ConocoPhillips 2012 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2012, filed February 19, 2013. ConocoPhillips completed the separation of its downstream businesses into Phillips 66 on April 30, 2012, and is now focused on global exploration and production. Phillips 66, and businesses planned for sale (Kashagan, Nigeria and Algeria), are presented as discontinued operations in all periods; prior-year comparisons are therefore not fully comparable with the former integrated company.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Sales and other operating revenue | $57.967 billion | $64.196 billion |
| Income from continuing operations | $7.481 billion | $7.188 billion |
| Net income attributable to ConocoPhillips | $8.428 billion | $12.436 billion |
| Diluted EPS | $6.72 | $8.97 |
| Cash from continuing operating activities | $13.458 billion | $13.953 billion |
| Capital expenditures and investments, continuing operations | $14.172 billion | $11.214 billion |
| Total debt | $21.725 billion | $22.623 billion |
| Cash and cash equivalents | $3.618 billion | $5.780 billion |
Continuing-operations earnings rose 4%, despite revenue declining 10%. Total net income and EPS fell largely because discontinued-operations income declined to $1.017 billion from $5.314 billion. Earnings benefited from $1.567 billion after-tax gains on asset dispositions, higher crude oil and LNG prices, a $236 million tax-loss-carryforward benefit and $235 million after-tax from favorable claims and settlements. Offsets included lower production volumes, weaker natural gas, natural gas liquids and bitumen prices, increased expenses and higher impairments.
Continuing-operations production averaged 1.527 million BOE per day, down 2% from 1.561 million in 2011. Crude oil sales prices were broadly flat at $105.72 per barrel; natural gas liquids prices fell 17% to $46.36 per barrel, natural gas prices fell 6% to $5.48 per thousand cubic feet, and bitumen prices fell 14% to $53.91 per barrel. Proved reserves were 8.642 billion BOE, up from 8.387 billion; organic reserve replacement was 156%.
Year-end total assets were $117.144 billion and total equity was $48.427 billion. Current assets were $23.989 billion and current liabilities were $17.443 billion. The company reported $13.185 billion in long-term deferred income taxes and $9.164 billion in asset-retirement obligations. Its $7.5 billion revolving credit facility had $6.4 billion of available capacity at year-end; no direct revolver borrowings were outstanding. The filing does not present a single operating-margin figure.
For fourth-quarter 2012, sales and other operating revenues were $15.569 billion, income before tax from continuing operations was $3.622 billion, net income was $1.441 billion, and diluted EPS was $1.16.
Material changes versus the prior comparable period
- Downstream separation materially changed the company’s business mix, asset base and reporting perimeter; 2012 continuing-operations revenue excludes the separated business.
- Capital expenditures and investments from continuing operations increased 26% to $14.172 billion. Continuing operating cash flow declined 4% to $13.458 billion.
- Debt decreased by $0.898 billion, while the debt-to-capital ratio increased to 31% from 26%, reflecting a substantially lower equity base following the separation and capital returns.
- Canada recorded a $684 million continuing-operations loss, versus $91 million of earnings in 2011, including a $520 million after-tax impairment of the suspended Mackenzie Gas Project and associated leaseholds.
- Before-tax impairments totaled $1.175 billion, including Mackenzie, Cedar Creek Anticline, European asset-retirement revisions and Kashagan held-for-sale impairment.
Outlook, commentary, risks and unusual items
- Management forecast 2013 continuing-operations production of 1.475–1.525 million BOE per day; first-quarter total production guidance was 1.58–1.60 million BOE per day, including about 40,000 BOE per day from discontinued operations.
- The 2013 capital program was budgeted at $15.8 billion, including $0.8 billion of FCCL contributions; $14.7 billion was allocated to continuing operations. Management targeted 3–5% annual production-volume and margin growth over the following five years.
- The company had generated $2.132 billion from asset sales through year-end and expected approximately $9.6 billion of announced additional sales to close by mid-2013. Kashagan, Algeria and Nigeria were among the planned transactions; proceeds and closing remain subject to transaction terms and, where applicable, approvals.
- Significant project and contingent exposures include an APLNG completion guarantee with an estimated maximum potential payment of $3.2 billion (year-end exposure $860 million), and a $7.5 billion-plus-interest FCCL contribution obligation. Total contractual obligations were $82.370 billion, including $26.465 billion of purchase obligations.
- Risks highlighted include volatile commodity prices, reserve replacement and estimation uncertainty, project execution and cost overruns, environmental and climate regulation, operational incidents, political risk and expropriation, joint-venture exposure, and changes in tax regimes. Natural gas weakness and lower NGL and bitumen prices were identified as near-term pressures.
- Unusual legal and tax matters include ongoing Venezuela and Timor-Leste arbitrations. The company received $68 million from PDVSA and reversed a related contingent liability, generating $234 million of reported after-tax benefit in total. An Ecuador tribunal found unlawful expropriation; damages remain to be determined. Timor-Leste tax assessments paid under protest totaled about $227 million.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Important facts for investors to verify
- Reconcile continuing-operations results with discontinued-operations income and assess how the Phillips 66 separation affects year-over-year comparisons.
- Confirm completion, proceeds and uses of the announced asset sales, including whether proceeds fund capital spending, dividends or debt reduction.
- Track production guidance against field decline, downtime, dispositions and ramp-up of key developments; review reserve additions and proved undeveloped reserve conversion.
- Assess the economics, timing and funding needs of the $15.8 billion capital program, APLNG and Canadian oil-sands projects, including guarantees and FCCL payments.
- Monitor commodity-price exposure, impairment assumptions, cash generation, leverage and liquidity, as well as outcomes of the Venezuela, Ecuador and Timor-Leste proceedings.