ConocoPhillips — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The interim financial statements are unaudited. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context
ConocoPhillips is a global exploration and production company. Management described a persistently volatile, oversupplied energy market and prioritized maintaining investment-grade credit, funding the dividend and disciplined investment, reducing debt, and repurchasing shares. The company continued to sell noncore assets and focus on lower-cost-of-supply operations.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Sales and operating revenues | $6,781 | $5,348 | $14,299 | $10,469 |
| Total revenues and other income | $8,882 | $5,575 | $16,653 | $10,590 |
| Net loss attributable to ConocoPhillips | $(3,440) | $(1,071) | $(2,854) | $(2,540) |
| Loss per share, diluted | $(2.78) | $(0.86) | $(2.30) | $(2.04) |
| Impairment expense | $6,294 | $62 | $6,469 | $198 |
Higher realized prices lifted sales revenue, but reported losses widened in Q2, principally because of impairments and a $234 million pretax charge for premiums on early debt retirements. The Q2 loss also included a $1.855 billion pretax gain on the Canadian asset sale. No operating-margin figure is clearly provided in the filing text; margins are not readily comparable given the unusually large impairment and disposition items.
- Cash flow and investment: First-half operating cash flow was $3.541 billion, versus $1.680 billion a year earlier. Capital expenditures and investments were $1.986 billion, down from $2.954 billion. Asset-disposition proceeds were $10.742 billion, versus $363 million.
- Liquidity: Cash and cash equivalents were $7.534 billion at June 30, 2017, and short-term investments were $2.733 billion. The company had $6.75 billion of available revolving-credit capacity and no commercial paper outstanding.
- Debt: Total debt was $23.468 billion, down from $27.275 billion at December 31, 2016; debt to total capital was 43%, versus 44%. Q2 included $3.0 billion of debt redemptions. The remaining $645 million term-loan balance was repaid July 5; $1.8 billion of further redemptions were scheduled for August 1.
- Production: Q2 production averaged 1.437 million barrels of oil equivalent per day (MBOED), down 7% year over year. Excluding Libya and adjusting for closed and signed dispositions, management reported underlying growth of 3%. Average realized price was $36.08 per BOE, up 30% year over year.
- Dividend and buybacks: The quarterly dividend was $0.265 per share. The company repurchased $1.075 billion of stock in the first half and said it was on track for $3 billion of repurchases in 2017.
Material changes and unusual items
- Q2 impairments included $3.3 billion pretax for San Juan Basin assets held for sale, $566 million for Barnett assets held for sale, and $2.384 billion for the APLNG equity investment. The APLNG charge followed a lower oil-price outlook and was noncash.
- The May 17 sale of the FCCL oil-sands interest and most western Canada gas assets to Cenovus generated $10.4 billion cash consideration, 208 million Cenovus shares, and a five-year contingent payment. The company recorded a $1.855 billion pretax gain in Q2 and expected another $283 million pretax gain in Q3. The Cenovus shares were valued at $1.533 billion at June 30, reflecting an unrealized $424 million loss from their $1.96 billion cost basis.
- The San Juan Basin sale closed July 31 for $2.5 billion cash after adjustments. Barnett and Panhandle sales were pending at the filing date; Panhandle was agreed after quarter-end.
- Cash rose by $3.924 billion during the first half, substantially reflecting asset-sale proceeds. Financing activities used $5.943 billion, including debt repayments, dividends, and repurchases.
Outlook, risks and contingencies
- Management forecast Q3 production of 1.170–1.210 MBOED and full-year 2017 production of 1.340–1.370 MBOED, excluding Libya and reflecting expected disposition impacts. Full-year capital-expenditure guidance was reduced to $4.8 billion.
- Management expected more than $16 billion of asset dispositions in 2017, year-end debt below $20 billion, and a longer-term debt target of $15 billion by year-end 2019. These are forward-looking targets, not guarantees.
- The company anticipated further restructuring charges during 2017 and said additional impairments were reasonably possible as it marketed noncore assets; the amounts were not reasonably quantifiable and could be material.
- Commodity prices, production levels, reserve replacement, execution and completion of asset sales, Cenovus-share liquidity and value, political events, regulation, environmental obligations, and litigation are identified risks. Management said cash flows are highly sensitive to oil and gas prices.
- Contingencies include environmental remediation accruals of $188 million and various lawsuits and arbitrations. The company reported ongoing proceedings involving Venezuela, Ecuador, Angola and Senegal; outcomes and recoveries remain uncertain. Management stated that it believed known contingent exposures were unlikely to exceed accruals by a materially adverse amount.
- Management expected adoption of the new lease accounting standard to have a material impact on financial statements and disclosures. It expected revenue-standard adoption to have an immaterial impact.
Important facts for investors to verify
- Whether the Barnett and Panhandle transactions closed on expected terms, and the final proceeds and timing of contingent payments from asset sales.
- Whether production and $4.8 billion capital-spending guidance were achieved, especially after disposition impacts and planned maintenance.
- How assumptions for commodity prices, production, costs and discount rates support the $7.656 billion APLNG carrying value after impairment.
- Progress toward debt-reduction and share-repurchase targets, including redemption premiums and the use of disposition proceeds.
- The value and planned sale of the Cenovus shareholding, along with any material developments in arbitration, environmental or other legal exposures.