ConocoPhillips 10-Q Summary: Quarter Ended March 31, 2006
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2006. The reporting period is defined by the completion of the $33.8 billion acquisition of Burlington Resources Inc. on March 31, 2006. While the acquisition is reflected in the balance sheet, Burlington Resources' results of operations will be included in ConocoPhillips' consolidated income statement beginning in the second quarter of 2006. The company operates through six segments: Exploration & Production (E&P), Midstream, Refining & Marketing (R&M), LUKOIL Investment, Chemicals, and Emerging Businesses.
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Revenues | $47,927 million | $38,918 million |
| Net Income | $3,291 million | $2,912 million |
| Diluted EPS | $2.34 | $2.05 |
| Operating Cash Flow | $4,800 million | $4,089 million |
| Total Debt | $32,193 million | $12,516 million |
| Cash & Equivalents | $3,008 million | $2,421 million |
| Debt-to-Capital Ratio | 30% | 19% |
Profitability: Net income increased 13% year-over-year, driven primarily by higher crude oil and natural gas prices in the E&P segment and increased equity earnings from the LUKOIL investment. The E&P segment contributed 78% of total net income.
Liquidity: Cash and cash equivalents increased by $794 million to $3.0 billion, inclusive of cash acquired from Burlington Resources. The company maintains $5 billion in revolving credit facilities and a $5 billion commercial paper program.
Material Changes vs. Prior Period
- Acquisition Impact: Total assets increased significantly from $107.0 billion to $159.7 billion due to the Burlington Resources acquisition. Goodwill increased by $16.5 billion, and long-term debt rose by approximately $15.3 billion to fund the transaction.
- Revenue Growth: Sales and operating revenues rose 25% to $46.9 billion, primarily due to higher petroleum product prices and increased volumes.
- Segment Performance:
- E&P: Net income rose 43% to $2.55 billion due to higher commodity prices.
- R&M: Net income fell 44% to $390 million due to reduced refining volumes (turnarounds/downtime) and lower international refining margins.
- Midstream: Net income dropped 71% to $110 million, largely due to the absence of a one-time gain on asset sales recorded in Q1 2005.
- Capital Spending: Capital expenditures and investments increased to $4.5 billion in Q1 2006 from $1.8 billion in Q1 2005, reflecting higher international E&P spending and the acquisition of the Wilhelmshaven refinery.
Guidance, Outlook, and Risks
Outlook: The company increased its 2006 capital budget to $16.7 billion to include Burlington Resources' program and further investment in LUKOIL. Management expects to recover underlift positions in Libya by year-end. An asset rationalization process was announced in April 2006, targeting up to $3 billion in proceeds from asset dispositions over the next 18 months.
Management Commentary: Crude oil prices averaged $63.28 per barrel in Q1 2006, up significantly from the prior year. Natural gas prices decreased to $9.01/MMBTU due to mild weather. The company anticipates that liquidity sources will be adequate to meet funding requirements through 2006.
Risks and Contingencies:
- Regulatory/Tax: Potential tax increases in the U.K. (upstream corporation tax), Venezuela (Orinoco Oil Belt), and China (special levy on earnings) could impact future earnings. Alaska is considering changes to its production tax structure.
- Operational: A crude oil pipeline leak at Prudhoe Bay in March 2006 is expected to reduce average 2006 net production by approximately 4,100 barrels per day.
- Environmental: Total environmental accruals were $1.009 billion. The company faces ongoing remediation obligations under CERCLA and RCRA.
- Integration: Risks associated with successfully integrating Burlington Resources' operations and internal controls.
Investor Verification Checklist
- Verify the final purchase price allocation for Burlington Resources Inc., specifically the valuation of goodwill and deferred tax liabilities.
- Monitor the impact of the Prudhoe Bay pipeline leak on Q2 and full-year 2006 production volumes.
- Track the legislative progress of proposed tax changes in the U.K., Venezuela, China, and Alaska.
- Review the progress of the asset rationalization program and the identification of specific assets for disposition.
- Assess the integration of Burlington Resources' debt and the company's ability to refinance the $15 billion bridge facilities as planned.