ConocoPhillips — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited interim results; comparisons are with Q1 2016 unless otherwise noted. Dollar amounts are in millions except per-share data and operating statistics.
Business context and results
ConocoPhillips is an independent exploration and production company operating across six geographic segments. Management emphasized cost discipline, a strong investment-grade balance sheet, dividend growth and disciplined capital allocation amid volatile commodity markets.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Sales and operating revenues | $7,518 | $5,121; up 47% |
| Net income (loss) attributable to ConocoPhillips | $586 | $(1,469) |
| Basic and diluted earnings (loss) per share | $0.47 | $(1.18) |
| Cash provided by operating activities | $1,790 | $421 |
| Capital expenditures and investments | $966 | $1,821 |
| Production | 1,593 MBOED | 1,578 MBOED; up 1% |
| Average realized price | $36.18/BOE | $22.94/BOE; up 58% |
Reported net margin was approximately 7.8% of sales, but was materially affected by a $996 million deferred tax benefit related primarily to the planned Canadian asset sale. Pretax loss was $232 million; the reported income tax benefit was $831 million and the effective tax rate was 358%. Results therefore do not indicate equivalent improvement in underlying pretax profitability.
Operating cash flow less capital expenditures and investments was approximately $824 million, versus approximately negative $1.4 billion in Q1 2016. Cash flow also included a $180 million adverse cash impact from settling cross-currency swaps and a $130 million Cenovus deposit related to the Canadian sale.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $3.109 billion and short-term investments were $252 million. Current assets were $10.728 billion versus current liabilities of $7.526 billion.
- Total debt was $26.435 billion, down $840 million from year-end 2016, principally following an $805 million prepayment on the term loan due in 2019. Debt to total capital was 43%, versus 44% at year-end.
- The company had $6.75 billion available under its revolving credit facility, no commercial paper outstanding and no direct revolver borrowings. It reported compliance with the term-loan covenant.
- Cash declined by $501 million during the quarter. The company paid $331 million in dividends and repurchased $112 million of shares; capital expenditures and investments were $966 million.
Material changes and significant items
- Higher realized prices and improved equity earnings contributed to the earnings recovery; the Canadian deferred tax benefit was a major additional factor. Equity earnings improved to $200 million from a $149 million loss.
- Production and operating expenses fell 4% year over year. Depreciation, depletion and amortization declined 12%, while exploration expense increased to $551 million from $505 million, including higher dry-hole costs.
- Segment results included $948 million of Canadian income, substantially influenced by the tax benefit; Lower 48 reported a $362 million loss, improved from an $820 million loss. Corporate and Other losses widened to $348 million from $273 million.
- First-quarter impairment charges were $175 million, including $174 million in Alaska. Separately, the company recorded a $43 million pretax charge for cancellation of the Athena drilling-rig contract and a $60 million pension settlement expense.
Outlook, transactions and risks
- Second-quarter 2017 production guidance was 1,495–1,535 MBOED, excluding Libya and the effects of the announced Canada and San Juan Basin dispositions. Full-year production and capital-spending guidance was unchanged, but the filing text does not provide the numerical full-year guidance values.
- The March agreement to sell the 50% FCCL interest and most western Canada gas assets was valued at approximately $13.3 billion based on Cenovus’s signing-date share price: $10.6 billion cash, 208 million Cenovus shares and a five-year contingent payment tied to Western Canada Select prices. Closing was expected in Q2, subject to conditions and regulatory approval. Management expected to use proceeds to reduce debt to $20 billion in 2017; its longer-term debt target was $15 billion by year-end 2019.
- On April 12, 2017, the company agreed to sell its San Juan Basin interests for up to $3 billion, including $2.7 billion cash and up to $300 million contingent consideration. Closing was expected in Q3, subject to approvals. Management expected an approximately $3 billion noncash pretax impairment in Q2.
- Management revised expected asset-sale consideration to more than $16 billion in 2017 and planned $3 billion of share repurchases in 2017, within a $6 billion authorization through 2019. It expected further restructuring charges from the dispositions but said the amount could not yet be reasonably quantified and could be material.
- The estimated fair value of the APLNG investment was $8.629 billion versus a $10.059 billion carrying value; the $1.430 billion shortfall was not recorded as an impairment because management judged the decline not other than temporary. A future impairment remains possible.
- Key exposures include commodity-price volatility, production and reserve-replacement uncertainty, execution and approval risks for asset sales, and environmental, legal, political and regulatory matters. Environmental accruals were $260 million. APLNG-related guarantees included maximum exposure of $1.24 billion under a construction-completion guarantee and a separate potential $1 billion gas-delivery obligation; these are contingent exposures, not stated expected cash payments.
- In February 2017, an ICSID tribunal awarded Burlington Resources $380 million in its Ecuador expropriation case; Ecuador was separately awarded $42 million for limited environmental and infrastructure impacts and sought annulment. Venezuela damages proceedings and other arbitrations remained pending. The filing states that known contingencies were not expected to exceed accruals by a material amount, while acknowledging uncertainty.
Important facts for investors to verify
- Whether and when the Canadian and San Juan transactions close, final cash proceeds and Cenovus-share value, contingent consideration, and any post-closing adjustments.
- The cash and earnings effects of the Canadian tax benefit, including management’s statement that a further approximately $800 million potential tax benefit was not recorded because corresponding cash-tax savings were not considered likely.
- The actual Q2 San Juan impairment, Canadian-sale gain, restructuring charges and resulting debt reduction and share repurchases.
- Commodity prices, production versus guidance, and whether operating cash flow remains adequate to fund investment, dividends and debt reduction.
- Potential impairment of APLNG or other equity investments, and developments in environmental, guarantee and international arbitration exposures.