ConocoPhillips — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated financial statements; comparisons are with Q1 2018 unless otherwise noted. ConocoPhillips is an independent exploration and production company operating in 17 countries.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales and other operating revenues | $9.15 billion | $8.80 billion |
| Total revenues and other income | $10.06 billion | $8.96 billion |
| Net income attributable to ConocoPhillips | $1.83 billion | $888 million |
| Diluted earnings per share | $1.60 | $0.75 |
| Net cash provided by operating activities | $2.89 billion | $2.40 billion |
| Capital expenditures and investments | $1.64 billion | $1.54 billion |
| Total production, including Libya | 1,361 MBOED | 1,269 MBOED |
- Net income attributable to the company rose about 106%. The increase included a $343 million unrealized gain on Cenovus shares, a $147 million PDVSA settlement-related income item, and the absence of $193 million in after-tax early-debt-retirement premiums recorded in Q1 2018. Lower realized crude prices partly offset these factors.
- Sales revenue increased about 4%, with higher crude volumes in the Lower 48 and Alaska and improved Canadian bitumen realizations. Average realized price was $50.59 per BOE, versus $50.49 a year earlier.
- Production excluding Libya was 1,318 MBOED. Underlying production, excluding Libya and approximately 30 MBOED of added volumes from 2018 acquisitions and dispositions, increased 5% year over year. Higher output from the Lower 48, Alaska and Norway contributed to growth.
- Operating cash flow exceeded capital expenditures, dividends of $350 million and share repurchases of $752 million. Cash provided by operations less capital expenditures was approximately $1.26 billion; this is a simple calculation, not a company-reported free-cash-flow measure.
- At March 31, cash and cash equivalents were $6.22 billion, short-term investments $249 million, and total debt $14.95 billion, including $113 million short-term and $14.83 billion long-term. Total debt was nearly unchanged from year-end. The $6.0 billion revolving credit facility was undrawn and available.
- Total assets were $71.50 billion and total equity $32.98 billion. Current assets were $13.68 billion versus current liabilities of $7.37 billion.
- The effective tax rate was 31%, compared with 49% in Q1 2018, reflecting higher before-tax income in lower-tax jurisdictions and a reduction in the U.S. valuation allowance.
Material changes and notable items
- Q1 2019 earnings benefited from the Cenovus share-price increase; the investment was carried at fair value of $1.81 billion at quarter-end, up from $1.46 billion at year-end 2018. Management said it intends to reduce the holding over time, subject to market conditions.
- In January, the company agreed to sell its interests in the Golden Pass LNG Terminal and Pipeline; it recorded a $60 million pretax impairment. The transaction remained subject to regulatory approval.
- In April, ConocoPhillips completed the sale of its 30% Greater Sunrise interest for $350 million before adjustments and expected an approximately $50 million after-tax gain in Q2.
- In April, it agreed to sell two U.K. subsidiaries for $2.675 billion plus interest and customary adjustments. The company anticipated a roughly $2 billion gain on completion in the second half of 2019, subject to approvals and other conditions; it also expected a $200 million U.S. tax benefit in Q2. The sale was not reflected as completed at March 31.
- Adoption of lease accounting on January 1 resulted in initial recognition of $998 million of operating lease liabilities and corresponding right-of-use assets. The filing states adoption did not affect the income statement or cash flows.
- The ICSID tribunal ordered Venezuela to pay $8.7 billion for unlawful expropriation. Venezuela sought correction of calculations, and may seek annulment after that review. Separately, PDVSA was complying with a settlement of an approximately $2 billion ICC award; the filing reports $147 million of settlement-related income in Q1.
Outlook, commentary and risks
- Q2 2019 production guidance was 1,240–1,280 MBOED, excluding Libya, reflecting planned seasonal turnarounds. Full-year 2019 guidance remained 1,300–1,350 MBOED, excluding Libya and the impact of the proposed U.K. divestiture.
- Full-year capital expenditure guidance remained $6.1 billion and excluded the impact of the U.K. sale.
- Management described its strategy as emphasizing returns, financial strength, dividend growth and disciplined investment. It cited price volatility as a key feature of the business and said current liquidity and expected operating cash flow should meet near- and long-term funding needs.
- Key exposures include volatile oil and gas prices, production and reserve-replacement uncertainty, operating and transport disruptions, political and regulatory developments, environmental obligations and litigation, and the ability to complete dispositions and collect from counterparties.
- Environmental remediation accruals were $176 million at March 31. The filing also describes material potential guarantees, including APLNG-related obligations, and states that the maximum potential payments on certain indemnifications cannot reasonably be estimated.
- The company reported climate-related lawsuits and other legal matters; it said it was vigorously defending them. Management stated known contingency costs were not expected to exceed current accruals by an amount that would materially adversely affect the consolidated financial statements.
Important facts for investors to verify
- How much of the year-over-year earnings increase is repeatable, given the Cenovus unrealized gain, PDVSA-related income, tax effects and prior-year debt-retirement costs.
- Whether the U.K. and Golden Pass transactions receive required approvals, close on expected terms and deliver the anticipated proceeds and gains.
- The status, appeal risk and practical collectability of the $8.7 billion ICSID award, separately from PDVSA’s settlement payments on the ICC award.
- Whether production and capital-spending guidance is achieved, particularly given planned turnarounds, natural declines, Alberta curtailments and commodity-price volatility.
- How lease liabilities, environmental obligations, guarantees and legal contingencies evolve, and whether share repurchases and dividends remain supported by cash generation.