ConocoPhillips — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Unless noted, amounts are in U.S. dollars.
Business context
ConocoPhillips is a global independent exploration and production company. Its portfolio includes North American unconventional and oil sands assets, conventional operations, and LNG interests. During 2017, the company sold significant noncore assets and directed proceeds toward debt reduction, share repurchases and other capital priorities.
Key financial and operating metrics
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Sales and operating revenues | $6.688bn | $20.987bn | $6.415bn and $16.884bn, respectively |
| Net income (loss) attributable to ConocoPhillips | $420m | ($2.434bn) | ($1.040bn) and ($3.580bn), respectively |
| Basic EPS | $0.35 | ($1.98) | ($0.84) and ($2.88), respectively |
| Operating cash flow | Not stated separately | $4.596bn | $2.960bn |
| Capital expenditures and investments | Not stated separately | $3.074bn | $3.870bn |
| Total production | 1,226 MBOED; 1,202 MBOED excluding Libya | 1,418 MBOED | 1,557 MBOED and 1,560 MBOED, respectively |
- Q3 pretax income was $653m; income tax expense was $217m. Q3 net income was $436m before noncontrolling interests.
- Nine-month total costs and expenses were $27.788bn, including $6.475bn of impairments. No consolidated operating-margin figure is presented in the filing text.
- Cash and cash equivalents were $6.911bn and short-term investments $2.696bn at September 30. Total debt was $21.004bn, down from $27.275bn at December 31, 2016; total debt to capitalization declined to 41% from 44%.
- Current assets were $16.954bn and current liabilities $7.131bn. The company had $6.75bn of available revolving-credit capacity and no commercial paper outstanding.
- The company paid $986m in dividends and repurchased $2.045bn of common stock in the first nine months. The quarterly dividend was raised 6% to $0.265 per share.
Material changes versus prior periods
- Q3 attributable earnings improved from a $1.040bn loss to $420m income. Higher realized commodity prices, disposition-related gains, lower DD&A and lower operating and exploration expenses contributed. Nine-month losses narrowed year over year, but remained substantial.
- Nine-month sales and operating revenues rose 24% year over year, primarily on higher realized prices; lower volumes, especially following asset sales, partly offset the increase. The nine-month period included $2.144bn of gains on dispositions.
- Nine-month operating cash flow increased to $4.596bn from $2.960bn. Asset disposition proceeds were $13.740bn, compared with $419m in 2016; investing cash flow was therefore positive $8.231bn.
- Production declined 21% in Q3 and 9% for the nine-month period, largely because of dispositions and normal field decline. Excluding Libya and the effect of closed or signed dispositions, Q3 underlying production increased 1.4% year over year.
- The company completed the sale of its Canadian FCCL interest and most western Canada gas assets, San Juan Basin interests, and Panhandle assets. It received $11bn cash plus 208m Cenovus shares and contingent consideration for the Canadian sale; $2.5bn cash plus contingent consideration for San Juan; and $178m cash for Panhandle. The Barnett sale for $305m was pending at quarter-end.
Outlook, commentary and risks
- Management forecast Q4 2017 production of 1,195–1,235 MBOED and full-year production of 1,350–1,360 MBOED, both excluding Libya. Full-year 2017 capital expenditure guidance was reduced to $4.5bn.
- Management targeted debt below $20bn by year-end 2017 and a longer-term debt level of $15bn by year-end 2019. Planned 2017 share repurchases were $3bn; the company aimed to repurchase up to $6bn through 2019. It expected more than $16bn of asset dispositions during 2017.
- Management said operating cash flow had exceeded capital spending and dividends year to date, and that cash, operating cash generation and available funding sources should meet anticipated requirements. Commodity prices and production remain key determinants of cash flow.
- Nine-month impairments included a $2.384bn APLNG investment impairment and major Lower 48 write-downs, including San Juan and Barnett assets. Management said further impairments could occur; an estimated $60m Norway impairment was expected in Q4 2017.
- Other notable charges included $284m of debt-redemption premiums during the first nine months, a $43m first-quarter Athena rig contract charge, and a $600m contribution to the domestic qualified pension plan during Q3.
- Risks include volatile oil and gas prices, asset impairment, production and reserve-replacement uncertainty, weather and operational disruptions, regulatory and climate-related requirements, disposition execution, and political risk. The filing discusses ongoing Venezuela expropriation arbitrations and other legal matters; management did not expect known contingencies to materially adversely affect consolidated financial statements based on information then available. Environmental accruals were $182m at September 30.
Most important facts for investors to verify
- Whether production and cost performance meet guidance after portfolio dispositions, and how comparable “underlying production” is defined.
- Whether asset-sale proceeds and planned cash allocations translate into sustained debt reduction and the stated buyback and dividend plans.
- The sensitivity of earnings, operating cash flow and asset values to commodity-price assumptions, including the APLNG valuation and potential further impairments.
- Completion and final proceeds of the Barnett sale, contingent payments from prior transactions, and the market value and planned sell-down of the Cenovus shareholding.
- The timing and potential financial exposure from environmental, tax, legal and international arbitration matters.