ConocoPhillips 2011 Form 10-K Summary
Business context and reporting period
ConocoPhillips reported for the fiscal year ended December 31, 2011; the filing also presents unaudited fourth-quarter results. The company was an international integrated energy business organized across exploration and production (E&P), midstream, refining and marketing (R&M), chemicals, emerging businesses, and its former LUKOIL investment. It completed the sale of its remaining LUKOIL interest in the first quarter of 2011.
Management planned to separate R&M, most midstream activities, chemicals, and selected other operations into Phillips 66 through a pro rata distribution of one Phillips 66 share for every two ConocoPhillips shares. Completion was expected in the second quarter of 2012, subject to conditions including an IRS ruling, regulatory approvals, market conditions, and final Board approval.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Sales and other operating revenues | $244.8 billion | $189.4 billion |
| Net income attributable to ConocoPhillips | $12.436 billion | $11.358 billion |
| Diluted earnings per share | $8.97 | $7.62 |
| Cash from operating activities | $19.646 billion | $17.045 billion |
| Capital expenditures and investments | $13.266 billion | $9.761 billion |
| Total debt | $22.623 billion | $23.592 billion |
| Cash and cash equivalents | $5.780 billion | $9.454 billion |
| Total assets | $153.230 billion | $156.314 billion |
Fourth-quarter 2011 sales were $59.872 billion and net income attributable to ConocoPhillips was $3.390 billion, compared with $51.726 billion and $2.041 billion, respectively, in fourth-quarter 2010.
- Full-year revenue rose 29% and attributable net income rose about 9%, reflecting higher commodity prices and stronger U.S. refining results. Revenue growth also coincided with a 37% increase in purchased crude oil, natural gas, and product costs; revenue alone therefore does not indicate improved unit profitability.
- Crude oil and natural gas liquids sales prices averaged $97.22 per barrel, up 34%; bitumen averaged $62.56 per barrel, up 18%; and natural gas averaged $5.34 per thousand cubic feet, up 7%.
- E&P earnings were $8.242 billion, down from $9.198 billion. Worldwide E&P production averaged 1.619 million BOE per day, down from 1.752 million, mainly because of Libya and Bohai Bay suspensions, dispositions, and unplanned downtime. E&P production costs averaged $9.48 per BOE versus $8.10.
- R&M earnings increased to $3.751 billion from $192 million, benefiting from higher U.S. refining margins and asset-sale gains. Worldwide refinery utilization was 92%, versus 81%; the filing says domestic refining margins fell sharply in the fourth quarter.
- Midstream earnings were $458 million, up from $306 million; chemicals earnings were $745 million, up from $498 million. E&P and R&M remained the principal earnings drivers.
- Before-tax impairments were $792 million, versus $1.780 billion. Significant items included a Trainer Refinery impairment and impairments of certain E&P properties and an equity investment. After-tax impairments were $1.004 billion, compared with $1.928 billion.
- Proved reserves were 8.387 billion BOE, compared with 8.310 billion BOE. The five-year reserve replacement rate was 102% excluding LUKOIL and the effects of acquisitions, dispositions, and expropriations; the filing also reports a 30% five-year rate including those effects.
Cash, debt, liquidity, and capital allocation
Operating cash flow increased 15%. Capital spending and investments were $13.266 billion; operating cash flow less that spending was approximately $6.380 billion. Cash and cash equivalents fell by $3.674 billion during the year. The company used $11.123 billion to repurchase shares, paid $3.632 billion in common dividends, and repaid $961 million of debt. Total debt declined, while debt to total capital increased to 26% from 25%, partly because repurchases reduced equity; management’s target range was 20% to 25%.
At year-end, short-term investments were $581 million and the company reported $6.8 billion of available borrowing capacity under revolving credit facilities. It reported no direct revolving-credit borrowings and $1.128 billion of commercial paper outstanding. Management said cash, operating cash generation, and access to external funding were expected to meet near- and long-term requirements.
Outlook, material changes, risks, and unusual items
- For 2012, management expected production of approximately 1.6 million BOE per day, excluding additional asset sales. The capital expenditures and investments budget was $14.8 billion; the total capital program, including FCCL contributions, was expected to be approximately $15.5 billion. The company planned an additional $5 billion to $10 billion of asset sales in 2012.
- Management cited higher oil prices and refining margins as key 2011 benefits, while U.S. natural gas prices remained under pressure amid supply growth. Commodity prices, refining margins, production, costs, and the timing and performance of major projects remain important sensitivities.
- The planned Phillips 66 separation was expected to incur approximately $150 million of total after-tax pre-separation costs; $25 million was incurred in 2011. The company expected any cash distribution from Phillips 66 to be used primarily for debt repayment, with the balance directed to repurchases and dividends.
- At Peng Lai in China, seepage incidents led to production suspensions and reduced 2011 average net production by 14,000 barrels per day versus 2010. The reported releases were approximately 700 barrels of oil and 2,600 barrels of drilling mud; the mud was recovered. A January 2012 agreement with CNOOC and China’s Ministry of Agriculture provided for approximately $160 million of compensation for fishery-related claims, plus about $16 million designated from ConocoPhillips’ environmental fund for related projects. Future business impacts were stated to be unknown.
- Other material uncertainties include political instability and expropriation risk (including ongoing Venezuela and Ecuador arbitrations), environmental and climate regulation, operational and spill risks, reserve-estimation uncertainty, and exposure to joint-venture partners. Environmental remediation accruals were $922 million; asset-retirement obligations were $8.920 billion.
- The filing reports several ongoing environmental and regulatory proceedings. Management expected no material effect on consolidated financial position from the reported pending proceedings, but outcomes remain uncertain. The filing also describes a dispute with PDVSA over the MSLP ownership call right, with a merits hearing scheduled for December 2012.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls were effective at December 31, 2011.
Important facts for investors to verify
- Whether the Phillips 66 separation closed on the expected terms and schedule, and how the resulting distribution, costs, and debt allocation affected ConocoPhillips.
- Whether 2012 production, capital spending, and planned asset-sale targets were achieved, and how subsequent divestitures changed the production base.
- How much of 2011 earnings and cash flow came from recurring operations versus asset-sale gains, and how refining margins and commodity prices evolved after year-end.
- The status and financial allocation of the Peng Lai compensation and remediation commitments, and the timing and extent of any production restart.
- Reserve additions, development costs, and project delivery—particularly for oil sands, shale, and LNG—along with the assumptions underlying reserve estimates and impairments.
- Debt, liquidity, pension funding, environmental liabilities, and the outcomes of material legal, tax, and joint-venture contingencies.