ConocoPhillips 10-Q Summary — Second Quarter 2010
Reporting period: Three and six months ended June 30, 2010. Amounts are in millions of dollars unless stated otherwise. Interim financial statements are unaudited.
Business context and financial performance
ConocoPhillips is an international integrated energy company with Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), LUKOIL investment, Chemicals and Emerging Businesses segments. Results benefited from higher commodity prices and improved refining conditions, but were materially affected by asset-sale gains and a refinery impairment.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Sales and other operating revenues | $45,686 | $35,448 | $90,507 | $66,189 |
| Income before income taxes | $6,194 | $1,938 | $10,184 | $3,930 |
| Net income attributable to ConocoPhillips | $4,164 | $859 | $6,262 | $1,659 |
| Diluted earnings per share | $2.77 | $0.57 | $4.17 | $1.11 |
| Dividends per common share | $0.55 | $0.47 | $1.05 | $0.94 |
The filing does not provide a clear consolidated operating-margin measure. Q2 E&P earnings were $4,114, including the Syncrude sale gain; R&M reported a $279 loss, principally because of the Wilhelmshaven impairment.
Cash flow, balance sheet and liquidity
- Cash flow, first half: Operating activities provided $6,515, versus $4,452 in the prior-year period. Capital expenditures and investments were $4,080; investing activities provided $1,683, including $5,943 of asset-sale proceeds. Financing activities used $4,640.
- Cash: $4,120 at June 30, up from $542 at December 31, 2009.
- Debt: Total debt was about $26.3 billion, down from $28.7 billion at year-end; debt to total capital was 28%, versus 31%. Short-term debt was $3,082 and long-term debt $23,197.
- Liquidity: The company reported $6.7 billion of available borrowing capacity under revolving credit facilities, with no direct facility borrowings. Commercial paper outstanding was $1,126.
- Equity and assets: Total assets were $151,456 and total equity $65,945 at June 30. The current asset and liability totals were $26,666 and $25,668, respectively.
- Other obligations: The FCCL joint-venture acquisition obligation was $4,666 on the balance sheet. Environmental accruals were $971.
Material changes versus comparable periods
- Q2 revenue increased 29% and first-half revenue increased 37% year over year, primarily reflecting higher petroleum, crude oil and natural gas liquids prices.
- Net income attributable to ConocoPhillips rose to $4,164 in Q2 and $6,262 for the first half. Key contributors were the Syncrude disposition gain, higher E&P prices and improved LUKOIL equity earnings; lower E&P production and the Wilhelmshaven impairment offset part of the improvement.
- Crude oil and natural gas production, including equity affiliates, averaged 1.733 million BOE per day in Q2, down from 1.872 million a year earlier. Management cited field decline, downtime and other volume reductions.
- U.S. refinery utilization was 96% in Q2, compared with 93% a year earlier; international utilization was 54%, compared with 72%.
- Operating cash flow improved, while cash generation was partly offset by a discretionary inventory build. Asset-sale proceeds supported the increase in cash and debt repayment.
Outlook, management commentary and risks
- Management said cash, operating cash flow and available external funding were expected to meet near- and long-term requirements, including capital spending, dividends, debt payments and FCCL funding. The filing provides no specific earnings or commodity-price guidance.
- The 2010 E&P capital spending budget was increased by $0.5 billion to $9.4 billion. First-half capital expenditures and investments totaled $4.08 billion across the company.
- The company expected to raise another $4 billion to $5 billion from asset dispositions through 2011, as part of its previously announced $10 billion program, primarily targeting debt reduction. Separately, announced LUKOIL sale proceeds were expected to be used primarily for share repurchases.
- ConocoPhillips sold its 9.03% Syncrude interest on June 25 for $4.6 billion, recording a $2.878 billion pretax gain. It also recorded a $1.5 billion pretax impairment after cancelling the Wilhelmshaven refinery upgrade project, and a $100 million pretax impairment for ending participation in the Yanbu refinery project.
- After quarter-end, the company announced plans to sell its entire LUKOIL interest. A sale of 64.6 million shares for $3.44 billion was expected to close in Q3 2010; an option covered some or all of the remaining shares, with further sales intended by the end of 2011 if needed.
- Deepwater Gulf of Mexico drilling restrictions delayed planned exploration and appraisal drilling. Management reported no material near-term production impact, while longer-term effects remained uncertain. Chukchi Sea lease activities were also under review following a court ruling enjoining activity pending further agency proceedings.
- Key exposures include volatile oil, gas and refining margins; declining production; project execution and permitting; environmental and climate regulation; litigation and tax matters; and political, currency and financing risks. Management said known contingency exposures were not expected to exceed accruals by an amount that would materially adversely affect the consolidated financial statements.
Most important facts for investors to verify
- How much of reported earnings growth reflects recurring operating performance versus the Syncrude gain and other asset-sale effects.
- The eventual completion, proceeds and use of proceeds from the planned LUKOIL divestiture, and the effect of reduced ownership on equity earnings.
- Progress on reducing debt and completing the remaining asset-disposition program, alongside share repurchases and dividends.
- Whether E&P production declines stabilize, and the impact of Gulf of Mexico and Chukchi Sea restrictions on future activity.
- Refining recovery and the implications of the Wilhelmshaven impairment, cancelled projects and international refinery utilization.
- Changes in environmental, guarantee and other contingent obligations, including Qatargas 3 completion and the $971 million environmental accrual.
Comparability note: The company retrospectively changed LUKOIL equity earnings to a one-quarter-lag basis and recast prior periods. The reported comparisons reflect that change.