ConocoPhillips — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The interim financial statements are unaudited. ConocoPhillips is an independent exploration and production company operating in 30 countries.
Financial and operating results
| Metric | Q1 2013 | Comparable period |
|---|---|---|
| Sales and other operating revenues | $14.166 billion | $14.593 billion, Q1 2012 |
| Income from continuing operations | $2.024 billion | $2.179 billion, Q1 2012 |
| Net income attributable to ConocoPhillips | $2.139 billion | $2.937 billion, Q1 2012 |
| Diluted earnings per share | $1.73 | $2.27, Q1 2012 |
| Continuing operating cash flow | $4.608 billion | $4.070 billion, Q1 2012 |
| Continuing capital expenditures and investments | $3.391 billion | $3.818 billion, Q1 2012 |
| Cash and cash equivalents | $5.422 billion | $3.618 billion at Dec. 31, 2012 |
| Total debt | $21.670 billion | $21.725 billion at Dec. 31, 2012 |
| Total debt to capital | 31% | 31% at Dec. 31, 2012 |
Continuing operating cash flow less continuing capital expenditures was approximately $1.217 billion. Management said operating cash flow benefited from working-capital timing, including tax payments and disposition-related tax effects. The current ratio was approximately 1.32x at March 31, 2013, based on current assets of $24.235 billion and current liabilities of $18.315 billion. The quarterly dividend was $0.66 per share; $815 million was paid during the quarter.
Continuing production averaged 1.555 million barrels of oil equivalent per day (MBOED), down 2% year over year; total production including discontinued operations was 1.596 MBOED. Liquids production increased 3%. The filing does not present a single consolidated operating-margin measure.
Material changes and comparability
- Income from continuing operations declined 7% year over year. Management attributed the decrease mainly to lower asset-sale gains, lower crude oil, bitumen and natural gas liquids prices, and higher depreciation, depletion and amortization. Lower impairments, higher natural gas prices, and lower production taxes partly offset those factors.
- Reported net income declined about 27%, with discontinued-operations income falling to $129 million from $776 million. The prior-year comparison includes Phillips 66 downstream operations as discontinued operations following the April 2012 separation; Kashagan, Algeria and Nigeria are also classified as discontinued operations. Total revenue comparisons therefore reflect a materially changed business perimeter.
- Average benchmark WTI and Brent prices fell 8% and 5%, respectively, versus Q1 2012; Henry Hub natural gas prices rose 23%. The company’s realized bitumen price fell 35%, while realized natural gas liquids prices also weakened.
- Segment results varied: Asia Pacific and Middle East income declined to $932 million from $1.754 billion, principally because Q1 2012 included a large Vietnam divestiture gain. Canada moved from a $549 million loss to $133 million income, reflecting the absence of a prior-year Mackenzie project impairment and a favorable tax resolution. Lower 48 and Latin America income fell to $133 million from $255 million.
Outlook, management commentary and risks
- Management forecast Q2 2013 continuing production of 1.440–1.470 MBOED, reflecting planned downtime and turnarounds, and full-year 2013 continuing production of 1.485–1.520 MBOED. Q2 discontinued-operations production was expected to be about 40 MBOED.
- Management’s stated five-year objective was annual production-volume and margin growth of 3%–5%, supported by high-margin developments. It emphasized liquids-focused investment and expected bitumen prices to strengthen in Q2 versus Q1. These are forward-looking expectations, not guarantees.
- Sales of Kashagan, Algeria and Nigeria were expected to close in 2013 and generate approximately $8.5 billion in proceeds, subject to approvals and other conditions. Q1 asset-sale proceeds were $1.134 billion. The Kashagan interest had a $5.1 billion carrying value after impairment; the company recorded a $43 million first-quarter pre-tax impairment for the disposition group.
- Commodity-price volatility, production and operating risks, permitting and regulatory uncertainty, geopolitical events, environmental requirements, access to capital, and execution or timing of asset sales and development projects were identified as risks. The 2014 Chukchi Sea drilling plans were on hold pending greater clarity on federal regulatory and permitting requirements.
- Environmental accruals were $350 million. The company reported an APLNG project-financing completion guarantee with maximum exposure of $1.7 billion based on facility use at quarter-end; the stated maximum potential payment under the guarantee was $3.2 billion. Other APLNG and contractual guarantees also apply.
- Material legal matters include pending arbitration relating to Venezuela’s expropriation of assets, Ecuador expropriation damages, and Timor-Leste tax assessments of approximately $227 million paid under protest. Management said known contingency exposures were not expected to exceed accruals by an amount that would materially adversely affect the consolidated financial statements; outcomes remain uncertain.
Key facts for investors to verify
- Whether the planned $8.5 billion divestitures closed on the expected timetable and at proceeds consistent with stated expectations.
- Actual production versus the Q2 and full-year 2013 guidance ranges, including the effects of downtime, field decline and new-project ramp-ups.
- How commodity prices, realized bitumen and liquids pricing, and working-capital timing affect cash flow and funding of capital spending and dividends.
- Progress and potential exposure relating to APLNG guarantees, environmental obligations, and the Venezuela, Ecuador and Timor-Leste proceedings.
- The effect of the Phillips 66 separation and other discontinued operations when comparing reported revenue and earnings with Q1 2012.