ConocoPhillips — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are primarily with 2012. This is an annual filing, not a standalone fourth-quarter report. ConocoPhillips is a global exploration and production company operating in 27 countries. Results are presented for continuing operations unless noted; Phillips 66, Kashagan, Algeria and Nigeria are classified as discontinued operations.
Financial and operating performance
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Sales and other operating revenues | $54.413 billion | $57.967 billion | Down 6% |
| Income from continuing operations | $8.037 billion | $7.481 billion | Up 7% |
| Net income attributable to ConocoPhillips | $9.156 billion | $8.428 billion | Includes $1.178 billion from discontinued operations in 2013 |
| Diluted EPS | $7.38 | $6.72 | Continuing-operations diluted EPS was $6.43 vs. $5.91 |
| Continuing operating cash flow | $15.801 billion | $13.458 billion | Up 17% |
| Capital expenditures and investments, continuing operations | $15.537 billion | $14.172 billion | 2013 capital program was $16.918 billion including specified discontinued-operation spending and FCCL obligation principal |
| Cash and cash equivalents | $6.246 billion | $3.618 billion | Year-end balance |
| Total debt | $21.662 billion | $21.725 billion | Debt-to-capital ratio was 29%, versus 31% |
| Proved reserves | 8.921 billion BOE | 8.642 billion BOE | Up about 3%; includes equity affiliates |
The effective tax rate on continuing pretax income was 44.4%, down from 51.5%. The filing does not provide a single consolidated operating-margin measure. Total continuing production averaged 1.502 million BOE per day, down 2%; adjusted for dispositions, downtime and Libya’s export-terminal closure, production grew 2%. Total realized price was nearly unchanged at $67.62 per BOE versus $67.68. Crude oil prices averaged $103.32 per barrel (down 2%), NGLs $41.42 (down 11%), natural gas $6.11 per thousand cubic feet (up 11%), and bitumen $53.27 per barrel (down 1%).
Continuing-operations earnings improved mainly because impairments were lower, natural gas prices rose, the production mix shifted toward higher-margin areas, and production taxes declined. Offsets included higher DD&A and operating expenses, lower crude oil and NGL prices, and lower gains on asset sales. Segment results were mixed: Lower 48 and Latin America earnings rose to $1.081 billion; Canada returned to $718 million of earnings from a $684 million loss; Europe declined to $1.199 billion; and Asia Pacific and Middle East declined to $3.591 billion.
Liquidity, capital allocation and material changes
- Cash from continuing operations and $10.220 billion of asset-sale proceeds funded investment, dividends, debt repayment and other uses. Cash increased by $2.628 billion during the year.
- Capital expenditures and investments from continuing operations were $15.537 billion. ConocoPhillips paid $3.334 billion in dividends and prepaid the remaining $2.810 billion FCCL joint-venture acquisition obligation. Debt repayments were $946 million.
- Current assets were $19.023 billion and current liabilities $15.129 billion at year-end. The company reported a $7.5 billion revolving credit facility, with approximately $6.5 billion of available borrowing capacity; it had no direct borrowings under the facility at year-end.
- Dispositions generated $10.220 billion in 2013 proceeds, including $5.392 billion for Kashagan and $1.652 billion for Algeria. The Nigeria sale was pending, with expected upstream proceeds of about $1.5 billion and a separate Brass LNG sale potentially adding about $0.16 billion.
- The quarterly dividend increased 4.5% to $0.69 per share in July; 2013 dividends declared were $2.70 per share. The $10 billion repurchase program expired in December 2013 after approximately $5.1 billion of repurchases.
- Organic reserve replacement was 179%; total reserve replacement was 147%. Proved undeveloped reserves were 3.314 billion BOE, or 37% of total proved reserves.
Outlook, commentary, risks and unusual items
- Management targeted 3–5% annual production and margin growth beginning in 2014. Full-year 2014 continuing production guidance was approximately 1.550 million BOE per day, excluding Libya; first-quarter guidance was 1.490–1.530 million BOE per day, also excluding Libya. The 2014 capital budget was $16.7 billion.
- Corporate and Other earnings were forecast to be an after-tax loss of approximately $1.0 billion for 2014. Management emphasized portfolio optimization, high-margin developments, cost control, safety and financial flexibility.
- Libyan production remained shut in following closure of the Es Sider export terminal in July 2013; the shutdown continued into the first quarter of 2014. The company said it would exclude Libya from future production outlooks.
- The proposed Alaska LNG project was estimated at $45–$65 billion gross and 17 million tonnes per year, but required legislation, further agreements and resolution of substantial engineering, regulatory, commercial and permitting matters before a final investment decision.
- The planned Freeport LNG agreement termination was conditional on approvals and financing, then expected in the second half of 2014. It involved an approximately $600 million termination fee, an expected $540 million after-tax earnings charge and an estimated $80 million net cash outflow, alongside projected annual operating-cost savings of $50–$60 million.
- Notable 2013 items included $1.132 billion of after-tax gains from asset dispositions, $289 million of after-tax impairments, a $116 million after-tax China settlement charge related to the Bohai Bay seepage incidents, and a $146 million after-tax insurance settlement for those incidents. Reported net income also includes discontinued-operation results and disposition gains.
- Risks include commodity-price volatility, field decline and reserve-estimation uncertainty, project execution and permitting, geopolitical and fiscal changes, environmental and climate regulation, operational and transportation disruptions, joint-venture exposure, and cybersecurity. The company reported $10.076 billion of asset-retirement obligations and $348 million of accrued environmental costs at year-end.
- ConocoPhillips had won liability rulings in arbitration concerning expropriated assets in Venezuela and Ecuador, but damages remained to be determined. It had paid approximately $232 million in Timor-Leste tax assessments under protest while arbitration proceeded. Management stated known contingencies were not expected to have a material adverse effect, while noting estimates may change.
Important facts for investors to verify
- Reconcile continuing-operations earnings, discontinued-operation income and disposition gains to assess the sustainability of reported net income and EPS.
- Track production against 2014 guidance, particularly project ramp-ups, natural decline, unplanned downtime and the ongoing Libya shutdown.
- Assess whether the $16.7 billion capital budget and major developments deliver targeted production and margin growth, and whether reserve additions convert into developed production.
- Monitor liquidity and leverage after the FCCL prepayment, planned investment and dividends; verify the timing and completion of the pending Nigeria and Brass LNG sales.
- Review key project and contingent exposures, including APLNG completion guarantees, Freeport LNG termination conditions, Alaska LNG prerequisites, arbitration awards and environmental obligations.
- ConocoPhillips’ financial statements received unqualified audit opinions, and management reported effective internal control over financial reporting as of December 31, 2013.