ConocoPhillips — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparisons are primarily with Q1 2011. Dollar amounts are in millions unless noted.
Business context
ConocoPhillips was an integrated energy company with Exploration & Production (E&P), Midstream, Refining & Marketing (R&M), Chemicals and other businesses. The company reported that its board had approved the planned separation of downstream businesses into Phillips 66, expected to be distributed to shareholders after the market close on April 30, 2012.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Sales and other operating revenues | $56,132 | $56,530 |
| Total revenues and other income | $58,354 | $58,247 |
| Net income attributable to ConocoPhillips | $2,937 | $3,028 |
| Diluted earnings per share | $2.27 | $2.09 |
| Dividend per share | $0.66 | $0.66 |
| Cash provided by operating activities | $4,182 | $1,947 |
| Capital expenditures and investments | $4,260 | $2,884 |
| Cash and cash equivalents at period end | $3,707 | $5,780 at Dec. 31, 2011 |
| Restricted cash at period end | $6,050 | None reported at Dec. 31, 2011 |
| Total debt | $28,360 | $22,623 at Dec. 31, 2011 |
| Total debt to capital | 30% | 26% at Dec. 31, 2011 |
Net income attributable to the company declined about 3%, while diluted EPS rose as average diluted shares outstanding fell to 1.293 billion from 1.445 billion. The effective tax rate was 46%, versus 48%. The filing does not present a single consolidated operating-margin measure.
Operating cash flow increased mainly because inventory builds were lower than in the prior-year quarter. Investing cash outflow was $3,010, including $4,260 of capital spending and investment, partly offset by $1,109 of asset-sale proceeds. The company repurchased $1,899 of stock and paid $843 in dividends. At quarter-end, current assets were $37,066 and current liabilities $36,430; restricted cash was escrowed and not generally available for company use.
Short-term debt rose to $7,002 from $1,013, largely reflecting $5.8 billion of Phillips 66 notes issued into restricted escrow pending the separation. The company reported $1,097 of commercial paper outstanding and $6.9 billion of available borrowing capacity under revolving facilities.
Material changes and management commentary
- Q1 earnings were affected by lower E&P production and U.S. natural-gas prices, higher impairments, and lower LUKOIL-related earnings than in 2011. These were partly offset by higher crude oil and LNG prices, improved equity-affiliate earnings and asset-sale gains.
- E&P earnings were $2,548, up from $2,352; average total E&P production fell to 1.637 million BOE per day from 1.702 million. Higher prices and the Vietnam disposition gain helped offset lower volumes and impairments.
- R&M earnings were $452, down from $482. U.S. results improved slightly, while international results fell. Management cited improved U.S. refining economics but weaker international margins and an impairment related to the canceled Wilhelmshaven upgrade.
- Exploration expense rose to $679 from $176, including $481 of undeveloped leasehold impairment associated with the Mackenzie Gas Project. The project was suspended indefinitely amid weak market conditions and unacceptable commercial terms; the company also recorded a $213 project-development-cost impairment.
- The Vietnam E&P business was sold for $1.1 billion. The notes report a $937 before-tax gain; the MD&A also describes a $937 after-tax gain, so the gain’s tax characterization is not consistent in the provided filing text and merits verification.
- U.S. WTI averaged $102.99 per barrel, up 10% year over year. Henry Hub natural gas averaged $2.72 per MMBTU, down 34%; management noted prices fell below $2.00 in April and warned prolonged low prices could adversely affect results.
Outlook, risks and contingencies
- Production outlook: 2012 production was expected at approximately 1.55–1.60 million BOE per day, dependent on asset-sale timing. Q2 production was expected to be reduced by approximately 70,000–90,000 BOE per day from international turnarounds and dispositions, with seasonal effects also expected.
- Phillips 66 separation: Shareholders were to receive one Phillips 66 share for every two ConocoPhillips shares held on the April 16 record date. ConocoPhillips expected to receive approximately $5.8 billion plus working-capital adjustments, restricted to dividends, repurchases, debt repayment or a combination within 12 months. Further one-time separation costs of $75–$100 million after tax were expected.
- Other expected charges: The company expected an approximately $135 million after-tax Q2 loss from Sinopec’s planned increase in its APLNG ownership, subject to approvals and a final investment decision. It also anticipated an approximately $200 million Q3 earnings reduction if expected U.K. tax legislation limiting decommissioning-cost relief were enacted.
- Bohai Bay: A late-April agreement provided for $173 million of payments to China’s State Oceanic Administration over two years and $18 million for social projects by December 2014; an $89 million after-tax Q2 charge was expected. This followed earlier fishery-related payments described in the filing.
- Environmental and legal exposure: Environmental accruals were $920 million at March 31. The company said material adverse effects from known contingencies were considered remote, but estimates could change. It continued arbitration matters concerning expropriated Venezuelan and Ecuadorian assets and an arbitration dispute involving Merey Sweeny; outcomes and recoveries were uncertain.
- Other stated risks include volatile commodity prices and refining margins, production and project execution, permitting and regulation, environmental and climate-related obligations, political events and expropriation, and successful execution of the separation and asset-disposition plan. Management planned to raise up to an additional $10 billion through asset sales over the following 12 months.
Most important facts for investors to verify
- Completion and terms of the Phillips 66 distribution, including the downstream assets transferred, separation costs and use of the expected cash distribution.
- Whether restricted escrow cash and related Phillips 66 debt were released or retained after separation, and the resulting ConocoPhillips debt and liquidity position.
- Actual 2012 production versus the 1.55–1.60 million BOE-per-day outlook, including disposition timing and Q2 turnaround impacts.
- Actual amounts and timing of expected APLNG dilution, U.K. tax and Bohai Bay charges.
- The Vietnam gain’s correct before-tax and after-tax amounts, given the differing descriptions in the filing, and the sustainability of earnings excluding disposition gains and impairments.
- Progress on planned asset sales, environmental liabilities and material arbitration claims.