ConocoPhillips — First Quarter 2015 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2015, compared with the prior-year quarter. ConocoPhillips is an independent exploration and production company operating in 27 countries. Results reflect a sharp decline in oil and gas prices, partly offset by higher production.
Key financial and operating metrics
| Metric | Q1 2015 | Q1 2014 or year-end 2014 |
|---|---|---|
| Sales and other operating revenues | $7.716 billion | $15.415 billion |
| Income from continuing operations | $286 million | $2.117 billion |
| Net income attributable to ConocoPhillips | $272 million; $0.22 per diluted share | $2.123 billion; $1.71 per diluted share |
| Cash from operating activities | $1.870 billion | $6.278 billion from continuing operations |
| Capital expenditures and investments | $3.332 billion | $3.895 billion |
| Cash and cash equivalents | $2.664 billion | $5.062 billion at Dec. 31, 2014 |
| Total debt | $22.511 billion | $22.565 billion at Dec. 31, 2014 |
| Total equity | $49.008 billion | $52.273 billion at Dec. 31, 2014 |
| Average production | 1.610 million BOE per day | 1.532 million BOE per day |
| Average realized price | $36.96 per BOE | $71.21 per BOE |
Operating cash flow less capital expenditures was negative $1.462 billion, before dividends and other investing or financing flows. The company paid $910 million in dividends, or $0.73 per share. The debt-to-capital ratio was 31%, compared with 30% at year-end. The $7.0 billion revolving credit facility had $6.2 billion of available borrowing capacity; there were no direct borrowings under it.
Material changes and results drivers
- Revenue fell 50% and income from continuing operations fell 86% year over year, primarily due to lower commodity prices. Brent averaged $53.97 per barrel, down 50%; WTI averaged $48.56, down 51%; and Henry Hub gas averaged $2.99 per MCF, down 40%.
- Realized prices declined across products, including crude oil to $48.05 per barrel from $101.59 and bitumen to $17.22 from $56.47. Higher production volumes partly offset price declines.
- A $555 million net deferred tax benefit from a U.K. tax-rate change materially supported earnings. The reported effective tax rate was 180%, reflecting the benefit against a pretax loss.
- Operating cash flow declined 70% from continuing operations, also reflecting the absence of a $1.3 billion FCCL distribution received in Q1 2014. Management does not expect that distribution to recur under current conditions.
- Production increased about 5%. Lower 48 and Canada reported losses of $405 million and $158 million, respectively; Europe reported $637 million of income, including the U.K. tax benefit. Asia Pacific and Middle East income was $409 million, down from $756 million.
- Foreign-currency translation reduced other comprehensive income by $2.719 billion, contributing to a $2.415 billion comprehensive loss attributable to ConocoPhillips.
Outlook, commentary, risks and contingencies
- Full-year 2015 production guidance remained 2–3% growth, excluding Libya; Q2 guidance was 1.555–1.595 million BOE per day, excluding Libya. Management remained on track for a 2015 capital budget of $11.5 billion and expected spending to decline through the year as major projects start up.
- The updated three-year plan reduces planned capital spending about 30% versus the prior plan. Management targets 1.7 million BOE per day of production and cash-flow neutrality in 2017, and a $1 billion operating-cost reduction in 2016 versus 2014.
- Five major project start-ups were targeted by year-end: Surmont 2, APLNG, Enochdhu, CD5 and Drill Site 2. First production began at Eldfisk II, Brodgar H3 and Bayu-Undan Phase III during the quarter.
- Management cited commodity-price volatility as the principal earnings and cash-flow risk and said it could further reduce capital spending or use balance-sheet capacity as needed. Other stated risks include production and exploration uncertainty, transportation constraints, regulation, political unrest, weather and environmental obligations.
- Libya production remained shut in amid closure of the Es Sider export terminal and ongoing civil unrest. Dry-hole charges included about $61 million after tax for Harrier and $81 million after tax for Omosi-1.
- Environmental remediation accruals were $322 million. Material unresolved matters include international arbitrations concerning expropriated assets in Venezuela and Ecuador, and a Timor-Leste tax dispute involving approximately $237 million paid under protest. Outcomes and recoveries are uncertain.
- Guarantee exposures include a $3.1 billion maximum exposure under the APLNG project-completion guarantee and a $1.7 billion maximum under a Phillips 66 supply-agreement guarantee; the latter is indemnified by Phillips 66. The filing describes future payments under these guarantees as conditional.
Investor verification priorities
- Assess how sustainable earnings and operating cash flow are at prevailing commodity prices, excluding the one-time U.K. tax benefit and the prior-year FCCL distribution.
- Track delivery, costs and production ramp-up for the major projects, and compare actual capital spending with the $11.5 billion 2015 budget.
- Review liquidity and dividend funding given Q1 operating cash flow below capital expenditures and the $2.4 billion cash decline.
- Monitor exploration outcomes, Libya operating status, and the timing and collectability of potential Venezuela, Ecuador and Timor-Leste recoveries.
- Verify guarantee and environmental exposures, including APLNG completion milestones and the Phillips 66 indemnification, as circumstances change.