Business context and reporting period
ConocoPhillips’ unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. The independent exploration and production company reported in a prolonged low-commodity-price environment; management cited global oversupply and uncertainty about the timing of a recovery. Amounts below are in U.S. dollars unless stated otherwise.
Key financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales and operating revenues | $5.348B | $8.293B | $10.469B | $16.009B |
| Net income (loss) attributable to ConocoPhillips | $(1.071)B | $(0.179)B | $(2.540)B | $0.093B |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1.680B | $4.042B |
| Capital expenditures and investments | Not separately stated for quarter | Not separately stated for quarter | $2.954B | $5.739B |
| Average production | 1,546 MBOED | 1,595 MBOED | 1,562 MBOED | 1,603 MBOED |
Q2 loss before income taxes was $1.644B, versus a $91M loss in Q2 2015. The filing does not provide a clear headline operating-margin measure. Q2 average realized price was $27.79 per BOE, down 29% year over year. Q2 average Brent crude, WTI crude and Henry Hub gas prices were $45.57/barrel, $45.48/barrel and $1.95/MMBTU, respectively.
At June 30, 2016, cash and cash equivalents were $2.863B and short-term investments were $1.289B. Current assets were $9.259B and current liabilities $7.348B. Total debt was $28.677B, up from $24.880B at year-end 2015; debt to total capitalization was 43%, versus 38%. Total equity was $37.831B. The company had $6.75B of available revolving-credit capacity and no direct revolver borrowings or outstanding commercial paper under its Qatar program.
Material changes versus the prior comparable period
- Revenue fell 36% in Q2 and 35% in the first half, primarily due to lower commodity prices; production also declined 3% in both periods.
- ConocoPhillips’ Q2 loss widened to $1.071B from $179M, and the first-half result shifted to a $2.540B loss from $93M of income. Management attributed the deterioration chiefly to lower commodity prices, lower affiliate earnings, higher interest and debt expense, and exploration charges.
- First-half operating cash flow declined 58% year over year. Capital expenditures and investments were reduced to $2.954B from $5.739B.
- Production and operating expenses declined 20% in Q2 and 22% in the first half, reflecting lower activity, reduced headcount, asset dispositions and favorable currency effects. Interest and debt expense increased 49% in Q2 and 44% in the first half, principally due to higher debt and lower capitalized interest.
- The quarterly dividend was reduced 66% in February to $0.25 per share. First-half dividends paid were $626M, compared with $1.819B.
Outlook, management commentary, risks and unusual items
- Full-year 2016 production guidance was raised to 1,540–1,570 MBOED; Q3 guidance was 1,510–1,550 MBOED, including planned turnaround activity. Full-year capital-spending guidance was lowered to $5.5B in July from $5.7B, itself reduced from $6.4B earlier in the year.
- Management expected up to $1B of 2016 asset-sale proceeds. In July, the company agreed to sell its 35% interest in three Senegal exploration blocks for $350M plus approximately $80M in customary adjustments, subject to approvals and preemption rights. It also planned targeted workforce reductions affecting about 6% of global employees; the financial impact was not yet quantifiable and could be material to Q3 results.
- Management cited strong second-quarter operating performance, including first production at Foster Creek Phase G, and said APLNG Train 2’s first cargo and first production from Alder were on track for Q4 2016. Production excluding 95 MBOED associated with dispositions and downtime was up 46 MBOED, or 3%, year over year.
- Q2 exploration expense included a $203M pretax impairment of Gibson and Tiber deepwater Gulf of Mexico leaseholds; first-half exploration expense totaled $1.115B. In July, the company terminated its final Gulf of Mexico deepwater drillship contract and expected approximately $140M in pretax cancellation and third-party costs in Q3.
- APLNG’s tax-functional-currency change in July was expected to reduce the carrying value of the investment by approximately $200M through Q3 equity earnings. Separately, APLNG construction-completion guarantees had a maximum potential exposure of approximately $3.2B and a $114M carrying value at quarter-end.
- Key exposures include commodity-price volatility, reserve and asset impairment risk, production and project execution, political and operational disruption, and environmental, legal and regulatory matters. Environmental remediation accruals were $262M. The filing said known contingency costs were not expected to exceed accruals by an amount that would materially adversely affect the consolidated financial statements, while noting estimates can change.
- Debt ratings were downgraded by Moody’s, Fitch and S&P during 2016; the company reported no ratings-triggered automatic default provisions and said the revolving facility remained available. Management said cash, operating cash flow and external funding sources were expected to cover funding needs, but cash generation remains highly dependent on commodity prices.
- The company continued international arbitration related to expropriated assets in Venezuela and Ecuador; awards or damages were unresolved. A Timor-Leste tax dispute was settled in principle. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether commodity prices, realized prices and production levels support the revised production and capital-spending guidance.
- Debt, cash flow and liquidity trends, including access to commercial-paper and revolving-credit markets after rating downgrades.
- Execution and timing of the Senegal sale and other planned asset dispositions, and the expected effect of workforce reductions.
- Actual Q3 charges from the drillship cancellation and the APLNG currency-accounting change.
- Developments in APLNG project completion and related guarantees, reserve revisions, environmental accruals and outstanding arbitration matters.
- Whether the $0.25 quarterly dividend remains sustainable under prevailing prices and funding requirements.