ConocoPhillips — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Interim financial statements are unaudited. Unless stated otherwise, amounts are in millions of dollars.
Business context and results
ConocoPhillips is an integrated energy company whose results are significantly affected by oil and gas prices and refining margins. Reported sales growth largely reflected higher commodity and product prices; sales include petroleum excise taxes, and purchased crude oil and products are substantial costs.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales and operating revenues | $65,627 | $45,686 | $122,157 | $90,507 |
| Net income attributable to ConocoPhillips | $3,402 | $4,164 | $6,430 | $6,262 |
| Diluted earnings per share | $2.41 | $2.77 | $4.50 | $4.17 |
| Dividends per share | $0.66 | $0.55 | $1.32 | $1.05 |
Quarterly attributable earnings declined 18% despite higher revenue; first-half earnings increased 3%. Prior-year comparisons included substantial disposition gains and a major refinery impairment, so headline year-over-year changes are not fully indicative of underlying performance. The filing does not provide a single comparable consolidated operating-margin figure.
Cash flow, balance sheet and liquidity
- First-half cash flow: Operating cash flow was $8,221, up from $6,515. Investing used $4,894, including $5,777 of capital expenditures and investments; financing used $7,296, including $4,785 of share repurchases and $1,861 of dividends.
- Cash: Cash and equivalents fell $3,949 during the half to $5,505. Short-term investments were $2,635, for combined cash and short-term investments of $8,140.
- Debt: Total debt was approximately $23.2 billion, down $396 from year-end 2010. Debt-to-capital was 25%; approximately 10% of debt was floating rate.
- Liquidity: The company reported $6.7 billion of available capacity under revolving credit facilities, with $1,157 of commercial paper outstanding and no direct revolving-facility borrowings. Current assets were $34,678 and current liabilities $29,344.
- Other obligations: The company is obligated to contribute $7.5 billion plus interest to FCCL over a 10-year period that began in 2007; approximately $713 was classified as short-term at June 30.
Material changes and segment performance
- Exploration and Production (E&P) earned $2,524 in Q2 versus $4,114 a year earlier. Higher oil prices helped, but the prior-year period included the Syncrude sale gain. Q2 production averaged 1.640 million BOE per day, down from 1.733 million; the company cited field decline, asset sales, Libya disruption and downtime.
- Refining and Marketing (R&M) earned $766 versus a $279 loss. The comparison benefited from the absence of the 2010 Wilhelmshaven refinery impairment and stronger U.S. refining margins. The U.S. 3:2:1 crack spread rose 107% year over year; U.S. refinery utilization was 90%, versus 96%.
- Midstream earned $130 versus $61, and Chemicals earned $199 versus $138, supported by higher NGL prices and improved chemical margins.
- The company completed the sale of its remaining LUKOIL interest in Q1 2011, receiving $1,243 and recording a $360 pretax gain. It also recorded an $83 pretax write-off related to cancellation of the Denali gas pipeline project.
- Production volumes declined, while depreciation, depletion and amortization fell 9% for Q2, primarily reflecting lower E&P volumes. Interest and debt expense also declined, mainly due to lower debt levels.
Outlook, risks and contingencies
- Production guidance: 2011 E&P production was expected to be 1.625–1.650 million BOE per day; Q3 production was expected to be lower than Q2 because of planned maintenance and turnarounds.
- Planned R&M separation: The board approved pursuing a tax-free spin-off of R&M as a stand-alone public company, expected in the first half of 2012. Completion depends on market conditions, regulatory and IRS approvals, agreements and final board approval; the filing warns it may be delayed, changed or not completed.
- APLNG: Sinopec agreements provide for LNG purchases of up to 4.3 million tonnes annually for 20 years and a 15% equity subscription, subject to closing conditions then expected in Q3 2011. ConocoPhillips expected an approximately $275 after-tax loss from the ownership dilution. APLNG also approved an initial LNG project train, with exports anticipated in 2015.
- Tax change: Newly enacted U.K. upstream tax legislation was expected to cause an approximately $190 charge to Q3 2011 earnings. The company was also evaluating a proposed limit on tax relief for decommissioning costs.
- Operating disruptions: A July 2011 Chinese regulatory shut-in at Bohai Bay was expected to temporarily reduce net production by approximately 17,000 barrels per day; future effects were uncertain. Libya operations and exports were suspended amid civil unrest and sanctions.
- Environmental and legal exposure: Environmental accruals were $988 at June 30, with expenditures expected over as long as 30 years. Arbitration related to Venezuela and Ecuador expropriations remained ongoing. The company said it believed known contingent exposures were unlikely to exceed accruals by a materially adverse amount, while noting estimates can change.
- Guarantees: Before QG3 completion certification, the company’s maximum exposure under project financing was stated as $1.2 billion; certification was expected later in 2011. It also disclosed other guarantees and indemnifications, including APLNG-related commitments.
- Key business risks include commodity prices and refining margins, production and project execution, political disruption, environmental regulation, litigation, taxes, and access to capital. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether 2011 production meets the 1.625–1.650 million BOE-per-day outlook, given declining volumes and operational disruptions.
- Progress, tax treatment, transaction terms and expected timing of the R&M spin-off and APLNG Sinopec transaction.
- Cash generation and liquidity after substantial repurchases, dividends and capital spending; the company also planned $5–$10 billion of additional asset sales through 2012.
- Resolution and potential financial effects of the Bohai Bay shut-in, Libya suspension, U.K. tax change, and Venezuela and Ecuador arbitrations.
- QG3 completion certification and release of project participants from financing guarantees, as well as changes in environmental accruals and other contingent obligations.