ConocoPhillips — 2009 Second-Quarter Form 10-Q
Business context and period: ConocoPhillips is an international integrated energy company. This unaudited filing covers the quarter and six months ended June 30, 2009; comparisons are with the corresponding 2008 periods unless noted. Amounts are in millions of dollars except per-share data and operating statistics.
Financial results and position
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Sales and operating revenues | $35,448 | $71,411 | $66,189 | $126,294 |
| Income attributable to ConocoPhillips | $1,298 | $5,439 | $2,138 | $9,578 |
| Diluted EPS | $0.87 | $3.50 | $1.43 | $6.11 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $4,452 | $12,021 |
| Capital expenditures and investments | Not provided quarterly | Not provided quarterly | $5,578 | $6,720 |
- Second-quarter net income attributable to the company fell about 76% year over year; first-half earnings fell about 78%. Lower oil, natural gas and natural-gas-liquids prices and weaker refining margins were the primary drivers.
- Net cash used in investing was $5,508 in the first half; financing provided $1,100. Cash increased $133 to $888. Operating cash flow was below capital expenditures and investments for the period.
- At June 30, total debt was $30.4 billion, versus $27.5 billion at December 31, 2008; debt-to-capital was 34%, versus 33%. Total equity was $60.0 billion. Short-term debt was $1.4 billion and long-term debt $28.9 billion.
- Current assets were $23.1 billion and current liabilities $23.1 billion. The company reported $888 million in cash. It had $4.8 billion of available borrowing capacity under its $7.35 billion revolving facility; a new $500 million facility was arranged in July.
- The quarterly dividend remained $0.47 per share. First-half dividends paid were $1.393 billion.
- Crude oil prices averaged $59.54 per barrel in Q2, up $16.57 from Q1. Henry Hub natural gas averaged $3.51 per MMBtu, down $1.40 from Q1 and $7.43 from Q2 2008.
Material changes and segment performance
- Exploration and Production: Q2 earnings were $725, down from $3,999 a year earlier. Worldwide production, including equity affiliates, rose to 859,000 barrels of oil equivalent per day from 772,000; international growth offset declines in U.S. output. Lower prices sharply reduced earnings.
- Refining and Marketing: Q2 loss was $52, versus earnings of $664 in Q2 2008. Weak margins and lower volumes were key factors. Worldwide refinery utilization was 88%, versus 93% a year earlier, reflecting market-driven run reductions and maintenance.
- LUKOIL investment: Q2 earnings were $682, versus $774; first-half earnings were $730, versus $1,484. Q2 included a positive $192 million adjustment aligning the prior-quarter estimate with LUKOIL’s reported results.
- Other segments: Q2 Midstream earnings were $31 (prior year $162); Chemicals earnings were $67 (prior year $18). First-half income attributable to the company was $1,425 for E&P, $154 for Midstream, a $52 loss for R&M, $730 for LUKOIL and $90 for Chemicals.
- Production and operating expenses and SG&A declined year over year, reflecting lower costs, foreign-exchange effects and asset dispositions. Interest and debt expense rose 28% in Q2, mainly due to higher average debt and less capitalized interest.
Outlook, risks and unusual items
- Management expected full-year 2009 E&P production to be slightly above 2008, while noting seasonal maintenance and lower North American gas drilling could partly offset first-half gains in the next two quarters.
- Management expected full-year 2009 R&M crude-oil capacity utilization in the mid-80% range, citing planned maintenance and potentially weak margins. No specific earnings or commodity-price guidance was provided.
- In Q2, the company recorded a $51 million noncash charge for full impairment of its Ecuador E&P investments after Ecuadorian authorities continued seizing and selling its crude production despite arbitration tribunal orders. A separate Keystone-related impairment was recorded; the filing describes a $59 million pretax impairment in the financial-statement note and a $72 million after-tax segment impact.
- The company signed an agreement in June to sell its remaining Keystone Pipeline interest to TransCanada, with closing expected in Q3 subject to approvals. Upon closing, Keystone-related guarantees were expected to cease.
- Debt issuance totaled $9 billion in the first half, primarily to reduce commercial paper and for general corporate purposes. Commercial paper outstanding fell to $2.211 billion from $6.933 billion at year-end.
- Material contingent exposures include guarantees for Qatargas 3, Rockies Express and Keystone, as well as Australia Pacific LNG gas-delivery commitments. Environmental accruals were $972 million; management said known contingencies were not expected to have a material adverse effect, while noting estimates can change.
- Management identified commodity prices and refining margins, project execution and production risks, access to capital, political developments and expropriation, environmental and climate regulation, and litigation as risks. The filing reported no material change to previously disclosed risk factors.
Investor verification priorities
- Confirm the drivers and sustainability of the sharp year-over-year earnings decline, particularly commodity prices, refining margins and segment performance.
- Assess whether operating cash generation can support capital spending, dividends, FCCL payments and debt obligations if commodity prices or margins weaken.
- Review the maturity, refinancing and liquidity profile of the increased debt, including commercial paper and the FCCL joint-venture obligation.
- Track the Ecuador arbitration and asset recovery prospects, and the closing and guarantee releases associated with the Keystone sale.
- Evaluate the scale and triggers of joint-venture guarantees, environmental liabilities and other contingencies, including potential effects of changes in laws and market conditions.