ConocoPhillips (COP) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context and results
ConocoPhillips is a global exploration and production company operating in 13 countries. Q2 production was a record 1.805 million barrels of oil equivalent per day (MMBOED), up 7% year over year; production excluding acquisition and disposition effects rose 6%. Lower 48 production also reached a record.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales and other operating revenues | $12,351 | $21,161 | $27,162 | $38,923 |
| Net income | $2,232 | $5,145 | $5,152 | $10,904 |
| Diluted earnings per share | $1.84 | $3.96 | $4.22 | $8.36 |
| Cash provided by operating activities | $3.9 billion | Not clearly stated for quarter | $9.257 billion | $12.982 billion |
| Capital expenditures and investments | $2.9 billion | Not clearly stated for quarter | $5.820 billion | $5.129 billion |
The filing does not provide a conventional operating-margin measure. Total realized price averaged $54.50 per BOE in Q2, down from $88.57. Brent averaged $78.39 per barrel, down 31%, and Henry Hub gas averaged $2.09 per MMBTU, down 71% year over year.
Financial position and capital allocation
- At June 30, cash and cash equivalents were $5.735 billion and short-term investments were $1.080 billion. Total liquidity, including $5.5 billion of undrawn revolving credit, was $12.3 billion.
- Total debt was $16.444 billion, versus $16.643 billion at December 31, 2022; debt was 26% of total capital. Current debt was $879 million. The company reported no commercial paper or direct revolving-facility borrowings outstanding.
- Q2 shareholder distributions totaled $2.7 billion: $1.3 billion in repurchases and $1.4 billion in ordinary dividends and variable return of cash (VROC). First-half dividends paid were $2.838 billion and share repurchases were $3.0 billion.
- Management reaffirmed expected 2023 total return of capital of $11 billion. In August, it declared an ordinary dividend of $0.51 per share and a VROC of $0.60 per share.
Changes versus the prior comparable period
Q2 revenue fell about 42% and net income fell about 57% year over year; first-half revenue and net income declined about 30% and 53%, respectively. Management attributed lower earnings chiefly to weaker realized commodity prices and lower disposition gains. Higher production volumes partly offset these effects, while production and operating expenses and DD&A increased. First-half results also lacked the prior-year $515 million tax benefit from an IRS audit resolution and gains from asset and Cenovus share sales. Operating cash flow for the first half declined $3.7 billion year over year, primarily due to lower realized prices.
Q2 benefit included stronger production, partly offsetting lower prices. Lower taxes other than income taxes also helped cushion earnings declines. The effective tax rate was 33.6% for Q2 and 35.0% for the first half, compared with 32.8% and 29.9%, respectively, in 2022.
Outlook, management commentary, and notable items
- Third-quarter production guidance: 1.78–1.82 MMBOED. Full-year 2023 production guidance increased to 1.80–1.81 MMBOED from 1.78–1.80 MMBOED.
- 2023 capital guidance was narrowed to $10.8–$11.2 billion from $10.7–$11.3 billion. DD&A guidance increased from $8.1 billion to $8.2 billion. Guidance excludes the announced Surmont and APLNG transactions.
- The company describes itself as unhedged and expects commodity prices to remain cyclical and volatile. It cites global demand and supply, OPEC+ actions, geopolitical events, inflation, policy changes, and supply-chain issues as factors affecting results.
- In July, ConocoPhillips agreed to buy the remaining 50% of Surmont for approximately C$4 billion (about $3 billion), plus possible contingent payments of up to C$440 million. Closing is expected in the second half of 2023, subject to approvals and other conditions.
- The company closed its 25% interest in Qatar’s North Field South LNG joint venture in June. It also signed conditional 20-year LNG offtake agreements for approximately 2.2 MTPA at Mexico’s Saguaro facility, subject to the project reaching final investment decision and other conditions.
- Q2 refinancing issued $1.1 billion of 5.3% notes due 2053 and repurchased $1.133 billion principal amount of existing notes. Management said the refinancing extended weighted-average debt maturity from 15 to 17 years and reduced near-term maturities.
Risks and contingencies
Key risks include commodity-price volatility, production and reserve uncertainty, operating disruptions, inflation and project execution, regulatory and climate-related changes, and access to markets and transportation. The filing discusses ongoing environmental, climate, royalty, tax, contract, and other litigation; management says known contingencies are not expected to have a material adverse financial impact based on information currently available, but some claims remain uncertain. Environmental remediation accruals for the U.S. and Canada were $185 million; the company expects substantial related spending over the next 30 years.
ConocoPhillips continues to pursue Venezuelan arbitration awards, including an $8.5 billion ICSID award plus interest; collection is uncertain. It has received approximately $776 million under a separate PDVSA settlement and says PDVSA defaulted on that settlement. A foreign-exchange forward position entered in anticipation of the Surmont acquisition had a $19 million fair-value gain; the filing estimates an adverse hypothetical 10% exchange-rate move could result in an additional pretax loss of about $350 million.
Important facts for investors to verify
- Whether production growth and the increased full-year production guidance are achieved, including the contribution from Lower 48 development.
- How commodity prices, realized prices, and operating costs affect cash generation and the $11 billion 2023 capital-return plan.
- Surmont purchase price, contingent-payment exposure, closing conditions, and financing; likewise, conditions and timing for the APLNG share purchase.
- Progress and capital requirements for LNG projects and the conditional Saguaro offtake arrangements.
- Developments in Venezuelan award enforcement and material litigation or environmental claims, as well as the potential impact of currency movements on the Surmont-related forwards.