ConocoPhillips — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Financial statements are unaudited; amounts are in U.S. dollars unless noted. ConocoPhillips is an integrated energy company operating in exploration and production, midstream, refining and marketing, chemicals, and other businesses.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales and operating revenues | $47.208 billion | $40.173 billion | $137.715 billion | $106.362 billion |
| Net income attributable to ConocoPhillips | $3.055 billion | $1.470 billion | $9.317 billion | $3.129 billion |
| Diluted earnings per share | $2.05 | $0.97 | $6.21 | $2.08 |
| Dividends per share | $0.55 | $0.47 | $1.60 | $1.41 |
- Cash flow, nine months: Operating cash flow was $10.854 billion, investing cash flow provided $5.784 billion, and financing activities used $9.327 billion. Capital expenditures and investments were $6.371 billion.
- Liquidity at September 30: Cash and cash equivalents were $7.996 billion. The company reported $6.7 billion of available borrowing capacity under revolving facilities, with $1.159 billion of commercial paper outstanding.
- Debt and capitalization: Total debt was $23.601 billion, down from $28.653 billion at year-end 2009. Debt to total capital was 25%, versus 31% at year-end. Total equity was $69.917 billion.
- Production: Total E&P production averaged 1.717 million BOE per day in Q3, down from 1.791 million a year earlier.
- Margins and taxes: Management said global refining margins fell in Q3 from Q2; U.S. and Northwest Europe benchmark crack spreads declined approximately 13% and 15%, respectively. The effective tax rate was 42% for Q3 and 39% for the nine months.
Material changes versus comparable periods
- Q3 net income attributable to ConocoPhillips more than doubled year over year; nine-month earnings also rose substantially. Higher oil, natural gas and natural gas liquids prices, LUKOIL share-sale gains, and improved domestic refining results were key contributors. Lower E&P volumes partly offset these gains.
- Nine-month results included a $2.878 billion pretax gain on the Syncrude sale, completed in June for $4.6 billion, and a $1.219 billion pretax gain on third-quarter LUKOIL share sales. The LUKOIL gain was included in other income.
- Nine-month impairments increased to $1.682 billion from $110 million, primarily reflecting $1.502 billion for the Wilhelmshaven, Germany refinery and $98 million related to the Yanbu refinery project. R&M reported a nine-month loss of $15 million, including the Wilhelmshaven impairment.
- Effective January 1, 2010, the company changed to recording its equity-method share of LUKOIL earnings on a one-quarter lag and retrospectively recast prior periods. This affected comparability; for example, recast Q3 2009 net income attributable to ConocoPhillips was $33 million lower than originally reported.
- After selling 113 million LUKOIL shares during Q3, ConocoPhillips held a 5.9% interest at quarter-end and ceased equity-method accounting after Q3. Remaining shares were classified as a current available-for-sale investment at a fair value of $2.856 billion.
Outlook, commentary, and risks
- Management expected 2010 capital expenditures and investments, loans to affiliates, and FCCL contributions to total $10 billion to $11 billion. It planned to raise a further $4 billion to $5 billion through asset sales by the end of 2011, excluding LUKOIL share sales.
- The company announced a quarterly dividend of $0.55 per share, payable December 1, 2010, and a plan to repurchase up to $5 billion of shares over two years. It had repurchased 22.3 million shares for $1.3 billion through September 30 and said a significant portion of its cash balance was expected to support repurchases.
- Following the lifting of the federal deepwater drilling ban in October 2010, the company was evaluating implications for Gulf of Mexico exploration; management reported no material near-term production impact. Chukchi Sea drilling plans remained under review amid litigation.
- Key exposures include volatile commodity prices and refining margins, production declines and project execution, operational hazards, regulatory and permitting changes, foreign currency and political risks, and environmental and climate-related regulation.
- Environmental accruals were $987 million at September 30. The company reported 73 unresolved U.S. sites with potential environmental liability. It stated that known contingencies were not expected to exceed current accruals by a material amount, while noting estimates may change.
- Qatargas 3 financing involved a construction-completion guarantee with a maximum potential payment of approximately $850 million to third-party lenders; project completion certification was expected in 2011. The filing also describes other guarantees and indemnities, including APLNG-related guarantees.
- Management stated disclosure controls were effective as of September 30 and that no material change in internal control over financial reporting occurred during the quarter. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus Syncrude and LUKOIL divestiture gains and other unusual items.
- Whether E&P production declines continue, and how the loss of LUKOIL equity earnings affects future reported production and earnings.
- Refining-margin trends, particularly international utilization and the continuing effect of the Wilhelmshaven impairment and operating decisions.
- Execution of the remaining asset-sale program, capital spending plans, share repurchases, dividends, and the resulting cash and debt levels.
- Potential exposure from environmental matters, guarantees, project obligations, litigation, and evolving offshore and climate regulations.