ConocoPhillips — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparative results are for the three and nine months ended September 30, 2011. The April 30, 2012 separation of the downstream businesses into Phillips 66 makes continuing operations the more representative measure of ConocoPhillips as an independent exploration and production company. Prior periods were presented with those businesses classified as discontinued operations.
Financial performance and position
| Metric | Third quarter 2012 | Nine months 2012 |
|---|---|---|
| Sales and operating revenue | $14.520 billion, down 12% year over year | $43.492 billion, down 12% |
| Income from continuing operations | $1.811 billion; $1.798 billion attributable to ConocoPhillips | $5.807 billion; $5.755 billion attributable to ConocoPhillips |
| Diluted EPS from continuing operations | $1.46 | $4.56 |
| Net income attributable to ConocoPhillips, including discontinued operations | $1.798 billion | $7.002 billion |
| Continuing operating cash flow | Not separately stated for the quarter | $9.846 billion, down 14% |
| Capital expenditures and investments | Not separately stated for the quarter | $11.337 billion |
The filing does not provide a clear consolidated operating-margin measure. The continuing-operations effective tax rate was 52% in the third quarter and 53% for the first nine months. The third-quarter rate was lower than the prior-year 59%, mainly due to tax benefits associated with 2012 asset dispositions.
- At September 30, cash and cash equivalents were $1.268 billion, with a further $2.468 billion in restricted cash from the Phillips 66 distribution. The restricted funds were subject to specified uses within 12 months.
- Total debt was $21.117 billion, down from $22.623 billion at December 31, 2011; debt to total capital was 31%, versus 26%. The company reported $6.0 billion of available revolving-credit capacity.
- Total assets were $115.369 billion and total equity $47.877 billion. The substantial declines from year-end primarily reflect the downstream separation.
- Operating cash flow did not cover reported capital expenditures and investments for the nine-month period. Asset-sale proceeds were $2.088 billion; the $7.818 billion Phillips 66 distribution also supported liquidity and capital allocation.
- Dividends paid were $2.469 billion for the first nine months ($0.66 per share quarterly). Share repurchases were $5.098 billion.
Material changes and operating developments
- Third-quarter continuing earnings increased 21% year over year, principally reflecting improved disposition results and lower production taxes; lower prices and volumes and an after-tax pension settlement expense partly offset the increase.
- Nine-month continuing earnings attributable to ConocoPhillips declined about 5%. Lower production volumes, weaker natural gas and natural gas liquids prices, impairments, higher expenses and the absence of LUKOIL earnings outweighed higher asset-sale gains and higher crude oil and LNG prices.
- Average production was 1.525 million barrels of oil equivalent per day in the third quarter, down 1%; nine-month production averaged 1.569 million, down 4%. Lower volumes reflected dispositions, field decline, maintenance and downtime, partly offset by growth in North American shale and Canadian oil sands.
- Natural gas benchmark prices remained weak: Henry Hub averaged $2.80 per MMBtu in the quarter, down from $4.20 a year earlier. The company cited low U.S. gas prices and lower domestic NGL prices as pressures on results.
- Disposition gains included the sale of the Vietnam business and North Sea assets, and the August sale of the NMNG interest. The company had received about $2.1 billion in asset-sale proceeds through September and remained positioned to complete its $8–$10 billion disposition program by the end of 2013.
Outlook, risks and unusual items
- Management estimated 2012 production at 1.57–1.58 million barrels of oil equivalent per day and expected fourth-quarter production to exceed the third quarter, supported by completed turnarounds and ramp-ups in the Eagle Ford and Canadian oil sands.
- 2012 capital spending was expected to be $15.5–$16 billion. Over the following five years, management planned for 3–5% annual production-volume and margin growth, subject to execution and market conditions.
- Management stated that it planned to raise up to an additional $8 billion through asset sales by the end of 2013. Share repurchases were to remain opportunistic and contingent on commodity prices and disposition proceeds. Full-year Corporate and Other net costs were estimated at $1.1 billion after tax.
- APLNG sanctioned its second 4.5-million-tonne-per-year LNG train, with exports expected to begin in early 2016. ConocoPhillips’ interest was diluted from 42.5% to 37.5%; the dilution generated a $133 million loss. The company provided a completion guarantee with maximum potential payments estimated at $3.2 billion, although reported exposure at September 30 was zero based on its share of facility usage at that date.
- The Mackenzie Gas Project was suspended indefinitely amid weak market conditions and unacceptable commercial terms. Related charges included a $213 million property impairment and $481 million of leasehold impairment; the filing reports $550 million of total after-tax impairments for the first nine months.
- U.K. legislation restricting tax relief on decommissioning costs reduced third-quarter earnings by $170 million through deferred-tax remeasurement. A U.S. pension remeasurement increased the net pension liability by $432 million, and the company recognized $137 million of pension settlement expense before tax.
- Environmental accruals were $380 million at September 30, down from $922 million at year-end, largely reflecting the separation and transfer of downstream-related obligations. The company said known contingent exposures were not expected to exceed accruals by a material amount, while noting estimates may change.
- Legal matters include pending international arbitration relating to Venezuela and Ecuador. A separate September 2012 arbitration decision awarded the company $67 million against PDVSA for pre-expropriation breaches; the company was awaiting further decisions in the larger claims.
- Nigeria flooding interrupted the fourth-quarter drilling program and could affect production; the impact was not yet known. The filing also identifies commodity-price volatility, operational and project risks, regulation, environmental liabilities, political events and cybersecurity as risks.
Important facts for investors to verify
- How production, realized prices and cash generation develop against management’s 2012 production and capital-spending outlook.
- Whether asset dispositions reach the stated program target and how proceeds are allocated among investment, dividends, repurchases and debt repayment.
- Liquidity available after accounting for restricted cash, capital commitments and the FCCL Partnership payment obligation.
- Progress, funding needs and guarantee exposure associated with APLNG, including project completion and the planned 2016 start of second-train exports.
- Potential changes in environmental, tax and legal exposures, and the production effects of Nigeria flooding and other operational disruptions.