ConocoPhillips — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Interim financial statements are unaudited. Dollar amounts are in millions unless otherwise stated.
Business context and reporting period
ConocoPhillips completed the separation of its downstream businesses on April 30, 2012, creating Phillips 66. The company is now focused on exploration and production. The former downstream businesses are presented as discontinued operations for all periods shown, so revenue and earnings comparisons with 2011 reflect a different continuing-business scope.
Financial and operating metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales and operating revenues | $13,988 | $17,176 | $28,972 | $32,956 |
| Income from continuing operations | $1,755 | $2,300 | $3,996 | $4,617 |
| Net income attributable to ConocoPhillips, including discontinued operations | $2,267 | $3,402 | $5,204 | $6,430 |
| Diluted earnings per share | $1.80 | $2.41 | $4.08 | $4.50 |
- Q2 income from continuing operations before tax was $4,089; the effective tax rate was 57%, versus 49% in Q2 2011. The first-half rate was 53%, versus 50%.
- First-half operating cash flow was $6,532, including $6,368 from continuing operations. Capital expenditures and investments were $7,858; cash dividends were $1,661 and share repurchases were $4,949.
- At June 30, cash and cash equivalents were $1,044, with a further $5,000 of restricted cash from the Phillips 66 distribution. Current assets were $16,912 and current liabilities $18,360.
- Total debt was $23,008, including $4,179 short-term debt; debt-to-capital was 33%, versus 26% at year-end 2011. The company reported $5.6 billion of available borrowing capacity under its revolving credit facilities.
- Q2 production averaged 1.542 million barrels of oil equivalent per day, down 6% year over year. First-half production averaged 1.590 million BOED, down 5%.
- Quarterly dividends were $0.66 per share. The company repurchased about 52 million shares in Q2 for approximately $4.9 billion.
Material changes versus the prior comparable period
- Q2 continuing-operations income fell 24%; first-half continuing-operations income fell 13%. Management cited lower production volumes and prices, higher operating costs and, for the first half, higher impairments.
- Production declines reflected field decline, asset sales, reduced China production, North American gas curtailments and downtime. Lower natural gas and natural gas liquids prices pressured results; U.S. Henry Hub averaged $2.21/MMBtu in Q2, down from $4.32.
- Disposition gains increased to $583 in Q2 and $1,523 for the first half, compared with $35 and $648, respectively, in 2011. First-half gains included the Vietnam business and North Sea field sales.
- First-half net income included $1,248 from discontinued operations, versus $1,844 in 2011. The separation also removed downstream assets and liabilities from the year-end balance-sheet comparison.
- Cash and cash equivalents fell from $5,780 at year-end to $1,044; the company also recorded $5,000 as restricted cash. Total equity declined from $65,749 to $46,443, substantially reflecting the downstream separation and share repurchases.
Outlook, commentary, risks and unusual items
- Production guidance: 1.475–1.525 million BOED for Q3 2012 and 1.565–1.585 million BOED for full-year 2012. Planned Alaska and Canada downtime is expected to affect Q3 production.
- Management expected approximately $16 billion of capital spending in 2012 and about $15 billion annually over the following five years, targeting reserve replacement above 100%. It projected 3–5% annual production-volume and margin growth from 2013, supported by major projects.
- The company targeted $8–10 billion of noncore asset sales during 2012–2013; first-half proceeds were about $1.6 billion. Management also described plans to raise up to an additional $8 billion from asset sales over the next 12 months.
- First-half results included a $520 after-tax Mackenzie Gas Project impairment, including a $213 property impairment and $481 leasehold impairment before tax; the project was suspended indefinitely. Q2 results included an $89 after-tax charge related to the Bohai Bay settlement. First-half separation costs were $73 after tax.
- Management expected a Q3 after-tax loss of approximately $135 from dilution of its APLNG ownership to 37.5%, and an approximately $175 reduction in Q3 earnings from U.K. tax-law changes affecting decommissioning-cost relief. Early redemption of $1.5 billion of bonds was expected to produce an approximately $75 pretax loss in Q3.
- APLNG sanctioned a second LNG train in July 2012, with exports expected in early 2016. Management said project financing and Sinopec’s increased stake would reduce ConocoPhillips’ future funding requirements.
- Key risks include volatile oil, gas and LNG prices; production and project execution; permits and regulation; environmental obligations; political disruption and expropriation; and timing or proceeds of planned asset sales. Arbitration proceedings concerning Venezuela and Ecuador expropriations remain ongoing. Management said known contingencies were not expected to have a material adverse financial effect, but estimates for environmental, tax and legal matters may change.
Most important facts for investors to verify
- How post-separation production, prices and continuing earnings compare with prior periods on a consistent E&P-only basis.
- Progress against production guidance, capital-spending plans, the 3–5% growth outlook and the stated asset-sale targets.
- Use of the $5 billion restricted Phillips 66 distribution within the permitted period, and the effects of share repurchases, dividends and debt maturities on liquidity.
- Actual Q3 effects of the APLNG ownership dilution, U.K. tax change and bond redemption.
- Developments in Bohai Bay operations, Mackenzie project suspension, environmental liabilities and the Venezuela and Ecuador arbitrations.