ConocoPhillips — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Interim financial statements are unaudited. Amounts are in U.S. dollars unless noted.
Business context and results
ConocoPhillips is a global exploration and production company operating across six geographic segments. Q2 results benefited substantially from higher oil and gas prices; management said commodity prices remain cyclical and volatile. Q2 average production was 1.692 million barrels of oil equivalent per day (MMBOED), up 7% from a year earlier, including acquisition and accounting-basis effects.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales and other operating revenues | $21.161B | $9.556B | $38.923B | $19.382B |
| Net income | $5.145B | $2.091B | $10.904B | $3.073B |
| Diluted EPS | $3.96 | $1.55 | $8.36 | $2.31 |
| Cash from operating activities | $7.9B | Not clearly stated for Q2 2021 | $12.982B | $6.331B |
| Capital expenditures and investments | Approximately $2.0B | Not stated for Q2 | $5.129B | $2.465B |
- Q2 net income was approximately 23.4% of total revenues and other income, versus 20.5% a year earlier; these are calculated ratios, not company-reported margins.
- Q2 total average realized price rose to $88.57 per BOE from $50.03. Brent averaged $113.78 per barrel and Henry Hub gas $7.17 per MMBTU.
- At June 30, cash and cash equivalents were $6.909B and short-term investments $1.272B. Total liquidity was $13.7B, including $5.5B of undrawn revolving-credit capacity.
- Total debt was $16.971B, down from $19.934B at year-end 2021; debt represented 25% of total capital, versus 31%. Debt less cash and short-term investments was approximately $8.8B.
- Q2 shareholders received $1.0B through ordinary dividend and variable return of cash (VROC), plus $2.3B through share repurchases. Six-month dividends paid were $1.852B and repurchases were $3.725B.
Changes versus the prior comparable period
- Q2 revenue more than doubled and net income rose by $3.054B year over year, primarily on higher realized commodity prices, higher sales volumes (including the Shell Permian acquisition), higher affiliate earnings, and disposition gains.
- Higher production and operating costs, taxes other than income taxes, and income tax provision partly offset the gains. Q2 also lacked the prior-year mark-to-market gains on Cenovus shares, which were fully sold in Q1 2022.
- Reported Q2 production rose 104 MBOED year over year, but after adjustments for acquisitions, dispositions, and Concho volume accounting, production was down 69 MBOED, or 4%, primarily due to planned and unplanned downtime.
- Six-month operating cash flow increased to $12.982B from $6.331B. Cash taxes paid rose to $3.942B from $107M.
- Debt fell by about $3B through refinancing and retirements. The company also acquired an additional 10% of APLNG for approximately $1.4B and divested its Indonesia assets, recording a $534M pretax gain.
Outlook, commentary, and risks
- Q3 2022 production guidance: 1.70–1.76 MMBOED. Full-year production expectation: approximately 1.74 MMBOED, subject to uncertainty in Libya. Full-year DD&A guidance decreased to $7.6B; capital guidance was unchanged.
- Full-year operating-plan capital expenditures were expected to be $7.8B, excluding the $1.4B APLNG acquisition. In August, after quarter-end, the company increased expected 2022 shareholder distributions to $15B and declared a $0.46-per-share Q3 ordinary dividend and $1.40-per-share Q4 VROC.
- Management emphasized an unhedged strategy and disciplined investment, while citing Russia’s invasion of Ukraine, OPEC+ supply, demand, inflation, supply-chain disruption, and COVID-related uncertainty as market considerations. Commodity-price volatility is a key risk to earnings and cash flow.
- Libya production stopped in late June following civil unrest and the Es Sider terminal shutdown; force majeure was lifted July 15 and production resumed. Three of four Norway exploration/appraisal wells drilled in the campaign were dry, adding approximately $76M to exploration expense.
- Material exposures include environmental remediation, climate-change and Louisiana coastal litigation, royalty and tax disputes, and the challenged BSEE decommissioning order concerning former California offshore facilities. Environmental accruals were $178M. The company said known contingencies were not expected to have a material adverse financial effect based on information then available.
- ConocoPhillips continues enforcement efforts related to Venezuela awards, including an $8.5B ICSID award plus interest; recovery depends on legal and counterparty developments. The filing also identifies risks from regulation, operating interruptions, permits, project execution, and counterparties. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether commodity prices and realized prices remain strong enough to sustain earnings, cash generation, and the announced $15B distribution plan.
- Actual production versus guidance, particularly the effects of turnarounds, downtime, natural decline, and Libya uncertainty.
- Execution and returns from the $7.8B operating capital plan, Shell Permian assets, and increased APLNG ownership; also track proposed LNG arrangements, which include nonbinding or approval-dependent elements.
- Progress toward the $5B debt-reduction target by 2026, and the costs and benefits of refinancing and debt retirement.
- Potential changes in tax-audit outcomes, environmental and legal liabilities, and recoveries from Venezuela or other counterparties.