Business context and reporting period
ConocoPhillips’ Form 10-K covers the fiscal year ended December 31, 2009, with comparative results for 2008 and 2007. It is an integrated energy company operating across exploration and production, midstream, refining and marketing, a LUKOIL investment, chemicals, and emerging businesses. The filing is annual; it also provides unaudited fourth-quarter results.
Financial and operating highlights
| Metric | 2009 | 2008 |
|---|---|---|
| Sales and other operating revenues | $149.3 billion | $240.8 billion |
| Net income (loss) attributable to ConocoPhillips | $4.86 billion | $(17.00) billion |
| Diluted earnings (loss) per share | $3.24 | $(11.16) |
| Cash provided by operating activities | $12.48 billion | $22.66 billion |
| Capital expenditures and investments | $10.86 billion | $19.10 billion |
| Total debt at year-end | $28.65 billion | $27.46 billion |
| Cash and cash equivalents at year-end | $542 million | $755 million |
| Debt to capital | 31% | 33% |
- Annual net margin was approximately 3.3% (net income attributable to ConocoPhillips divided by sales).
- Fourth-quarter 2009 sales were $43.0 billion; pretax income was $2.67 billion, net income attributable to ConocoPhillips was $1.22 billion, and diluted EPS was $0.81.
- Worldwide production, including equity affiliates, averaged 2.29 million BOE per day. E&P production excluding LUKOIL averaged 1.854 million BOE per day, up from 1.789 million in 2008.
- Average E&P oil and liquids sales prices fell 37% to $55.63 per barrel; natural gas prices fell 48% to $4.26 per thousand cubic feet.
- Worldwide refinery utilization was 84%, down from 90%. U.S. R&M recorded a $192 million loss; total R&M earnings were $37 million.
- Year-end proved reserves were 10.326 billion BOE including equity affiliates and LUKOIL, versus 9.975 billion in 2008. Reserve replacement was 141% including Syncrude; excluding Syncrude, it was 112%.
Material changes versus the prior comparable period
- Revenue declined 38% and operating cash flow declined 45%, primarily reflecting lower commodity prices and weak refining margins.
- Reported earnings rebounded from 2008’s loss, but comparison is heavily affected by 2008 noncash impairments: $25.4 billion for E&P goodwill and $7.4 billion for the LUKOIL investment. Excluding the E&P goodwill impairment, E&P earnings fell 70% in 2009.
- R&M earnings fell from $2.32 billion to $37 million as refining and marketing margins and volumes weakened. Midstream earnings declined 42%, while Chemicals earnings rose to $248 million from $110 million.
- Production and operating expenses fell 13%, and selling, general and administrative expense fell 18%. Total debt increased by about $1.2 billion, while the debt-to-capital ratio improved as equity increased.
- Proved reserves rose overall, supported by additions in oil sands and other projects; consolidated crude oil and liquids reserves nevertheless declined.
Outlook, commentary, risks and unusual items
- Management planned approximately $10 billion of asset dispositions over two years, with proceeds targeted to debt reduction and a stated target debt-to-capital range of 20% to 25%.
- For 2010, the company forecast production of about 2.2 million BOE per day, including anticipated dispositions; capital expenditures and investments of approximately $10.5 billion and a total capital program of approximately $11.2 billion. These are forward-looking estimates, not guarantees.
- Key risks include volatile oil, gas and refining prices; reserve replacement and project execution; political and regulatory exposure; joint-venture obligations; environmental compliance and climate regulation; and operational hazards.
- Venezuelan oil interests were expropriated in 2007 and Ecuadorian assets were effectively expropriated in 2009. Arbitration proceedings remained unresolved; potential compensation was not recognized as an asset.
- Environmental accruals were $1.017 billion at year-end; the company expected annual expensed environmental costs of about $1.1 billion and capitalized costs of about $830 million in 2010 and 2011.
- Notable commitments include a $5.669 billion FCCL joint-venture acquisition obligation and guarantees related to Qatargas 3 and Rockies Express Pipeline. Qatargas 3 participant guarantees were expected to end after project completion certification, then anticipated in 2011.
- Management reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether planned asset sales occur on schedule and at values sufficient to reduce debt toward management’s target range.
- Actual 2010 production after dispositions, and progress converting undeveloped reserves into producing assets.
- Sensitivity of earnings and cash flow to commodity prices, refining margins, and refinery utilization; assess results excluding exceptional impairment effects.
- Developments in Venezuela and Ecuador arbitration, the MSLP ownership dispute with PDVSA, and related recoverability or legal exposure.
- Funding and contingent exposure for FCCL, Qatargas 3, Rockies Express, environmental remediation, and other guarantees.
- Reserve estimates and standardized-measure assumptions, noting the 2009 change to 12-month average prices and the inclusion of Syncrude under updated disclosure rules.