CONOCOPHILLIPS annual report, FY2014

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ConocoPhillips — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; filed February 24, 2015. This is an annual filing, with selected fourth-quarter data also reported. ConocoPhillips is a global exploration and production company operating in 27 countries. Its downstream business was separated into Phillips 66 in 2012; Nigeria, Algeria and Kashagan are reported as discontinued operations.

Financial and operating performance

  • Revenue: $52.5 billion, down 3% from $54.4 billion in 2013, principally reflecting lower crude oil prices.
  • Profit: Continuing-operations income was $5.8 billion, down 28% from $8.0 billion; diluted continuing-operations EPS was $4.60 versus $6.43. Net income attributable to ConocoPhillips, including discontinued operations, was $6.9 billion versus $9.2 billion. Approximate continuing-operations income as a share of sales was 11.1%, compared with 14.8% in 2013.
  • Fourth quarter: The quarterly data report a $321 million loss from continuing operations before tax and a $39 million net loss attributable to ConocoPhillips. The quarter included a $540 million after-tax charge for the Freeport LNG termination agreement.
  • Production and prices: Continuing-operations production averaged 1.540 million BOE/day, up 3% year over year; excluding Libya, it rose 4% to 1.532 million BOE/day. Average realized price declined 4% to $64.59/BOE. Worldwide crude oil sales price fell 10% to $92.80/barrel; natural gas price rose 8% to $6.57/MCF.
  • Cash flow and investment: Continuing-operations operating cash flow was $16.6 billion, up from $15.8 billion. Capital expenditures and investments were $17.1 billion, so operating cash flow was about $0.5 billion below that spending before dividends and other uses. Operating cash flow included a one-time $1.3 billion FCCL distribution, which the company did not expect to recur under then-current conditions. Dividends paid were $3.5 billion.
  • Liquidity and debt: Year-end cash was $5.1 billion, down from $6.2 billion. Total debt was $22.6 billion, up from $21.7 billion; debt was 30% of total capital. The company reported $6.1 billion of available revolving-credit borrowing capacity at year-end and no direct revolver borrowings.
  • Reserves: Proved reserves were 8.906 billion BOE, essentially flat with 8.921 billion BOE in 2013. Organic reserve replacement was 124%; total reserve replacement was 97%.

Material changes versus 2013

  • Continuing-operations earnings fell 28%, despite higher production, mainly due to lower crude prices, sharply lower disposition gains, increased impairments and higher operating costs.
  • After-tax asset-disposition gains were approximately $70 million, compared with $1.132 billion in 2013. After-tax non-cash impairments rose to $662 million from $289 million.
  • The Freeport LNG termination contributed an after-tax earnings charge of $540 million; the agreement also reduced terminal capacity and is expected to save approximately $50–$60 million annually over 18 years.
  • Cash from continuing operations rose 5%, but the comparison benefited from the nonrecurring FCCL distribution. Year-end cash declined, while total debt increased.
  • Production growth in the Lower 48, Canada and Europe was partly offset by field decline, planned downtime and Libya’s renewed production shutdown.

Outlook, risks and unusual items

  • 2015 outlook: Management forecast 2%–3% production growth from continuing operations, excluding Libya, and first-quarter production of 1.570–1.610 million BOE/day on the same basis. The 2015 capital budget was reduced to $11.5 billion from the initially announced $13.5 billion, versus 2014 spending of $17.1 billion. Management stated the dividend was its top priority and anticipated cash-flow neutrality in 2017.
  • Commodity exposure: Oil prices fell sharply in the second half of 2014, and management cited mid-$40s-per-barrel prices in early 2015. The company cautioned that lower prices can reduce cash flow and liquidity, lead to spending cuts and impairments, and affect economically recoverable reserves.
  • Project and operating risks: Some oil-sands expansions were deferred to preserve cash. APLNG and Surmont 2 remained major projects under completion; APLNG’s first LNG was expected in mid-2015. Libya production was shut in again amid civil unrest and export-terminal disruption. Permitting, execution, transportation, environmental and safety risks could affect project timing and returns.
  • Guarantees and contingencies: ConocoPhillips provided a completion guarantee for its APLNG financing share, with maximum exposure of approximately $3.1 billion at year-end. It was awaiting arbitration decisions on Timor-Leste tax assessments after paying about $237 million under protest. Claims against Venezuela and Ecuador remained in arbitration phases concerning damages; the filing does not state a clear expected recovery amount.
  • Environmental obligations: Accrued environmental costs were $344 million; asset retirement obligations were $10.9 billion. Expensed environmental costs were $573 million in 2014, with about $560 million annually expected in 2015 and 2016. The company also cited potential costs and restrictions from evolving climate and emissions rules.
  • Reporting and audit: Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal controls; management concluded controls were effective at year-end.

Important facts for investors to verify

  • Whether the $11.5 billion 2015 capital plan and 2%–3% production-growth outlook remained achievable after the late-2014 oil-price collapse.
  • How much operating cash flow depends on commodity prices and whether the dividend can be supported without recurring asset sales or one-time affiliate distributions.
  • The timing, cost and production contribution of APLNG, Surmont 2 and other major projects, including the potential impact of APLNG completion guarantees.
  • Reserve sensitivity to lower prices: the filing notes that reserve estimates depend on commodity prices, costs and engineering assumptions.
  • Potential outcomes and timing of the Timor-Leste, Venezuela and Ecuador proceedings, and whether any exposure or recovery estimates have changed.
  • The basis and sustainability of the reported 124% organic reserve replacement and 8% price-normalized cash-margin growth, both management measures that should be read alongside GAAP results.