ConocoPhillips 2010 Form 10-K Summary
Business context and reporting period
ConocoPhillips is an integrated international energy company with six reporting segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), LUKOIL Investment, Chemicals and Emerging Businesses. This Form 10-K covers the fiscal year ended December 31, 2010; the filing was signed February 23, 2011. The company employed approximately 29,700 people.
Financial and operating performance
| Metric | 2010 | 2009 |
|---|---|---|
| Sales and other operating revenues | $189.441 billion | $149.341 billion |
| Net income attributable to ConocoPhillips | $11.358 billion | $4.414 billion |
| Diluted earnings per share | $7.62 | $2.94 |
| Cash provided by operating activities | $17.045 billion | $12.479 billion |
| Capital expenditures and investments | $9.761 billion | $10.861 billion |
| Total debt | $23.592 billion | $28.653 billion |
| Cash and short-term investments at year-end | $10.427 billion | $542 million |
| Total assets | $156.314 billion | $152.138 billion |
Net income was $11.417 billion before $59 million attributable to noncontrolling interests. The fourth quarter contributed revenue of $51.726 billion, net income attributable to ConocoPhillips of $2.041 billion and diluted EPS of $1.39.
- Profit drivers and unusual items: 2010 results included $5.803 billion in pretax gains on dispositions, including Syncrude and LUKOIL sales. Management cited $4.583 billion after tax of gains from asset dispositions and LUKOIL share sales as a major contributor to the year-over-year earnings improvement. The filing reports $1.780 billion of impairments on the consolidated statement of operations; management also discusses the $645 million NMNG equity-investment impairment. It describes total 2010 pretax impairments of approximately $2.4 billion.
- Margins and segment results: The filing does not provide a single consolidated operating-margin figure. E&P earnings rose to $9.198 billion from $3.604 billion, mainly on higher commodity prices and disposition gains. R&M earnings were $192 million versus $37 million; U.S. results improved, while international R&M recorded an $830 million loss, including the Wilhelmshaven refinery impairment. Chemicals earnings rose to $498 million from $248 million.
- Production and reserves: E&P production averaged 1.752 million BOE per day, down from 1.854 million in 2009. Total proved reserves were 8.310 billion BOE versus 10.326 billion; the company attributes much of the reduction to the LUKOIL sell-down and other asset dispositions. Excluding acquisitions and dispositions, E&P reserve replacement was 138% of 2010 production.
- Liquidity and capital returns: Year-end current assets were $34.660 billion and current liabilities $27.419 billion. The company reported $6.6 billion of available borrowing capacity under revolving credit facilities. It paid $3.175 billion in common dividends and repurchased $3.866 billion of shares in 2010. Dividends declared were $2.15 per share for the year.
Material changes versus the prior comparable period
- Revenue increased 27% and attributable net income rose to $11.358 billion from $4.414 billion, reflecting higher oil, gas, NGL and LNG prices, improved U.S. refining results, and substantial disposition gains. Impairments and lower E&P volumes partly offset these gains.
- Operating cash flow increased 37% to $17.045 billion. Total debt fell by approximately $5.1 billion and debt-to-capital declined to 25% from 31%.
- Worldwide E&P production declined about 5.5%, principally due to field decline, production-sharing effects at higher prices, and the Syncrude sale. Worldwide refinery utilization was 81%, down from 84%; excluding Wilhelmshaven, it was 90%, up from 88%.
- ConocoPhillips reduced its LUKOIL ownership from 20% at year-end 2009 to 2.25% at year-end 2010, ceased equity-method accounting after the third quarter, and sold its remaining shares in the first quarter of 2011.
Outlook, commentary, risks and contingencies
- 2011 outlook: Management expected production of approximately 1.7 million BOE per day, excluding further asset sales. The 2011 capital program was projected at approximately $13.5 billion, including $12.8 billion of capital expenditures and investments. The company planned an additional $3 billion of asset dispositions through 2011 under its existing program, excluding LUKOIL.
- Capital allocation: The board authorized up to $10 billion of additional share repurchases over two years in February 2011. The company also announced a 20% increase in the quarterly dividend to $0.66 per share.
- Market and operating risks: Results depend heavily on volatile commodity prices and refining margins. Management noted continued pressure on U.S. natural gas prices from rising shale supply. Other key risks include production declines, exploration outcomes, project timing and costs, political and fiscal changes, joint-venture exposures, and environmental and regulatory requirements.
- Deepwater Horizon and environmental exposure: The 2010 deepwater drilling moratorium and subsequent permitting rules delayed Gulf of Mexico exploration and appraisal. The longer-term regulatory and operating effects were uncertain. Accrued environmental costs were $994 million; environmental costs expensed in 2010 were $928 million, with approximately $1.1 billion per year expected in 2011 and 2012. The company identified 73 unresolved U.S. sites with potential CERCLA or similar state-law liability.
- Legal and contractual matters: Arbitration proceedings remain pending over expropriated Venezuelan assets; the Ecuador expropriation case was proceeding to a merits hearing. The filing also discusses arbitration over the MSLP ownership dispute and refinery environmental matters. Management stated that known contingencies were not expected to materially affect consolidated financial position, while noting outcomes cannot be predicted with certainty.
- Other commitments: Purchase obligations totaled $139.575 billion, substantially including market-based product purchase commitments. The company’s maximum stated exposure to Qatargas 3 project financing before completion certification was $1.2 billion; completion certification was expected in 2011. Asset retirement obligations were $8.776 billion.
Important facts for investors to verify
- How much of 2010 earnings and cash generation came from recurring operations versus the $5.803 billion in disposition gains, and how impairments affect comparisons.
- Whether 2011 production guidance and the capital program were achieved, particularly given further possible asset sales and ongoing field declines.
- Reserve replacement and the composition of proved reserves after the LUKOIL exit and other divestitures; the filing’s reserve totals include significant effects from those transactions.
- Progress and funding requirements for major projects, including Australia Pacific LNG, oil sands developments and Qatargas 3, as well as Gulf of Mexico permitting and safety developments.
- Exposure to environmental remediation, expropriation arbitrations, the MSLP dispute, and large purchase and retirement obligations.
- Reported net income and cash flow should be read with the audited statements and notes. Ernst & Young issued an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2010.