ConocoPhillips Q1 2011 10-Q Summary
Business context and reporting period
ConocoPhillips filed this unaudited quarterly report for the three months ended March 31, 2011. The integrated energy company’s results are primarily exposed to crude oil and natural gas prices and refining margins. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 or prior date |
|---|---|---|
| Sales and operating revenues | $56,530 | $44,821; up 26% |
| Net income attributable to ConocoPhillips | $3,028 | $2,098; up 44% |
| Diluted earnings per share | $2.09 | $1.40 |
| Dividends per share | $0.66 | $0.50 |
| Cash provided by operating activities | $1,947 | $3,040; down 36% |
| Capital expenditures and investments | $2,884 | $2,071 |
| Cash and cash equivalents | $6,172 at March 31 | $9,454 at December 31 |
| Short-term investments | $2,231 at March 31 | $973 at December 31 |
| Total debt | $23,209 at March 31 | $23,592 at December 31 |
| Total equity | $70,521 at March 31 | $69,109 at December 31 |
The company reported a 48% effective tax rate, versus 47% in Q1 2010, primarily reflecting foreign taxes. Debt was 25% of total capital, unchanged from year-end. It had $6.7 billion of available borrowing capacity under revolving facilities and $1,155 million of commercial paper outstanding. Operating cash flow fell despite higher earnings, reflecting working-capital needs, including inventory builds, and higher tax payments related to 2010 asset dispositions. Cash declined by $3,282 million; financing uses included $1,636 million of share repurchases and $944 million of dividends.
Material changes and segment results
- Exploration and Production: Earnings rose to $2,352 million from $1,832 million, mainly on higher crude prices, asset-sale gains and lower depreciation, partly offset by lower production and higher production taxes. Production averaged 1.702 million BOE per day, down from 1.828 million.
- Refining and Marketing: Earnings improved to $482 million from a $4 million loss, primarily due to higher refining margins. Worldwide refinery utilization was 89%, compared with 78%.
- Midstream: Earnings decreased to $73 million from $77 million, chiefly due to lower volumes and higher operating expenses.
- Chemicals: Earnings increased to $193 million from $110 million, on improved margins and lower operating costs.
- LUKOIL: The company completed the sale of its remaining interest, receiving $1,243 million cash and recognizing a $360 million pretax gain. Segment earnings were $239 million, compared with $387 million a year earlier, when the company still held an equity investment.
Consolidated sales rose largely with higher crude and petroleum product prices, while purchased crude oil, natural gas and products costs increased 34%. The company cited WTI averaging $93.98 per barrel, up 19% year over year; Henry Hub gas averaged $4.11 per MMBtu, down 22%. U.S. and international refining benchmarks improved materially year over year.
Outlook, commentary, risks and unusual items
- Management expected 2011 E&P production of approximately 1.7 million BOE per day, before the effects of Libyan unrest and 2011 dispositions.
- The company planned to raise an additional $5 billion to $10 billion from asset sales through the end of 2012, targeting non-strategic properties. It also announced a new share-repurchase authorization of up to $10 billion over two years; the prior $5 billion authorization was completed in Q1. Management said a significant portion of cash and short-term investments was expected to go toward repurchases.
- The quarterly dividend was increased 20% to $0.66 per share. The filing reports $5.5 billion of repurchases under both programs through March 31, 2011.
- In April 2011, Australia Pacific LNG and Sinopec signed agreements for up to 4.3 million tonnes of LNG annually for 20 years. Sinopec was to acquire a 15% APLNG interest, diluting ConocoPhillips’ and Origin Energy’s interests to 42.5% each. Closing was expected in Q3 2011; ConocoPhillips anticipated an approximately $250 million after-tax disposition loss.
- Libyan production was temporarily suspended and exports ceased amid civil unrest and sanctions. The company’s 2010 net production from Libya averaged 46,000 BOE per day; future effects were uncertain.
- Pending U.K. tax legislation could raise the upstream tax rate. If enacted, the company expected an approximately $100 million earnings reduction from deferred-tax remeasurement, plus higher cash taxes for the period after March 24, 2011. It was also evaluating a separate proposed restriction on tax relief for decommissioning costs.
- Environmental accruals were $1,011 million at March 31, compared with $994 million at year-end; the company expected substantial expenditures over the next 30 years. Management said known contingencies were not expected to have a material adverse financial effect, but estimates for environmental, tax and legal matters may change.
- Material proceedings include ongoing arbitration concerning Venezuelan expropriations and an Ecuador expropriation claim; the Ecuador merits hearing occurred in March 2011. PDVSA arbitration concerning the Sweeny coker partnership was also ongoing. The company reported 71 unresolved U.S. sites with potential environmental liability. It stated that no material developments had occurred in previously reported legal matters and that the disclosed proceedings were not expected to materially affect consolidated financial position.
- QG3 project financing remained guaranteed before project completion certification, expected in 2011; the company’s maximum exposure under the financing structure was $1.2 billion. Completion certification was expected to make the project loans nonrecourse to participants.
Principal risks identified include commodity-price and refining-margin volatility, production declines and operational interruptions, exploration and project execution, political unrest and expropriation, environmental and climate regulation, litigation, tax changes, and access to capital. Management reported that disclosure controls were effective as of March 31, 2011, and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether production recovers or is further affected by field decline, downtime, dispositions and the Libyan suspension, and how actual output compares with the 1.7 million BOE-per-day outlook.
- Whether operating cash flow improves as working capital and tax-payment effects change, given Q1 cash generation was below net income and lower year over year.
- Timing and proceeds of planned asset sales, the APLNG-Sinopec transaction and its expected after-tax loss, and the completion of QG3 project certification.
- Actual repurchase pace, funding needs and the effect of buybacks and the higher dividend on cash balances, debt and capital spending.
- Enactment and financial impact of proposed U.K. tax changes, and developments in Venezuela, Ecuador, environmental matters and other contingencies.