferred its Brass LNG interest in July.
- Subject to project-financing and regulatory conditions, the Freeport LNG agreement termination was expected to require a roughly $520 million after-tax earnings charge. The transactions were expected to result in about $50 million of net cash outflow, while producing estimated annual operating-cost savings of $50–$60 million.
- Risks include volatile commodity prices, production and project execution, transportation constraints, political and regulatory developments, environmental obligations and litigation. The company reported $378 million of environmental accruals. It also disclosed APLNG-related guarantees, including maximum exposure of about $2.9 billion under a project-completion guarantee at quarter-end.
- Damages phases remained pending in the company’s Venezuela and Ecuador arbitration claims. It had paid approximately $236 million in Timor-Leste tax assessments under protest and was awaiting an arbitration decision.
Important facts for investors to verify
- Whether production guidance and planned project startups were achieved, particularly excluding Libya and allowing for maintenance and downtime.
- How much of first-half operating cash flow was recurring, given the FCCL distribution, and whether capital spending and dividends remained funded by operating cash.
- Completion and final proceeds of the Nigeria disposition, and the timing and realized financial impact of the Freeport LNG termination.
- Changes in debt, short-term maturities, available credit capacity, APLNG guarantee exposure and environmental or legal contingencies.
- Whether reported earnings trends persist after adjusting for prior-year insurance, disposition and claims-related gains and the current-period impairment.