ConocoPhillips — Q2 2018 Form 10-Q
Business context and reporting period. ConocoPhillips is a global exploration and production company. This unaudited report covers the three and six months ended June 30, 2018; financial amounts below are in U.S. dollars unless stated otherwise.
Key financial and operating metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Sales and other operating revenues | $8.504 billion | $6.781 billion | $17.302 billion | $14.299 billion |
| Total revenues and other income | $9.240 billion | $8.882 billion | $18.201 billion | $16.653 billion |
| Net income (loss) attributable to ConocoPhillips | $1.640 billion | $(3.440) billion | $2.528 billion | $(2.854) billion |
| Diluted earnings (loss) per share | $1.39 | $(2.78) | $2.13 | $(2.30) |
| Net cash provided by operating activities | Not stated separately | Not stated separately | $5.741 billion | $3.541 billion |
Q2 pretax income was $2.619 billion and income tax expense was $965 million; the effective tax rate was 37%. The filing does not provide a standalone operating-margin measure. Q2 average production was 1,249 thousand barrels of oil equivalent per day (MBOED), including 38 MBOED from Libya; production excluding Libya was 1,211 MBOED. Average realized price was $54.32 per barrel of oil equivalent, up 51% year over year.
For the first half, capital expenditures and investments were $3.534 billion, dividends paid were $675 million, and share repurchases were $1.146 billion. Cash, cash equivalents and restricted cash totaled $3.457 billion at June 30; short-term investments were $612 million. Total debt was $14.974 billion, down from $19.703 billion at December 31, 2017. Total debt to capital was 32%, versus 39% at year-end. The company reported $6.0 billion of available revolving-credit capacity and no outstanding commercial paper or direct revolver borrowings.
Changes versus the prior comparable period
- Q2 sales and operating revenues rose 25%, mainly reflecting higher realized commodity prices, partly offset by lower sales volumes. First-half revenues rose 21%.
- The return to profit largely reflects the absence of 2017 impairment charges, including the Lower 48 impairments and the $2.384 billion APLNG investment impairment. Higher realized prices, lower depreciation expense and lower interest expense also supported earnings.
- Comparisons were partly offset by the absence of the 2017 Canadian asset-sale gain ($1.855 billion before tax) and lower volumes following asset dispositions. First-half 2018 also lacked the prior-year Canadian deferred-tax benefit.
- Total production declined 13% in Q2 and 17% in the first half year over year, mainly due to 2017 asset sales, field declines and unplanned downtime. Excluding Libya and the effect of prior-year dispositions, Q2 underlying production increased 5%.
- Operating cash flow increased to $5.741 billion from $3.541 billion in the first half, primarily because of higher realized prices. Asset-sale proceeds fell to $308 million from $10.742 billion in the 2017 period.
Outlook, management commentary and notable matters
- Management raised full-year 2018 production guidance to 1,225–1,255 MBOED, excluding Libya. Q3 guidance was 1,215–1,255 MBOED, reflecting seasonal turnaround and maintenance activity.
- 2018 capital guidance increased from $5.5 billion to $6.0 billion, excluding the Alaska bolt-on acquisition and Montney acreage purchase; total capital expenditures and investments including those items were expected to be $6.5 billion.
- Management said the company achieved its $15 billion debt-reduction target 18 months ahead of schedule. It increased planned 2018 share repurchases to $3 billion and, in July, authorized an additional $9 billion, bringing total authorization to $15 billion. Management expected 2018 capital spending, dividends and repurchases to be funded with operating cash flow.
- In July, the company agreed to exchange its subsidiary holding a 16.5% interest in the UK Clair Field for BP’s 39.2% interest in Alaska’s Greater Kuparuk Area and related assets, subject to regulatory approval. The transactions were expected to be cash-neutral before customary adjustments; the Clair sale was expected to produce a noncash gain of $0.5–$1.0 billion.
- ConocoPhillips recorded a $147 million pension-settlement expense in Q2 after lump-sum payments triggered settlement accounting. The Cenovus share investment was carried at $2.159 billion; its fair-value increase contributed to other income.
- Venezuela-related arbitration remained significant: an ICC award against PDVSA was revised in July to $1.93 billion plus interest, and collection efforts were underway. A separate ICSID damages decision was expected later in 2018. The company also disclosed climate-related lawsuits, environmental obligations and other legal claims; it stated that known contingencies were not expected to materially adversely affect consolidated financial statements.
- Key risks include volatile oil and gas prices, production and reserve uncertainty, operational or political disruption, regulatory and climate-related developments, and execution or approval risks for transactions. The company expected adoption of the new lease standard in 2019 to have a material financial-statement and disclosure impact.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects commodity prices and recurring operations versus Cenovus fair-value gains, tax items and other unusual effects.
- Whether production guidance and underlying growth are achieved, particularly given Libya disruptions, seasonal maintenance, field declines and unplanned downtime.
- Whether operating cash flow can support the planned $3 billion 2018 repurchases, dividends and higher capital program while maintaining the targeted balance-sheet strength.
- Completion, regulatory approval and final economics of the BP asset exchange, including the timing and amount of the expected Clair disposal gain.
- Progress and collectability of Venezuela arbitration awards, and developments in environmental, climate-related and other legal contingencies.