ConocoPhillips — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. ConocoPhillips is a global exploration and production company operating in 17 countries.
Key financial and operating metrics
Amounts in US$ billions except per-share data, production and percentages.
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Sales and operating revenues | 7.953 | 8.504 | 17.103 | 17.302 |
| Net income attributable to ConocoPhillips | 1.580 | 1.640 | 3.413 | 2.528 |
| Diluted earnings per share | $1.40 | $1.39 | $3.00 | $2.13 |
| Net cash from operating activities | 2.9 | Not stated | 5.785 | 5.741 |
| Capital expenditures and investments | 1.7 | Not stated | 3.366 | 3.534 |
| Total production | 1,332 MBOED | 1,249 MBOED | 1,346 MBOED | 1,258 MBOED |
Calculated net margin, using net income attributable to ConocoPhillips divided by sales and operating revenues, was approximately 19.9% in Q2 2019 versus 19.3% in Q2 2018, and 20.0% for H1 2019 versus 14.6% for H1 2018. These ratios include material non-operating and unusual items.
At June 30, cash and cash equivalents were $5.941 billion, short-term investments $732 million, total debt $14.923 billion, and equity $33.074 billion. Debt was 31% of total capital, compared with 32% at year-end 2018. The company had $6.0 billion available under its revolving credit facility and no commercial paper or direct facility borrowings outstanding. H1 share repurchases were $2.002 billion and dividends paid were $696 million.
Material changes and drivers
- Q2 revenue declined 6%, and attributable earnings fell $60 million year over year. Lower realized commodity prices, a smaller unrealized gain on Cenovus shares, higher operating costs and legal accruals, and a $73 million after-tax MWCC investment impairment weighed on earnings.
- H1 attributable earnings increased $885 million. Contributors included the U.K.-sale-related $234 million tax benefit, PDVSA settlement income, higher Cenovus share gains, and the absence of prior-year debt-retirement premiums and pension settlement expense. Lower commodity prices, higher DD&A and operating costs, and equity-investment impairments partly offset these items.
- Q2 production excluding Libya was 1,290 MBOED, up 7% year over year; underlying production increased 4%. Lower 48 Big 3 production (Eagle Ford, Bakken and Delaware) rose 26%. Total production growth reflected new wells, 2018 Alaska acquisitions and higher Norway output, partly offset by decline, turnarounds and dispositions.
- Average realized price was $50.50 per BOE in Q2, versus $54.32 a year earlier. Brent averaged $68.82/barrel, WTI $59.80/barrel and Henry Hub gas $2.64/MMBTU, all lower year over year.
Outlook, commentary and unusual items
- Q3 2019 production guidance is 1,290–1,330 MBOED; full-year guidance is 1,310–1,340 MBOED. Both exclude Libya; management cited planned turnarounds.
- 2019 capital expenditure guidance increased from $6.1 billion to $6.3 billion due to additional Alaska exploration/appraisal drilling and an Eagle Ford rig. Including approximately $0.3 billion of acquisitions, total capital expenditures and investments are expected to be $6.6 billion. Guidance excludes obligations under an announced Indonesia production-sharing-contract extension and is expected to be revised after the U.K. sale.
- In July, the company raised expected 2019 share repurchases to $3.5 billion, subject to market conditions and other factors. The quarterly dividend was $0.305 per share.
- The planned sale of two U.K. subsidiaries to Chrysaor for $2.675 billion plus interest and customary adjustments was subject to approvals and other conditions. Management anticipated an approximately $2 billion gain on completion in H2 2019. The assets had approximately 72 MBOED of 2018 production and 99 MMBOE of year-end 2018 proved reserves.
- The Greater Sunrise interest was sold for $350 million before adjustments, generating a $52 million after-tax gain. The company also recorded a $95 million pre-tax impairment of its MWCC investment and a $60 million first-quarter impairment on Golden Pass interests sold in Q2.
- Management described commodity prices as volatile and its strategy as emphasizing returns, financial strength, dividend growth, disciplined investment and share repurchases. It stated that cash and expected operating cash flows, together with external funding access, should meet near- and long-term requirements.
Risks and contingencies
- Results and cash flow are highly sensitive to oil, gas, LNG and NGL prices, production levels, operating costs, and geopolitical and market disruptions. The filing also identifies reserve replacement, exploration, permits, transportation, regulation, climate policy, foreign exchange and access to capital as risks.
- ConocoPhillips reported an $8.7 billion ICSID award against Venezuela for expropriation; Venezuela sought correction of calculations and could later seek annulment. Collection is uncertain. Separately, the company had received approximately $665 million under its PDVSA settlement through Q2 2019; payments continue under a multi-year schedule.
- Environmental remediation accruals were $175 million. The company faces various legal claims, including climate-related and Louisiana operations lawsuits, and stated that material adverse costs beyond current accruals for known contingencies were considered remote based on available information.
- Potential guarantees include up to $760 million for certain APLNG gas-delivery obligations (up to $1.4 billion for intentional or reckless breach), plus other guarantees. The filing says triggering payments are considered unlikely or generally not expected to be material.
Most important facts for investors to verify
- Whether the U.K. divestiture closed on the expected timetable and the realized proceeds, gain, tax effects and production/reserve changes.
- Whether production and capital guidance were revised after the U.K. sale, and whether the company achieved full-year production and repurchase targets.
- Commodity-price assumptions and their effect on realized prices, operating cash flow, capital allocation and returns.
- PDVSA settlement payment progress and the status, enforceability and collectability of the separate ICSID award.
- The persistence of Lower 48 cost and legal-accrual increases, equity-affiliate impairments, environmental exposures and other litigation developments.