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| COP > SEC Filings for COP > Form 10-Q on 30-Apr-2012 | All Recent SEC Filings |
30-Apr-2012
Quarterly Report
Management's Discussion and Analysis is the company's analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the financial statements and notes. It contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations and intentions that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The words "anticipate," "estimate," "believe," "budget," "continue," "could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995," beginning on page 49.
The terms "earnings" and "loss" as used in Management's Discussion and Analysis refer to net income (loss) attributable to ConocoPhillips.
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
ConocoPhillips is an international, integrated energy company. We are the third-largest integrated energy company in the United States, based on market capitalization. At March 31, 2012, we had approximately 29,700 employees worldwide and total assets of $163 billion.
Earnings of the company depend largely on the profitability of our Exploration and Production (E&P) and Refining and Marketing (R&M) segments. Crude oil and natural gas prices, along with refining margins, are the most significant factors in our profitability. Industry crude oil prices for West Texas Intermediate (WTI) averaged $102.99 per barrel in the first quarter of 2012, an increase of 10 percent compared with the first quarter of 2011, and an increase of 9 percent compared with the fourth quarter of 2011. The increase in oil prices in the first quarter of 2012 was primarily due to concerns about the potential for supply disruptions associated with European sanctions on Iran. This impact on prices was partially offset by the continued slowing of economic growth in much of the world, including China, and concerns about the European sovereign debt crisis.
Henry Hub natural gas prices averaged $2.72 per million British thermal units (MMBTU) in the first quarter of 2012, a decrease of 34 percent compared with the first quarter of 2011, and a decrease of 23 percent compared with the fourth quarter of 2011. U.S. natural gas prices remained under pressure in the first quarter of 2012 due to continued production growth from shale plays, combined with lower heating demand as a result of an exceptionally warm winter across much of the United States. This combination led to record-high storage inventory levels by the end of the first quarter, with U.S. natural gas prices trending below $2.00 per MMBTU in April. Prolonged substantial decreases in U.S. natural gas prices could have an adverse effect on our results of operations.
E&P segment earnings were $2,548 million in the first quarter of 2012, which accounted for 87 percent of our total earnings in the quarter. This compares with E&P earnings of $2,352 million in the first quarter of 2011 and $1,604 million in the fourth quarter of 2011.
Domestic refining margins significantly improved in the first quarter of 2012, while international refining margins decreased. The U.S. 3:2:1 crack spread, which is primarily WTI-based, increased 24 percent in the first quarter of 2012, compared with the first quarter of 2011, and 21 percent compared with the fourth quarter of 2011. The improvement in domestic refining margins primarily resulted from increased crude oil production from shale plays and rising imports from Canada, in addition to infrastructure constraints, causing WTI to continue to trade at a deeper discount relative to waterborne crudes. Refineries capable of processing WTI and crude oils that are WTI-based, primarily the Midcontinent and Gulf Coast refineries, benefitted from these lower regional feedstock prices.
The Northwest Europe benchmark increased 3 percent in the first quarter of 2012, compared with the first quarter of 2011, and decreased 9 percent compared with the fourth quarter of 2011. Despite a cold winter in Europe, demand for refined products decreased in the first quarter of 2012, driven by slowing economic activity as a result of their recession.
Our R&M segment reported earnings of $452 million in the first quarter of 2012, compared with earnings of $482 million in the first quarter of 2011, and earnings of $1,714 million in the fourth quarter of 2011.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2012, is based on a comparison with the corresponding period of 2011.
Consolidated Results
A summary of net income (loss) attributable to ConocoPhillips by business
segment follows:
Millions of Dollars
Three Months Ended
March 31
2012 2011
E&P $ 2,548 2,352
Midstream 93 73
R&M 452 482
LUKOIL Investment - 239
Chemicals 218 193
Emerging Businesses (14 ) (7 )
Corporate and Other (360 ) (304 )
Net income attributable to ConocoPhillips $ 2,937 3,028
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Earnings for ConocoPhillips were $2,937 million in the first quarter of 2012, a decrease of 3 percent compared with earnings of $3,028 million in the first quarter of 2011. The decrease was primarily the result of:
• Higher impairments. In the first quarter of 2012, non-cash impairments totaled $562 million after-tax.
• Lower production volumes from our E&P segment.
• Lower natural gas prices.
These items were partially offset by:
• Higher gains from asset sales. Gains from asset dispositions in the first quarter of 2012 primarily consisted of the $937 million after-tax gain from the disposition of our Vietnam business, compared with gains of $394 million after-tax in the first quarter of 2011, which mostly consisted of remaining LUKOIL share sales and Lower 48 asset dispositions.
• Substantially higher crude oil and liquefied natural gas (LNG) prices in our E&P segment. Commodity price benefits were somewhat offset by increased production taxes.
See the "Segment Results" section for additional information on our segment results.
Income Statement Analysis
Equity in earnings of affiliates increased 20 percent in the first quarter of 2012, which primarily resulted from:
• Improved earnings from Qatar Liquefied Gas Company Limited (3) (QG3), mainly due to significantly higher LNG prices.
• Improved earnings from WRB Refining LP, primarily due to higher refining margins in the Midcontinent region.
• Higher earnings from FCCL Partnership, mainly as a result of the ramp-up of production from Christina Lake Phase C.
• Improved earnings from Chevron Phillips Chemical Company LLC (CPChem), mostly due to higher margins in the olefins and polyolefins business line.
The increase in equity earnings was partially offset by:
• Lower earnings from Merey Sweeny, L.P., mainly due to lower refining margins.
• Lower earnings from Naryanmarneftegaz (NMNG), largely due to lower volumes.
Gain on dispositions increased 53 percent in the first quarter of 2012. The increase was mainly due to the $937 million gain on sale of our Vietnam business in the first quarter of 2012, partly offset by the first quarter 2011 disposition of certain E&P assets located in the Lower 48 and our remaining LUKOIL shares.
Selling, general and administrative expenses increased 37 percent in the first quarter of 2012, primarily as a result of costs associated with the separation of Phillips 66.
Exploration expenses increased $503 million in the first quarter of 2012. The increase was mostly due to the impairment of undeveloped leasehold costs associated with the Mackenzie Gas Project as a result of the suspension of the project.
Depreciation, depletion and amortization (DD&A) decreased 11 percent in the first quarter of 2012. The decrease was mostly associated with our E&P segment, reflecting lower production volumes primarily due to unplanned downtime and asset dispositions. These decreases were partially offset by higher production volumes in the Lower 48.
Impairments increased $259 million in the first quarter of 2012, primarily as a result of the impairment of capitalized project development costs associated with the Mackenzie Gas Project, in addition to the impairment of equipment formerly associated with the canceled Wilhelmshaven Refinery (WRG) upgrade project.
Interest and debt expense decreased 20 percent in the first quarter of 2012, primarily due to higher capitalized interest on projects.
See Note 20-Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rate.
Segment Results
E&P
Three Months Ended
March 31
2012 2011
Millions of Dollars
Net Income Attributable to ConocoPhillips
Alaska $ 616 549
Lower 48 254 314
United States 870 863
International 1,678 1,489
$ 2,548 2,352
Dollars Per Unit
Average Sales Prices
Crude oil and natural gas liquids (per barrel)
United States $ 95.71 85.36
International 109.10 96.86
Total consolidated operations 101.23 91.30
Equity affiliates 107.41 94.95
Total E&P 101.56 91.55
Bitumen (per barrel)
International 64.95 47.94
Equity affiliates 60.04 56.15
Total E&P 60.66 54.77
Natural gas (per thousand cubic feet)
United States 2.72 4.10
International 6.65 6.43
Total consolidated operations 5.09 5.54
Equity affiliates 2.58 2.59
Total E&P 4.80 5.22
Millions of Dollars
Worldwide Exploration Expenses
General and administrative; geological and
geophysical; and lease rentals $ 161 126
Leasehold impairment 512 41
Dry holes 6 9
$ 679 176
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Three Months Ended
March 31
2012 2011
Thousands of Barrels Daily
Operating Statistics
Crude oil and natural gas liquids produced
Alaska 226 214
Lower 48 201 150
United States 427 364
Canada 38 37
Europe 166 196
Asia Pacific/Middle East 79 142
Africa 64 61
Total consolidated operations 774 800
Equity affiliates
Asia Pacific/Middle East 24 22
Russia 18 38
816 860
Bitumen produced
Consolidated operations-Canada 11 11
Equity affiliates-Canada 73 53
84 64
Millions of Cubic Feet Daily
Natural gas produced*
Alaska 59 67
Lower 48 1,502 1,522
United States 1,561 1,589
Canada 863 944
Europe 632 751
Asia Pacific/Middle East 697 720
Africa 164 158
Total consolidated operations 3,917 4,162
Equity affiliates
Asia Pacific/Middle East 505 507
4,422 4,669
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*Represents quantities available for sale. Excludes gas equivalent of natural gas liquids included above.
The E&P segment explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. At March 31, 2012, our E&P operations were producing in the United States, Norway, the United Kingdom, Canada, Australia, offshore Timor-Leste in the Timor Sea, Indonesia, China, Libya, Nigeria, Algeria, Qatar and Russia. Total E&P production on a barrel-of-oil-equivalent (BOE) basis averaged 1,637,000 BOE per day in the first quarter of 2012, compared with 1,702,000 BOE per day in the first quarter of 2011.
Our E&P operations reported earnings of $2,548 million in the first quarter of 2012, an 8 percent increase compared with earnings of $2,352 million in the first quarter of 2011. See the "Business Environment and Executive Overview" section for additional information on industry crude oil and natural gas prices.
U.S. E&P
U.S. E&P earnings were $870 million in the first quarter of 2012, a 1 percent increase compared with earnings of $863 million for the same period in 2011. Earnings benefitted from higher crude oil prices and crude oil and natural gas liquids volumes, which were mostly offset by higher production taxes in Alaska, lower natural gas prices, lower gains from asset sales and higher DD&A.
U.S. E&P production averaged 687,000 BOE per day in the first quarter of 2012, an increase of 9 percent from 629,000 BOE per day in the first quarter of 2011. The increase was mainly due to new production, primarily from shale plays in the Lower 48, and lower unplanned downtime, partially offset by field decline.
International E&P
International E&P earnings were $1,678 million in the first quarter of 2012, a 13 percent increase compared with earnings of $1,489 million for the same period in 2011. The increase was primarily due to the $937 million after-tax gain on sale of our Vietnam business, higher crude oil and LNG prices and lower DD&A. These increases were partially offset by lower crude oil volumes, primarily in China, the $520 million after-tax impairment of the Mackenzie Gas Project and associated undeveloped leaseholds and higher taxes. For additional information, see Note 8-Impairments, in the Notes to Consolidated Financial Statements.
International E&P production averaged 950,000 BOE per day in the first quarter of 2012, a decrease of 11 percent from 1,073,000 BOE per day in the first quarter of 2011. The decrease primarily resulted from field decline, suspended operations in China and dispositions, partly offset by new production.
Midstream
Three Months Ended
March 31
2012 2011
Millions of Dollars
Net Income Attributable to ConocoPhillips* $ 93 73
*Includes DCP Midstream-related earnings: $ 56 48
Dollars Per Barrel
Average Sales Prices
U.S. natural gas liquids*
Consolidated $ 52.44 53.55
Equity affiliates 42.10 47.64
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*Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix.
Thousands of Barrels Daily
Operating Statistics
Natural gas liquids extracted* 213 188
Natural gas liquids fractionated** 136 139
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*Includes our share of equity affiliates.
**Excludes DCP Midstream.
The Midstream segment purchases raw natural gas from producers and gathers natural gas through an extensive network of pipeline gathering systems. The natural gas is then processed to extract natural gas liquids from the raw gas stream. The remaining "residue" gas is marketed to electrical utilities, industrial users and gas marketing companies. Most of the natural gas liquids are fractionated-separated into individual components like ethane, butane and propane-and marketed as chemical feedstock, fuel or blendstock. The Midstream segment consists of our 50 percent equity investment in DCP Midstream, LLC, as well as our other natural gas gathering and processing operations, and natural gas liquids fractionation, trading and marketing businesses, primarily in the United States and Trinidad.
Earnings from the Midstream segment were $93 million in the first quarter of 2012, an increase of 27 percent compared with the same period in 2011. This increase was largely due to higher gathering and processing volumes, primarily as a result of less weather-related downtime, increased volumes from expansion projects and improved marketing results. These increases were partially offset by lower natural gas liquids prices.
R&M
Three Months Ended
March 31
2012 2011
Millions of Dollars
Net Income Attributable to ConocoPhillips
United States $ 415 402
International 37 80
$ 452 482
Dollars Per Gallon
U.S. Average Wholesale Prices*
Gasoline $ 2.98 2.73
Distillates 3.21 2.92
*Excludes excise taxes.
Thousands of Barrels Daily
Operating Statistics
Refining operations*
United States
Crude oil capacity 1,801 1,986
Crude oil runs 1,610 1,735
Capacity utilization (percent) 89 % 87
Refinery production 1,775 1,914
International
Crude oil capacity 430 426
Crude oil runs 417 410
Capacity utilization (percent) 97 % 96
Refinery production 433 417
Worldwide
Crude oil capacity 2,231 2,412
Crude oil runs 2,027 2,145
Capacity utilization (percent) 91 % 89
Refinery production 2,208 2,331
Petroleum products sales volumes
United States
Gasoline 958 1,099
Distillates 837 852
Other products 298 437
2,093 2,388
International 625 672
2,718 3,060
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*Includes our share of equity affiliates.
The R&M segment refines crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuels); buys, sells and transports crude oil; and buys, transports, distributes and markets petroleum products. R&M has operations mainly in the United States, Europe and Asia.
R&M reported earnings of $452 million during the first quarter of 2012, a 6 percent decrease compared with earnings of $482 million in the corresponding quarter of 2011. See the "Business Environment and Executive Overview" section for additional information on industry refining margins.
U.S. R&M
U.S. R&M earnings were $415 million in the first quarter of 2012, a 3 percent increase compared with earnings of $402 million in the same period of 2011. This increase mainly resulted from processing higher refining volumes in our Central Region and from higher marketing margins, in addition to a favorable tax adjustment related to a fourth quarter 2011 disposition. These increases were partially offset by lower refining margins and higher operating expenses. Refining margins decreased as the impact of less favorable crude differentials more than offset improved market crack spreads.
In 2011, we idled the Trainer Refinery and announced plans to permanently close the facility by the end of the first quarter of 2012 if a sales transaction was unsuccessful. We have extended the sales deadline to the end of May 2012.
Our U.S. refining capacity utilization rate was 89 percent in the first quarter of 2012, compared with 87 percent in the first quarter of 2011. The current year rate primarily reflects lower maintenance and unplanned downtime, partly offset by higher turnaround activity.
International R&M
International R&M earnings were $37 million in the first quarter of 2012, a 54 percent decrease compared with earnings of $80 million in the same period of 2011. The decrease was mainly due to the $42 million after-tax property impairment related to equipment formerly associated with the canceled WRG upgrade project, lower refining margins and lower gains from foreign currency transactions. These decreases were partially offset by higher refining volumes and marketing margins, as well as lower operating expenses. For additional information on the impairment, see Note 8-Impairments, in the Notes to Consolidated Financial Statements.
Our international refining capacity utilization rate was 97 percent in the first quarter of 2012, compared with 96 percent in the first quarter of 2011. The current year rate primarily reflects lower maintenance, partly offset by higher turnaround activity.
LUKOIL Investment
Millions of Dollars
Three Months Ended
March 31
2012 2011
Net Income Attributable to ConocoPhillips $ - 239
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