ConocoPhillips — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2020. ConocoPhillips is an independent exploration and production company operating in 17 countries. The quarter was marked by the COVID-19 demand shock and an oil supply surge following the OPEC–Russia breakdown; commodity prices fell sharply. Unless noted, financial amounts below are in millions of dollars.
Key financial and operating metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Sales and other operating revenues | $6,158 | $9,150 |
| Net income (loss) attributable to ConocoPhillips | $(1,739); $(1.60) per diluted share | $1,833; $1.60 per diluted share |
| Cash provided by operating activities | $2,105 | $2,894 |
| Capital expenditures and investments | $1,649 | $1,637 |
| Total debt at quarter-end | $14,973 | $14,895 at Dec. 31, 2019 |
| Net production | 1,289 MBOED | 1,361 MBOED |
| Average realized price | $38.81 per BOE | $50.59 per BOE |
At March 31, cash and cash equivalents were $3,908 and short-term investments were $3,866. The $6.0 billion revolving credit facility was undrawn, giving approximately $14 billion of total liquidity. Current assets were $13,144 and current liabilities $6,075. Cash, cash equivalents and restricted cash totaled $4,183 at quarter-end, down $1,179 during the quarter. The company repurchased $726 of shares and paid $458 in dividends ($0.42 per share). The filing does not provide a clear consolidated margin measure.
Material changes versus the prior comparable period
- Revenue declined 33%; net income attributable to the company swung to a $1,739 loss, a $3,572 deterioration year over year.
- Major drivers included a $1,691 unrealized loss on Cenovus shares (versus a $343 unrealized gain in Q1 2019), lower commodity realizations, $521 of impairment charges, a $228 inventory valuation adjustment, lower volumes and the absence of a prior-period PDVSA-related award payment.
- Brent averaged $50.31/barrel, down 20%; WTI averaged $46.06/barrel, down 16%; Henry Hub gas averaged $1.95/MMBTU, down 38%. Realized bitumen price fell 82% to $5.90/barrel.
- Production fell 5%, mainly reflecting the U.K. asset sale, Libya force majeure and natural decline. Excluding Libya and adjusting for closed and pending dispositions, production increased 52 MBOED, or 4%.
- Operating cash flow declined $789. Net investing cash use was $1,932; net financing cash use was $1,230.
- Equity fell to $31,387 from $35,050 at year-end, including the net loss and $788 of other comprehensive loss, largely foreign-currency translation.
Outlook, risks and unusual items
- Management suspended all further 2020 guidance, including production and capital guidance, and said prior guidance should not be relied upon. The original capital plan of $6.5–$6.7 billion was reduced by $2.3 billion in March and April. The company also announced $600 million of planned operating-cost reductions and suspended share repurchases; together, announced actions reduce 2020 cash uses by more than $5 billion versus the original plan.
- Voluntary production curtailments announced for May were 265 MBOD gross (approximately 230 MBOED net); June curtailments were estimated at 460 MBOD gross (approximately 420 MBOED net). Further curtailments may result from market, infrastructure, partner or government actions.
- Management expected near-term prices to remain weak and volatile, and warned that sustained low prices could cause further asset and investment impairments, lower reserve estimates, higher DD&A rates and reduced cash flow. COVID-19 effects, demand recovery, storage constraints and commodity prices remain highly uncertain.
- The $511 Lower 48 impairment was principally associated with non-core Wind River Basin natural-gas assets; a further $31 Malaysia leasehold impairment was included in exploration expense. Inventory was written down by $228 before tax.
- The planned sale of Australia-West assets to Santos for $1.39 billion plus customary adjustments and a potential $75 million Barossa payment was expected to close in Q2 2020, subject to approvals and other conditions.
- Libya production ceased February 12 after export-terminal shutdowns; the timing of resumed exports was unknown. S&P affirmed its A rating but changed the outlook to negative; Moody’s and Fitch ratings were A3 and A, respectively, with stable outlooks.
- Environmental accruals were $170. The filing describes climate-change, royalty, environmental and other litigation. Venezuela-related matters include an $8.5 billion ICSID award plus interest under annulment proceedings, and a separate PDVSA settlement in default; ConocoPhillips had received approximately $754 under that settlement and resumed enforcement actions.
Important facts for investors to verify
- Subsequent quarterly filings and disclosures for actual realized prices, production, curtailments, capital spending and delivery of the announced cost reductions.
- Whether the company maintains its dividend and its stated liquidity as weak prices affect operating cash flow.
- Progress, closing proceeds and conditions for the Santos Australia-West sale.
- Further impairment or reserve revisions, particularly if commodity-price assumptions remain depressed.
- Developments in Venezuela award enforcement and payment recovery, as well as material environmental, royalty and climate-related proceedings.
- Credit-rating outlook changes and any effects on financing costs, market access or collateral requirements.