ConocoPhillips — 2013 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The interim financial statements are unaudited. Unless noted, financial amounts below are in millions of dollars.
Business context
ConocoPhillips is a global exploration and production company operating through six geographic segments. Its downstream business was spun off as Phillips 66 in April 2012. Results for that business, and for the planned sales of Kashagan, Algeria and Nigeria, are presented as discontinued operations; continuing-operations results are therefore the more comparable measure of the company’s ongoing business.
Financial and operating performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales and other operating revenues | $13,350 | $13,664 | $27,516 | $28,257 |
| Total revenues and other income | $14,142 | $14,842 | $28,793 | $30,925 |
| Income from continuing operations | $2,066 | $1,720 | $4,090 | $3,899 |
| Net income attributable to ConocoPhillips | $2,050 | $2,267 | $4,189 | $5,204 |
| Diluted earnings per share | $1.65 | $1.80 | $3.38 | $4.08 |
| Dividend per share | $0.66 | $0.66 | $1.32 | $1.32 |
- Continuing-operations earnings rose 20% in Q2 and 5% for the first half. Management cited higher volumes, a shift toward liquids and higher-margin areas, higher natural-gas prices, a $234 million after-tax favorable resolution of claims and settlements, and lower production taxes. Lower disposition gains, lower crude oil, NGL and LNG prices, and higher DD&A partly offset these benefits.
- Q2 production from continuing operations was 1.510 million barrels of oil equivalent per day (MBOED), versus 1.489 MBOED a year earlier. Including discontinued operations, Q2 production was 1.552 MBOED. First-half continuing production averaged 1.531 MBOED, compared with 1.535 MBOED.
- Q2 diluted EPS from continuing operations was $1.65, up from $1.35; first-half continuing diluted EPS was $3.28, up from $3.03. Total net income and EPS were lower year over year because 2012 included substantial discontinued-operations earnings.
- Q2 continuing-operations income tax rate was 44%, versus 56%; the first-half rate was 45%, versus 53%. Management attributed the lower rates mainly to a smaller share of income in higher-tax jurisdictions; the first-half rate also benefited from a favorable prior-year tax resolution.
Cash flow, balance sheet and liquidity
- First-half cash from continuing operating activities was $8,297, up from $6,148; total operating cash flow, including discontinued operations, was $8,471, versus $6,532.
- Continuing capital expenditures and investments were $7,096, versus $7,441. Asset-disposition proceeds were $1,676. Dividends paid were $1,629 and debt repayments were $898. Cash and cash equivalents ended June at $3,909, up from $3,618 at year-end 2012.
- At June 30, total debt was $21,721, approximately unchanged from year-end; debt-to-capital was 31%. Total equity was $48,932. The company had $6.5 billion of available borrowing capacity under its revolving facilities; $1,009 of commercial paper was outstanding.
- Total assets were $116,947 and total liabilities were $68,015. Current assets were $22,602 and current liabilities were $16,715. These balances include $7,254 of noncurrent assets held for sale classified in current assets.
- Other financing commitments include a $3,201 carrying value for the FCCL joint-venture acquisition obligation and a $906 capital-lease obligation recognized for ConocoPhillips’ share of the Gumusut floating production system.
Material changes and unusual items
- Gain on dispositions was $95 in Q2 2013, versus $583 in Q2 2012; first-half gains were $153 versus $1,523. The prior-year comparison included major asset-sale gains, including Vietnam and North Sea interests.
- First-half 2013 results included a $146 after-tax insurance settlement related to the Bohai Bay seepage incidents. The company said approximately $153 related to prior agreements with Chinese authorities remained uncollected at June 30.
- Q2 Alaska earnings benefited from a $97 after-tax reduction in an accrual following FERC approval of TAPS pooling agreements. ConocoPhillips expects to pay approximately $356, including interest, to other TAPS owners in Q3 2013.
- Other comprehensive income included a $2,318 net-of-tax foreign-currency translation loss for the first half, reducing accumulated other comprehensive income to $1,840 from $4,087 at year-end.
- In July, Kazakhstan exercised its pre-emption right over the proposed Kashagan sale. Expected proceeds are approximately $5.4 billion, with closing anticipated in 2013. The Algeria and Nigeria sales were also expected to close in 2013. Together, the three sales were expected to generate approximately $9.0 billion.
Guidance, outlook and risks
- Management raised full-year production guidance: continuing operations are expected to average 1.515–1.530 MBOED in 2013; discontinued operations are expected to average 25–40 MBOED. Q3 continuing production is expected to be 1.460–1.490 MBOED, reflecting planned downtime and turnarounds.
- Full-year 2013 capital spending was expected to be approximately $15.9 billion for continuing operations and $0.6 billion for discontinued operations. Management’s five-year objective was annual production-volume and margin growth of 3–5%, supported by high-margin developments.
- The quarterly dividend was increased 4.5% to $0.69 per share in July, payable September 3, 2013. Management estimated a $750 million full-year after-tax loss for Corporate and Other.
- A July agreement to terminate ConocoPhillips’ Freeport LNG terminal-use arrangement is conditional on regulatory approval and project financing. If effective, the company expects to pay a roughly $600 million termination fee, receive repayment of its outstanding loan, incur an after-tax earnings charge of about $540 million, and have a net cash outflow of about $80 million. It anticipates annual operating-cost savings of $50–$60 million over 19 years.
- Commodity prices and production remain key cash-flow sensitivities. The filing also identifies operational and exploration risks, permitting and regulatory uncertainty, environmental and climate regulation, geopolitical events and expropriation, litigation, and execution of planned asset sales.
- Significant exposures include APLNG guarantees, with maximum potential project-completion payments estimated at $3.2 billion and exposure of $2.1 billion based on the facility utilized; environmental accruals of $359; and ongoing disputes involving Venezuela, Ecuador and Timor-Leste. Management stated that known contingencies were not expected to materially adversely affect consolidated financial statements. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the Kashagan, Algeria and Nigeria sales close on schedule and at expected proceeds, including any customary adjustments or approvals.
- Production performance against 2013 guidance, particularly planned downtime, project start-ups, field decline and higher-margin liquids growth.
- Commodity-price, production-volume and working-capital effects on operating cash flow and the ability to fund capital spending and dividends.
- Whether the conditional Freeport LNG termination becomes effective, and the timing and realized net cost, charge and projected savings.
- Developments in APLNG guarantee exposure, environmental liabilities, Bohai Bay recoveries, and the Venezuela, Ecuador and Timor-Leste proceedings.