ConocoPhillips 10-Q Summary: Period Ended June 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended June 30, 2003. The financial results reflect the combined operations of Conoco Inc. and Phillips Petroleum Company following their merger on August 30, 2002. The 2002 comparative periods reflect only Phillips Petroleum Company's operations prior to the merger, limiting direct year-over-year comparability. The company operates five primary segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), Chemicals, and Emerging Businesses.
Key Financial Metrics
| Metric (Millions of Dollars) | Q2 2003 | Q2 2002 | 6M 2003 | 6M 2002 |
|---|---|---|---|---|
| Total Revenues | $25,595 | $10,465 | $52,672 | $18,945 |
| Net Income | $1,138 | $351 | $2,575 | $249 |
| Income from Continuing Ops | $1,079 | $312 | $2,349 | $214 |
| Diluted EPS (Net Income) | $1.66 | $0.91 | $3.77 | $0.65 |
| Operating Cash Flow | N/A | N/A | $5,294 | $1,109 |
| Capital Expenditures | N/A | N/A | $(2,883) | $(1,519) |
| Total Debt | $17,569 | $9,600 | $17,569 | $9,600 |
| Cash and Equivalents | $524 | $145 | $524 | $145 |
Note: Q2 2002 debt and cash figures are estimated based on text descriptions of June 30, 2002 balances where specific table data was not provided for that exact date in the text.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 144% in Q2 and 178% for the six months ended June 30, 2003, compared to 2002. This is primarily due to the inclusion of Conoco's assets post-merger and higher sales volumes and prices for crude oil, natural gas, and refined products.
- Profitability: Net income surged 224% in Q2 and 934% for the six-month period. The E&P segment was the primary driver, with net income increasing 216% in Q2 due to higher production volumes and commodity prices.
- Cost Structure: Costs and expenses rose significantly (144% in Q2) reflecting the larger operational scale. Notable increases include purchased crude oil (129% in Q2) and depreciation, depletion, and amortization (114% in Q2).
- Accounting Changes: The adoption of SFAS No. 143 (Asset Retirement Obligations) on Jan 1, 2003, resulted in a cumulative effect benefit of $145 million in Q1 2003, boosting six-month net income.
- Discontinued Operations: Income from discontinued operations increased to $59 million in Q2 2003 from $39 million in Q2 2002, driven by assets classified as discontinued following the merger.
Guidance, Outlook, and Risks
- Outlook: Management expects worldwide E&P production in Q3 2003 to be below Q2 levels due to seasonal declines in the UK and Norway, asset dispositions, and field declines in the U.S. Lower 48. Refinery utilization is also expected to decrease in Q3 due to a fire at the Ponca City, Oklahoma refinery (July 21, 2003), which caused a shutdown of approximately 65,000 barrels per day of throughput.
- Asset Sales: The company plans to raise $2 billion to $3 billion in 2003-2004 through asset sales, including FTC-mandated divestitures and non-strategic E&P properties. Proceeds from asset dispositions totaled $591 million in the first six months of 2003.
- Regulatory Risks: Significant environmental liabilities exist, with an accrual of $845 million at June 30, 2003. The company faces potential costs related to the Kyoto Protocol, EPA sulfur rules (Tier II), and remediation of underground storage tanks.
- Accounting Impacts: New accounting standards (FIN 46 and SFAS 150) are expected to be adopted in Q3 2003, which will likely increase reported debt by approximately $2.5 billion due to the consolidation of certain variable interest entities (leasing arrangements) and reclassification of minority interests.
- Geopolitical Risks: Operations in Venezuela are subject to currency exchange controls and political instability. The company also faces risks related to the timing of Iraqi production restoration affecting global oil prices.
Investor Verification Checklist
- Merger Integration: Verify the realization of cost synergies and the final allocation of the $16 billion purchase price for Conoco, particularly regarding goodwill and deferred tax liabilities.
- Commodity Price Sensitivity: Assess the impact of volatile crude oil and natural gas prices on E&P margins and R&M refining spreads.
- Environmental Accruals: Review the adequacy of the $845 million environmental accrual, especially regarding MTBE contamination and Superfund sites.
- Debt Reclassification: Monitor the Q3 2003 financial statements for the impact of FIN 46 and SFAS 150 on the balance sheet, specifically the increase in debt and reduction in equity.
- Asset Dispositions: Track the progress of FTC-mandated divestitures and the sale of U.S. retail sites to ensure projected cash inflows of $2-3 billion are realized.
- Operational Disruptions: Evaluate the long-term impact of the Ponca City refinery fire on Q3 and Q4 refining capacity and margins.