ConocoPhillips Q1 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. ConocoPhillips operates globally in exploration and production (E&P), midstream, refining and marketing (R&M), and chemicals. The quarter was characterized by a severe downturn in global commodity prices due to the economic crisis, with West Texas Intermediate crude oil averaging $42.97 per barrel and Henry Hub natural gas at $4.91 per MMBtu.
Key Financial Metrics
| Metric (Millions USD) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenues and Other Income | $31,280 | $56,552 |
| Net Income Attributable to ConocoPhillips | $840 | $4,139 |
| Diluted Earnings Per Share | $0.56 | $2.62 |
| Operating Cash Flow | $1,885 | $6,587 |
| Capital Expenditures | $2,906 | $3,322 |
| Total Debt | $29,379 | $27,455 |
| Cash and Cash Equivalents | $802 | $1,423 |
Segment Performance: The E&P segment contributed $700 million (83%) of total net income. The LUKOIL Investment segment earnings dropped significantly to $48 million from $710 million. The R&M segment reported $205 million in net income.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 44% year-over-year, driven by a 48% drop in purchased crude oil and product costs and significantly lower sales prices.
- Profitability: Net income attributable to ConocoPhillips fell 80% to $840 million. This was primarily due to lower commodity prices in E&P, reduced earnings from LUKOIL, and lower refining volumes in R&M.
- Cash Flow: Operating cash flow decreased 71% to $1.9 billion, reflecting the direct impact of lower commodity prices.
- Debt Structure: Total debt increased by $1.9 billion to $29.4 billion. In February 2009, the company issued $6 billion in long-term notes (due 2014, 2019, and 2039) to reduce commercial paper balances.
- Dividends: The quarterly dividend remained unchanged at $0.47 per share.
Outlook, Risks, and Contingencies
- Guidance: Management expects Q2 2009 E&P production to be lower than Q1 due to scheduled maintenance. R&M crude oil capacity utilization is expected to be in the upper-80-percent range.
- Legal Proceedings (Ecuador): ConocoPhillips is in arbitration with the Republic of Ecuador regarding the Windfall Profits Tax Law. In March 2009, despite a temporary restraining order from the ICSID Tribunal, Ecuadorian authorities confiscated approximately 470,000 net barrels of crude oil. The company is awaiting a decision on provisional measures to prevent future confiscation.
- Legal Proceedings (TAPS): The FERC issued an order accepting tariff rates for the Trans Alaska Pipeline System for 2007 and 2008, ordering refunds to shippers. ConocoPhillips is evaluating the impact on existing accruals.
- Environmental: Total environmental accruals were $960 million at March 31, 2009. The company faces ongoing liabilities related to 64 unresolved sites under CERCLA and comparable state laws.
- Off-Balance Sheet Arrangements: Significant guarantees exist for joint ventures, including Qatargas 3 (max exposure $1.2 billion), Rockies Express Pipeline (max exposure $480 million), and Keystone Pipeline (max exposure $220 million after reimbursement).
Investor Verification Checklist
- Commodity Price Sensitivity: Verify the impact of current crude oil and natural gas prices on Q2 and full-year 2009 cash flow projections.
- Ecuador Arbitration Status: Monitor the ICSID Tribunal's decision on provisional measures regarding the confiscation of oil production in Blocks 7 and 21.
- Debt Refinancing: Confirm the successful rollover of commercial paper and the utilization of the $7.35 billion revolving credit facility given credit market volatility.
- Capital Spending Discipline: Assess whether capital expenditures will remain at Q1 levels ($2.9 billion) or be further reduced in response to lower margins.
- LUKOIL Valuation: Review the basis difference amortization and potential impairment risks associated with the 20% investment in LUKOIL given the depressed Russian market.