ConocoPhillips — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. ConocoPhillips is a global exploration and production company operating in 27 countries. Unless stated otherwise, comparisons are with Q1 2013. The filing presents Kashagan, Algeria and Nigeria results as discontinued operations.
Financial performance
| Metric | Q1 2014 | Prior period / comparison |
|---|---|---|
| Sales and operating revenues | $15.415 billion | $14.166 billion; up 9% |
| Income from continuing operations | $2.117 billion | $2.024 billion; up 5% |
| Net income attributable to ConocoPhillips | $2.123 billion | $2.139 billion |
| Diluted earnings per share | $1.71 | $1.73 |
| Dividend per share | $0.69 | $0.66 |
| Cash from continuing operating activities | $6.278 billion | $4.608 billion; up 36% |
| Capital expenditures and investments, continuing operations | $3.895 billion | $3.391 billion |
| Cash and cash equivalents at quarter-end | $7.520 billion | $6.246 billion at year-end 2013 |
| Total debt | $21.206 billion | $21.662 billion at year-end 2013 |
| Debt as a percentage of total capitalization | 28% | 29% at year-end 2013 |
Continuing operating cash flow less continuing capital expenditures was approximately $2.383 billion, before dividends, debt payments and other uses. The cash-flow increase primarily reflected a $1.3 billion distribution from FCCL Partnership. The filing does not provide a clear consolidated operating-margin figure.
Operations and changes versus Q1 2013
- Reported continuing-operations production averaged 1,532 thousand barrels of oil equivalent per day (MBOED) in the operating statistics; management cited 1,530 MBOED excluding Libya in its overview. Total production including discontinued operations was cited as 1,568 MBOED. Production was down about 1% year over year, but up 3% after adjusting for Libya, dispositions and downtime.
- Average realized price was $71.21 per barrel of oil equivalent, up 4%. Bitumen and natural gas prices increased; crude oil prices were lower. Benchmark Brent averaged $108.22/barrel, down 4%; WTI averaged $98.75/barrel, up 5%; Henry Hub gas averaged $4.94/MCF, up 48%.
- Continuing earnings increased, supported by higher natural gas, bitumen, LNG and natural gas liquids prices; improved third-party gas marketing; and a higher-margin production mix. Offsets included higher operating expenses, lower crude prices, reduced disposition gains and an $83 million after-tax loss on release of transportation and storage capacity.
- Lower 48 and Latin America earnings rose to $320 million from $133 million, and Canada earnings rose to $356 million from $133 million. Alaska earnings increased to $598 million from $543 million. Europe earnings fell to $343 million from $431 million; Asia Pacific and Middle East earnings fell to $756 million from $932 million. Other International reported a $21 million loss versus $14 million of earnings, chiefly reflecting Libya production shut-ins.
- Q1 2014 earnings included only $6 million of after-tax disposition gains, versus a $270 million after-tax disposition benefit in Q1 2013. Continuing-operations effective tax rate was 43%, compared with 47%; the company attributed the decrease mainly to a smaller share of income from higher-tax jurisdictions.
Liquidity, debt and capital plans
- Current assets were $20.4 billion and current liabilities $17.1 billion at March 31. The company held $7.5 billion of cash and had $1.712 billion of short-term debt and $19.494 billion of long-term debt on the balance sheet.
- A $7.5 billion revolving credit facility expires in August 2016. With $912 million of Qatar-program commercial paper outstanding and no direct facility borrowings or letters of credit, reported available borrowing capacity was $6.6 billion. The company said cash, operating cash flow and external funding sources should meet near- and long-term needs.
- The 2014 capital budget was $16.7 billion; $3.9 billion was funded in Q1. Q1 uses of cash also included $855 million of dividends and $450 million of debt repayment. The $400 million 4.75% notes due 2014 were repaid at maturity in February.
Outlook, unusual items and risks
- Full-year 2014 production guidance was unchanged at 1,510–1,550 MBOED from continuing operations, excluding Libya. Q2 guidance was 1,490–1,540 MBOED, reflecting planned downtime and turnarounds. Management stated a broader objective of 3–5% production and cash-margin growth.
- The Nigeria upstream sale was expected to close in Q2 2014, subject to government consents, for approximately $1.4 billion after customary adjustments, inclusive of deposits. The sale agreement for Phillips (Brass) Limited was terminated; the company was evaluating options for exiting the Brass LNG project.
- Freeport LNG termination remained conditional on regulatory approval and project financing, then expected in H2 2014. The company expected to pay an approximately $600 million fee, receive repayment of its outstanding loan, incur an approximately $80 million net cash outflow and recognize an approximately $540 million after-tax charge. It expected annual operating-cost savings of $50–$60 million over 19 years; capacity would decline to zero by July 1, 2016.
- Key exposures include commodity-price volatility, production and project execution, transportation constraints, political and regulatory changes, environmental and climate regulation, and litigation. Environmental remediation accruals were $347 million. APLNG guarantees included approximately $2.8 billion of maximum exposure on the completion guarantee at quarter-end, with a $114 million recorded carrying value.
- Venezuela and Ecuador expropriation cases had reached liability decisions in the company’s favor, but damages remained to be determined. The company had paid approximately $232 million in Timor-Leste tax assessments under protest and was pursuing arbitration. Management said known contingencies were not expected to have a material adverse financial-statement impact based on information then available.
- Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Nigeria’s upstream sale received required consents and closed on the expected terms, and the status of the Brass LNG exit decision.
- Whether Freeport LNG met its approval and financing conditions, and the timing and realized cash, earnings and savings effects of termination.
- Whether production delivered within the 2014 guidance range, especially given continued Libya shut-ins, scheduled downtime and project ramp-ups.
- How sustainable operating cash flow is after excluding the FCCL distribution and working-capital benefit, and how planned capital spending, dividends and debt maturities affect liquidity.
- Developments in commodity prices, APLNG guarantee exposure, environmental remediation costs, and Venezuela, Ecuador and Timor-Leste proceedings.