ConocoPhillips — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. ConocoPhillips is a global independent exploration and production company operating in 21 countries. Management cited persistent commodity oversupply and uncertainty about recovery as the main business backdrop.
Financial and operating metrics
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Sales and operating revenues | $5.121 billion | $7.716 billion; down 34% |
| Total revenues and other income | $5.015 billion | $8.002 billion |
| Net income (loss) attributable to ConocoPhillips | $(1.469) billion; $(1.18) per diluted share | $272 million; $0.22 per diluted share |
| Operating cash flow | $421 million | $2.068 billion; down 80% |
| Capital expenditures and investments | $1.821 billion | $3.332 billion |
| Average production | 1,578 thousand BOE/day | 1,610 thousand BOE/day; down 2% |
| Average realized price | $22.94/BOE | $36.92/BOE; down 38% |
| Cash and short-term investments | $5.173 billion | Cash was $2.368 billion at year-end 2015; no short-term investments |
| Total debt | $29.455 billion | $24.880 billion at year-end 2015 |
| Debt to total capital | 43% | 38% at year-end 2015 |
| Dividend paid per share | $0.25 | $0.73 in Q1 2015 |
Production and operating expenses declined 25% to $1.354 billion, while DD&A rose to $2.247 billion from $2.131 billion. Interest and debt expense increased to $281 million from $202 million. The filing does not provide a clear conventional operating-margin measure.
Material changes versus the prior comparable period
- The company moved from attributable net income of $272 million to a loss of $1.469 billion, primarily reflecting lower commodity prices. Other adverse factors included the absence of a $555 million U.K. deferred-tax benefit recognized in 2015, higher DD&A, and increased impairments.
- Brent averaged $33.89/barrel, down 37%; WTI averaged $33.27/barrel, down 31%; and Henry Hub gas averaged $2.09/MMBTU, down 30%. The filing attributes weak prices to supply exceeding demand and high inventories.
- Operating cash flow fell from $2.068 billion, also reflecting the absence of a $556 million 2015 tax refund. Cash nevertheless rose to $4.866 billion, mainly from financing proceeds.
- Production declined year over year, including normal field decline and prior asset sales, partly offset by new developments and APLNG’s ramp-up. Adjusted for downtime and dispositions, production increased 34 thousand BOE/day, or 2%.
- Q1 included $136 million of impairment charges on the income statement. Separately, exploration expense included a $95 million pre-tax impairment for the Melmar prospect and $73 million for certain Gulf of Mexico leases.
Outlook, commentary, risks and unusual items
- 2016 capital-spending guidance was reduced from $7.7 billion to $6.4 billion in February and then to $5.7 billion in April, reflecting reduced deepwater exploration, deferrals and lower costs. Full-year production guidance remained approximately 1,525 thousand BOE/day; Q2 guidance was 1,500–1,540 thousand BOE/day, including planned turnarounds.
- Management expected up to $1 billion of 2016 asset-sale proceeds and said Train 2 of APLNG was on track for its first cargo in Q4 2016. Eleven Train 1 cargoes were loaded in Q1. No earnings guidance was provided.
- To preserve liquidity, the company reduced its quarterly dividend to $0.25 per share, issued $3.0 billion of fixed-rate notes and entered a $1.6 billion three-year term loan. It reported $6.0 billion of available revolver capacity at quarter-end; $750 million of Qatar Funding commercial paper was outstanding then. In April it repaid a further $640 million and expected to repay the remainder in Q2.
- Moody’s and Fitch downgraded the company’s ratings during Q1, both with negative outlooks; S&P downgraded ratings on April 29, also with a negative outlook. Management said no corporate-debt ratings trigger would automatically cause default, but further deterioration could increase collateral needs. A below-investment-grade downgrade would have required an estimated additional $130 million collateral on certain derivatives at quarter-end.
- APLNG’s estimated fair value was $437 million below its $10.315 billion book value; the company judged the decline not other-than-temporary and recorded no related impairment. A future other-than-temporary decline could result in a noncash impairment. The company also disclosed a $3.2 billion maximum potential completion-guarantee exposure for APLNG, with a $114 million carrying value.
- Environmental accruals were $263 million. Other notable exposures include legal and environmental claims, contingent guarantees and unresolved damages proceedings related to expropriated investments in Venezuela and Ecuador. The filing says it is awaiting the Ecuador tribunal’s award; the Venezuela damages phase was proceeding.
- Management identified commodity-price volatility, potential further impairments, production and reserve-replacement uncertainty, political instability, regulatory and environmental requirements, litigation, financing access, and joint-venture and counterparty performance as risks.
Important facts for investors to verify
- Whether realized commodity prices and operating cash flow stabilize, and whether the company can fund spending and dividends through a prolonged downturn.
- Progress against the $5.7 billion capital budget, production guidance, planned turnarounds and APLNG Train 2 startup.
- Debt maturities, commercial-paper repayment, credit ratings, revolver availability and any additional collateral requirements.
- Whether APLNG’s fair value remains below book value and whether further impairments or guarantee obligations arise.
- Timing and proceeds from planned asset sales, and developments in Venezuela, Ecuador, environmental matters and other contingencies.