ConocoPhillips — Q1 2010 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2010, compared with the recast first quarter of 2009. ConocoPhillips is an integrated energy company spanning exploration and production (E&P), midstream, refining and marketing (R&M), chemicals, and investments including LUKOIL. Unless noted, financial amounts are in millions of dollars.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Sales and operating revenues | $44,821 | $30,741 |
| Income before income taxes | $3,990 | $1,992 |
| Net income attributable to ConocoPhillips | $2,098 | $800 |
| Diluted EPS | $1.40 | $0.54 |
| Cash from operating activities | $3,040 | $1,885 |
| Capital expenditures and investments | $2,071 | $2,906 |
| Dividends paid on common stock | $744 | $696 |
Cash and cash equivalents were $855 at March 31, up from $542 at year-end 2009. Current assets were $23,593 versus current liabilities of $26,605. Total debt was $28,988, up $335 from year-end; debt to total capital remained 31%. The company had $1,662 of commercial paper outstanding and $6.1 billion of available borrowing capacity under revolving facilities. A $7.85 billion revolving credit facility had no direct borrowings outstanding.
Production averaged 1.828 million barrels of oil equivalent per day, down from 1.925 million in Q1 2009. The effective tax rate was 47%, versus 59%. Management attributed the lower rate mainly to a lower proportion of income from higher-tax jurisdictions than in the prior-year quarter.
Material changes versus the prior comparable period
- Net income attributable to the company rose to $2,098 from $800, primarily on higher crude oil, natural gas liquids and bitumen prices and improved LUKOIL equity earnings. Higher production taxes partly offset commodity benefits.
- Revenue increased 46%, while purchased crude oil, natural gas and products costs rose 60%, mainly reflecting higher commodity and product prices.
- E&P earnings increased to $1,832 from $700. R&M moved to a $4 loss from $205 of earnings; management cited lower refining and marketing margins, weaker international volumes, foreign currency effects and a project impairment.
- LUKOIL Investment earnings were $387, compared with $8. Chemicals earnings rose to $110 from $23; Midstream earnings fell to $77 from $123, partly because Q1 2009 included an $88 after-tax benefit.
- Operating cash flow increased 61%; management cited higher commodity prices, partly offset by a discretionary inventory build. Capital spending decreased to $2,071 from $2,906.
Outlook, commentary, risks and unusual items
- Management said existing cash, operating cash generation and external funding access were expected to meet near- and long-term requirements, including capital spending, dividends, debt payments and FCCL Partnership commitments. Cash flows remain highly sensitive to commodity prices, refining margins and production.
- The company planned approximately $10 billion of asset dispositions over two years, targeting proceeds toward debt reduction and share repurchases. In April, it agreed to sell its 9.03% Syncrude interest for approximately $4.65 billion, subject to approvals and an expected Q3 2010 closing. It also announced a plan to sell up to half its LUKOIL interest over two years; sales through April 30 generated $274 million. A share repurchase program of up to $5 billion over two years began in April; $254 million had been spent through April 30.
- The quarterly dividend was increased from 50 cents to 55 cents per share, payable June 1, 2010. The $819 million declared dividend payable was recorded as a noncash financing item at quarter-end.
- Accounting change: beginning January 1, 2010, the company recorded its share of LUKOIL earnings on a one-quarter lag rather than estimating current-quarter earnings; prior periods were recast. The change increased reported Q1 2010 net income by $116 million versus the estimate-based amount and reduced recast Q1 2009 net income by $40 million. Consider this when interpreting year-over-year comparisons.
- Unusual charges included an $88 million pretax impairment for ending participation in the Yanbu refinery project and an $83 million after-tax Shah Gas project-cost write-off. Exploration expense also rose substantially, primarily due to the Shah project cancellation.
- Environmental accruals were $979 million at March 31; management said a substantial portion is expected to be spent over the next 30 years. The filing identified 67 unresolved U.S. sites with potential environmental liability. Recorded indemnification liabilities were $396 million; maximum future exposure for some indemnifications could not be reasonably estimated.
- Other exposures include a Qatargas 3 completion guarantee with up to $850 million of potential payments if project completion is not achieved, and Australia Pacific LNG guarantees estimated at up to $1.475 billion under specified failure conditions (or $3.185 billion for intentional or reckless breach). Management considered future payments unlikely. The $7.5 billion FCCL contribution obligation, plus interest, is payable over ten years beginning in 2007.
- Key stated risks include commodity-price and refining-margin volatility, production decline and project execution, environmental and climate regulation, litigation, political and currency developments, and delays in planned asset sales. Chukchi Sea lease litigation remained pending; the company planned no exploration well there before 2012. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the Syncrude sale closes as planned, required approvals are obtained, and proceeds are applied as described.
- Actual execution and proceeds from the planned LUKOIL divestiture and share repurchases, and the resulting effects on debt and share count.
- Whether higher prices and operating cash flow persist, given lower production, inventory requirements and volatile refining margins.
- The sustainability of segment earnings, particularly E&P and LUKOIL, and the effect of the one-quarter-lag accounting method on comparisons.
- Progress and funding obligations for FCCL and Qatargas 3, and developments in environmental, legal and guarantee exposures.