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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2002, for ConocoPhillips, a major integrated global energy company. The reporting period is defined by the consummation of the merger between Conoco Inc. and Phillips Petroleum Company on August 30, 2002. For accounting purposes, Phillips was designated as the acquirer. The company operates through five segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), Chemicals, and Emerging Businesses. At year-end, the company employed approximately 57,000 people in over 40 countries.

Key Financial Metrics

Note: 2001 figures are restated to exclude discontinued operations where applicable. The 2002 net loss includes significant charges related to discontinued operations and merger costs.

Material Changes vs. Prior Period

• Merger Impact: The combination of Conoco and Phillips significantly increased revenues (up 128%) and assets. However, it also resulted in $557 million in after-tax merger-related costs, including a $246 million write-off of acquired in-process research and development (R&D) costs and $253 million in restructuring charges.
• Discontinued Operations: The company recorded a loss of $993 million from discontinued operations, primarily due to $1,077 million in after-tax impairments and loss accruals associated with retail and wholesale marketing assets mandated for divestiture by the FTC.
• Production Volumes: Worldwide crude oil production averaged 682,000 barrels per day (up 21% from 2001), and natural gas production averaged 2,047 million cubic feet per day (up 53% from 2001), driven largely by the merger.
• Commodity Prices: Average worldwide crude oil sales price increased 1% to $24.07 per barrel, while natural gas sales price decreased 14% to $2.77 per thousand cubic feet.

Guidance, Outlook, and Risks

• 2003 Outlook: Management expects worldwide production of approximately 1.55 million barrels of oil equivalent per day. Crude oil throughputs in R&M are expected to average 2.5 million barrels per day. The 2003 capital budget is approved at $6.5 billion, a 48% increase over 2002, with 75% allocated to E&P.
• Venezuela Disruptions: Political unrest in Venezuela in December 2002 shut down operations at Petrozuata and Hamaca. Limited production resumed in February 2003. Management estimates these disruptions could reduce net income by $30 million to $50 million per month in 2003 while production remains curtailed.
• Divestitures: The company is actively selling a substantial portion of its U.S. retail sites and specific assets mandated by the FTC (e.g., Woods Cross refinery). Completion of these sales is expected in 2003.
• Key Risks: Significant risks include volatility in crude oil and natural gas prices, refining margins, political instability in operating regions (specifically Venezuela and the Middle East), and the potential failure to realize expected synergies from the merger.

Investor Verification Checklist

• Discontinued Operations: Verify the final sale prices and timing of the retail sites and FTC-mandated assets to confirm the accuracy of the $1.4 billion pre-tax impairment charge recorded in Q4 2002.
• Venezuela Exposure: Monitor the status of the Petrozuata and Hamaca joint ventures and the impact of the shutdown on feedstock supply for the Lake Charles and Sweeny refineries.
• Merger Integration: Assess the progress of the restructuring program and the realization of the projected cost savings and synergies.
• Debt Structure: Review the company's ability to service its increased debt load ($19.8 billion) given the volatility in commodity prices and the impact of the Venezuela disruptions on cash flow.
• Accounting Changes: Note the impact of new accounting standards (SFAS No. 143 and FASB Interpretation No. 46) on asset retirement obligations and the potential consolidation of Variable Interest Entities (VIEs) in 2003.