ConocoPhillips — 2013 Third-Quarter Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2013. ConocoPhillips operated as a global exploration and production company across six geographic segments. Following the 2012 separation of Phillips 66, and with Kashagan, Algeria and Nigeria classified as discontinued operations, continuing-operations results are the more representative measure of the company’s ongoing business. Unless noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales and operating revenues | $13,643 | $14,141 | $41,159 | $42,398 |
| Total revenues and other income | $15,470 | $14,713 | $44,263 | $45,638 |
| Income from continuing operations | $2,439 | $1,740 | $6,529 | $5,639 |
| Net income attributable to ConocoPhillips | $2,480 | $1,798 | $6,669 | $7,002 |
| Diluted EPS | $2.00 | $1.46 | $5.38 | $5.55 |
| Cash provided by operating activities | Not stated by quarter in the supplied filing text | $12,176 | $10,052 |
- Third-quarter continuing earnings increased 40%; nine-month continuing earnings increased 16%. Total nine-month net income declined, primarily reflecting much lower discontinued-operations income than in 2012.
- Q3 income included $1,069 of pretax disposition gains; management reported $777 of after-tax gains versus $336 in Q3 2012. The filing attributes improved Q3 earnings also to higher commodity prices and a richer liquids mix, partly offset by higher DD&A and operating costs.
- Nine-month continuing operating cash flow was $11,941, up from $9,588. Continuing capital expenditures and investments were $11,281, implying approximately $660 of cash flow after that spending, before asset-sale proceeds, dividends and other cash uses. Dividends paid were $2,481.
- At September 30, cash and cash equivalents were $3,883; total debt was $21,668; total equity was $51,537. Debt-to-capital was 30%, compared with 31% at year-end 2012. The company reported $6.5 billion of available revolving-credit capacity; $961 of Qatar-program commercial paper was outstanding.
- Total assets were $119,760 and current assets and current liabilities were $22,557 and $16,335, respectively. The filing does not present an explicit margin measure.
- The board raised the quarterly dividend 4.5% to $0.69 per share. The same rate was declared for payment in December 2013.
Material changes and operating trends
- Continuing production was 1,470 thousand barrels of oil equivalent per day (MBOED) in Q3, flat year over year; average liquids production increased 2%. Q3 total production including discontinued operations was 1,514 MBOED.
- Eagle Ford, Bakken and Permian production rose 40% year over year. Growth from new developments and drilling was offset by field decline, Libya disruption and dispositions. Excluding dispositions, downtime and the Libya terminal closure, production grew 2% in Q3 and 3% over the first nine months year over year.
- Q3 benchmarks: WTI averaged $105.80 per barrel, up 15%; Brent averaged $110.32, broadly flat; Henry Hub gas averaged $3.58 per MMBtu, up 28%. The company’s Q3 realized bitumen price rose 34% to $76.06 per barrel; domestic NGL prices declined 17% over the first nine months.
- Regional results were mixed. Canada swung to $642 of Q3 income from a $31 loss, helped by the Clyden sale gain and stronger bitumen prices. Lower 48 and Latin America income rose to $498 from $182. Europe earned $284 versus $132 in Q3, but nine-month earnings fell to $976 from $1,190. Asia Pacific and Middle East Q3 income rose to $757 from $684, while nine-month income declined to $2,719 from $3,232.
Outlook, commentary, risks and unusual items
- Management forecast Q4 continuing production of 1,485–1,525 MBOED and full-year 2013 continuing production of 1,505–1,515 MBOED; discontinued-operations production was expected at 35–45 MBOED for the year. The Q4 estimate assumed a full-quarter Es Sider terminal closure in Libya, reducing production by 50 MBOED.
- Expected 2013 capital spending was approximately $16 billion for continuing operations and $0.6 billion for discontinued operations. Management said high-margin developments were expected to support 3–5% annual production and margin growth over the next five years.
- The 2012–2013 disposition program had generated $10.7 billion through October 31, exceeding the $8–$10 billion target. Kashagan was sold on October 31 for $5.4 billion. Algeria and Nigeria sales were targeted to close by year-end 2013; the Brass LNG sale was targeted for Q1 2014. These latter transactions remained subject to conditions and approvals.
- The Freeport LNG agreement to terminate the company’s long-term terminal-use contract remained conditional on regulatory approval and project financing, then expected by Q1 2014. If effective, ConocoPhillips expected an approximately $540 million after-tax charge and approximately $80 million net cash outflow, while anticipating $50–$60 million of annual operating-cost savings over 19 years.
- Other notable items included a $116 million after-tax charge for a pending Asia Pacific and Middle East settlement; a $355 million payment to other TAPS owners following FERC approval of a pooling settlement, alongside a $97 million after-tax expense reduction from lowering an accrual; and $355 million of environmental remediation accruals.
- Contingencies include ongoing damages phases in the Venezuela and Ecuador expropriation arbitrations; the amount recoverable had not been determined. The company had paid approximately $232 million under protest in Timor-Leste tax disputes. APLNG guarantees included a $2.5 billion maximum exposure at the reporting date for the company’s share of project financing completion risk.
- Management identified commodity-price volatility, production and development execution, permits and regulation, political disruption, environmental obligations, litigation and asset-sale execution as key risks. The filing said no material risk-factor changes had occurred since the 2012 Form 10-K. Management considered disclosure controls effective at September 30, 2013.
Important facts for investors to verify
- How much of the quarter’s earnings improvement came from recurring operations versus disposition gains, tax effects and other one-time items.
- Whether Libya disruptions and other operating constraints affect production relative to the stated Q4 and full-year ranges.
- Completion, proceeds and any adjustments or approvals for the Algeria, Nigeria and Brass LNG sales; Kashagan’s $5.4 billion sale occurred after quarter-end.
- The timing and accounting impact of the conditional Freeport LNG termination, including the expected charge, cash flow and cost savings.
- Cash generation relative to the capital program, dividends, debt service and FCCL Partnership payments, as well as the exposure represented by guarantees and legal and environmental contingencies.