Business context and reporting period
ConocoPhillips’ unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. The independent exploration and production company completed its all-stock acquisition of Concho Resources on January 15, 2021; Concho’s results are included from that date, principally in Lower 48.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales and operating revenues | $9.56B | $2.75B | $19.38B | $8.91B |
| Net income attributable to ConocoPhillips | $2.09B | $0.26B | $3.07B | $(1.48)B |
| Diluted earnings per share | $1.55 | $0.24 | $2.31 | $(1.37) |
| Production | 1.588 MMBOED | 0.981 MMBOED | 1.558 MMBOED | 1.135 MMBOED |
- Profitability: Q2 net margin, calculated as attributable net income divided by sales and operating revenues, was approximately 21.9%, versus 9.5% a year earlier. Results included a $418 million gain on Cenovus shares; the filing does not provide a standardized operating-margin figure.
- Cash flow and investment: Operating cash flow was $6.33B for the first half, versus $2.26B in 2020; management reported Q2 operating cash flow of $4.3B. First-half capital expenditures and investments were $2.47B. First-half dividends were $1.17B and share repurchases were $981M.
- Liquidity: June 30 cash and cash equivalents were $6.61B and short-term investments were $2.25B, totaling $8.86B. The company reported more than $14B of liquidity, including $5.7B of available revolver capacity.
- Debt: Total debt was $20.01B, up from $15.37B at year-end 2020, primarily reflecting debt assumed with Concho. Debt-to-capital was 31%, versus 34% at year-end. S&P lowered its long-term rating from A to A-; Fitch and Moody’s affirmed their ratings with stable outlooks.
Material changes versus the prior comparable period
- Q2 attributable net income rose $1.83B year over year, supported by higher commodity prices and volumes, including Concho production and the absence of 2020 North American curtailments.
- Brent averaged $68.83/barrel and WTI $66.07/barrel in Q2, each more than doubling year over year; Henry Hub averaged $2.83/MMBTU, up 65%.
- Higher production and prices increased revenue, but also increased purchased commodities, operating expenses, DD&A and taxes. Q2 production rose 62%, substantially reflecting the acquisition and the recovery from prior-year curtailments.
- First-half results benefited from a $726M after-tax gain on Cenovus shares, compared with a $1.14B after-tax loss in the prior-year period, and from lower impairment charges. Offsetting items included Concho-related transaction and restructuring costs and $233M of after-tax losses on acquired hedges.
Guidance, outlook, risks and unusual items
- Guidance: 2021 capital guidance was reduced to $5.3B and cost guidance to $6.1B. Q3 production guidance is 1.48–1.52 MMBOED, excluding Libya and assuming announced divestitures close. The filing reports expected 2021 distributions of about $6B, including $2.3B in dividends and estimated $3.5B in share repurchases.
- Concho integration: Management raised its expected annual cost and capital savings to approximately $1B by 2022, from a prior $750M estimate. It said integration and savings progress had exceeded expectations; realization remains subject to execution and other risks.
- Capital and strategy: The company intends to reduce gross debt by $5B over five years and expects to monetize its Cenovus shares by year-end 2022, with proceeds directed to incremental repurchases. These plans depend on market conditions and management discretion.
- Unusual items and disputes: The company recorded a $200M Australia-West final-investment-decision bonus but says the buyer has not paid; arbitration is underway. Concho acquisition-related transaction and restructuring charges totaled $314M pre-tax in the first half. Settlement of acquired Concho derivatives generated $761M of cash payments in the first half.
- Risks and contingencies: Earnings and cash flows are highly sensitive to volatile oil and gas prices, production, disruptions and the pace of demand recovery. The filing discusses climate-related litigation and regulation, environmental and other legal matters, and uncertainty in collecting amounts from Venezuela/PDVSA. The ICSID expropriation award is approximately $8.5B plus interest, but annulment proceedings are ongoing; collections are uncertain. Environmental remediation accruals were $188M.
- Climate targets: The company reiterated its ambition for net-zero operated Scope 1 and 2 emissions by 2050, a 35–45% reduction in emissions intensity from 2016 levels by 2030, and zero routine flaring by 2030.
Important facts for investors to verify
- How much of reported earnings and cash flow reflects recurring operations versus Cenovus valuation gains, acquisition effects and other nonrecurring items.
- Whether Concho integration delivers the targeted approximately $1B annual savings by 2022, and how production and capital spending evolve.
- Debt-reduction progress, shareholder distributions and the effect of Cenovus share sales and market prices on planned repurchases.
- Whether the Australia-West bonus is recovered and the status and collectability of Venezuela-related awards and settlements.
- Commodity-price, operating, environmental, climate-litigation and regulatory exposures, including any material changes in contingencies or credit ratings.