ConocoPhillips 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This is a quarterly report (Form 10-Q) for ConocoPhillips for the period ended September 30, 2003. The company operates in five primary segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), Chemicals, and Emerging Businesses. The reporting period reflects the full integration of the August 2002 merger between Conoco Inc. and Phillips Petroleum Company. Results are significantly impacted by the adoption of new accounting standards, specifically SFAS No. 143 (Asset Retirement Obligations) and FIN 46 (Consolidation of Variable Interest Entities).
Key Financial Metrics
| Metric (Millions of Dollars) | Three Months Ended Sept 30, 2003 | Nine Months Ended Sept 30, 2003 |
|---|---|---|
| Total Revenues | $26,493 | $79,135 |
| Net Income | $1,306 | $3,695 |
| Net Income Per Share (Diluted) | $1.90 | $5.40 |
| Operating Cash Flow | N/A | $7,368 |
| Total Assets | $81,952 | N/A |
| Total Debt | $18,747 | N/A |
| Cash and Cash Equivalents | $483 | N/A |
| Capital Expenditures (9 Months) | N/A | $4,385 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 79% in the third quarter and 135% for the nine-month period compared to 2002. This was driven by higher sales volumes (due to the merger) and increased prices for crude oil, natural gas, and refined products.
- Profitability Surge: Net income turned from a loss of $116 million in Q3 2002 to a profit of $1,306 million in Q3 2003. For the nine-month period, net income rose from $133 million to $3,695 million.
- Segment Performance:
- E&P: Net income increased 110% (Q3) and 250% (9 months) due to higher production volumes and commodity prices.
- R&M: Net income increased substantially due to significantly higher U.S. refining margins.
- Discontinued Operations: Contributed $57 million in Q3 2003 income compared to a $42 million loss in Q3 2002, reflecting asset sales and improved margins.
- Accounting Changes:
- SFAS No. 143: Adoption resulted in a $145 million cumulative benefit to net income in Q1 2003 and increased asset retirement obligations.
- FIN 46: Adoption for Variable Interest Entities (VIEs) increased balance sheet debt by approximately $2.8 billion and resulted in a $258 million cumulative charge to equity, though it increased Q3 net income by $35 million.
Guidance, Outlook, and Risks
- Production Outlook: Management expects worldwide E&P production in Q4 2003 to exceed Q3 levels due to seasonal increases in the U.K., Norway, and Alaska, plus new production from the Grane field (Norway) and Su Tu Den field (Vietnam).
- Refining Outlook: Average refinery crude oil utilization is expected to exceed 90% in Q4 2003. A fire at the Ponca City, Oklahoma refinery in July 2003 reduced throughput, but full capacity restoration was expected by late November 2003.
- Asset Sales: The company is actively selling non-strategic assets, including U.S. retail marketing sites (Circle K sale signed in October 2003) and E&P properties, to fund debt reduction and capital programs.
- Dividends: In October 2003, the Board announced a quarterly dividend increase to $0.43 per share (a 7.5% increase).
- Risks and Contingencies:
- Commodity Prices: Results remain exposed to volatility in crude oil, natural gas, and refining margins.
- Environmental: Total environmental accruals were $1.101 billion. The company faces potential liabilities under CERCLA and RCRA, with costs subject to uncertainty regarding remediation scope and third-party recoveries.
- Legal: Pending matters include civil penalties for alleged air quality violations in California and permit violations in Alaska.
Investor Verification Checklist
- Debt Structure: Verify the impact of FIN 46 on the reported debt levels ($2.8 billion increase) and the composition of floating-rate debt (11% at Sept 30, rising to 19% after subsequent swaps).
- Asset Sales Progress: Monitor the closing of the Circle K sale and other FTC-mandated divestitures to confirm expected cash inflows of approximately $1.3 billion by year-end.
- Refining Margins: Assess the sustainability of the high refining margins reported in 2003, which were driven by supply disruptions and strong demand.
- Environmental Accruals: Review the $1.1 billion environmental liability accrual and the assumptions regarding future remediation costs, particularly for MTBE and underground storage tanks.
- Accounting Adjustments: Distinguish between operational performance and the one-time impacts of SFAS 143 and FIN 46 when analyzing year-over-year earnings growth.