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COP > SEC Filings for COP > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for CONOCOPHILLIPS

Form 10-Q for CONOCOPHILLIPS


30-Oct-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 53.

Due to the separation of our downstream businesses on April 30, 2012, which is reported as discontinued operations, income (loss) from continuing operations is more representative of ConocoPhillips as an independent exploration and production company. The terms "earnings" and "loss" as used in Management's Discussion and Analysis refer to income (loss) from continuing operations.

BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW

ConocoPhillips is the world's largest independent exploration and production (E&P) company, based on proved reserves and production of liquids and natural gas. Headquartered in Houston, Texas, we have operations and activities in 30 countries. At September 30, 2012, we had approximately 16,700 employees worldwide and total assets of $115 billion.

The Separation

On April 30, 2012, we completed the separation of our downstream businesses into an independent, publicly traded company, Phillips 66. Our refining, marketing and transportation businesses, most of our Midstream segment, our Chemicals segment, as well as our power generation and certain technology operations included in our Emerging Businesses segment, were transferred to Phillips 66. Results of operations related to Phillips 66 have been classified as discontinued operations in all periods presented in this Form 10-Q. For additional information, see Note 2-Separation of Downstream Business, in the Notes to Consolidated Financial Statements.

Business Environment

As a newly established, independent E&P company, we are solely focused on exploring for, developing and producing oil and natural gas globally. Our commitment to safety and environmental stewardship, operating excellence and financial responsibility is fundamental to our success. We continue to focus on improving our financial position and increasing shareholder returns through production and margin growth, portfolio optimization and maintaining sector-leading dividend distributions. In order to remain competitive, we must continually develop and replenish a portfolio of projects which offer attractive financial returns on our investment. We continue to evaluate our assets regularly to determine whether they fit our strategic plans or should be sold or otherwise disposed, and, as a result, we remain positioned to complete our $8-$10 billion asset disposition program by the end of 2013. For the first nine months of 2012, we have generated proceeds of approximately $2.1 billion as part of this program, which mainly included the sale of the Vietnam business, the Alba and Statfjord fields in the North Sea and our investment in Naryanmarneftegaz (NMNG) in Russia.


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Because we participate in a capital-intensive industry, we make significant investments to acquire acreage, explore for new oil and gas fields, develop newly discovered fields and maintain existing fields. In the short-term, we will fund a portion of our capital program through the proceeds from our strategic asset dispositions. In the long-term, we plan to fund our capital program organically by investing in high-return developments which will grow our margins and cash flow. We expect our capital spending will be $15.5 billion to $16 billion in 2012. Over the next five years, we plan to execute a disciplined capital program in order to generate 3 to 5 percent annual production volume and margin growth, primarily from major developments underway in the United States, Canada, the United Kingdom and Norwegian North Sea, Malaysia and Australia.

The most significant factors impacting our profitability and related reinvestment of our operating cash flows into our business are the prices for crude oil and natural gas. The prices for these commodity products are subject to factors external to our company, over which we have no control. These prices are supply- and demand-based and can be very volatile; therefore, our strategy is to maintain a core portfolio of low-risk, high-return projects from legacy assets, coupled with a portfolio which offers growth opportunities, such as unconventional plays, deepwater and arctic drilling and liquefied natural gas (LNG).

The following table depicts the average benchmark prices for West Texas Intermediate (WTI) crude oil, Dated Brent crude oil and U.S. Henry Hub natural gas:

                                                                       Dollars Per Unit
                                                        Three Months Ended           Nine Months Ended
                                                           September 30                September 30
                                                           2012          2011          2012          2011

Market Indicators
WTI (per barrel)                                      $   92.11         89.70         96.18         95.37
Dated Brent (per barrel)                                 109.61        113.46        112.09        111.93
U.S. Henry Hub first of month (per million British
thermal units)                                             2.80          4.20          2.58          4.21

Industry crude prices for WTI increased 3 percent in the third quarter of 2012 and increased 1 percent in the first nine months of 2012, compared with the same periods of 2011, while Brent prices decreased 3 percent in the third quarter of 2012 and remained relatively flat in the first nine months of 2012. Global oil prices strengthened during the third quarter of 2012, as global economic concerns eased and geopolitical risks remained high. WTI continued to trade at a discount to Brent, mainly due to high inventory levels and excess crude supply in the U.S. Midcontinent market.

Henry Hub natural gas prices decreased 33 percent in the third quarter of 2012, and decreased 39 percent in the first nine months of 2012, compared with the same periods of 2011. U.S. natural gas prices remained depressed in 2012, due to high inventory levels, which resulted from a warmer-than-normal winter and sustained production from shale plays. Prolonged low U.S. natural gas prices may continue to have an adverse effect on our results of operations. The expansion in shale production has also helped boost supplies of natural gas liquids, resulting in downward pressure on natural gas liquids prices in the United States. As a result, our domestic realized natural gas liquids price declined 26 percent in the first nine months of 2012, compared with the same period of 2011.


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Key Operating and Financial Highlights

Significant highlights during the third quarter of 2012 included the following:

Achieved quarterly production of 1.525 million barrels of oil equivalent per day.

Continued ramp-up of production in Eagle Ford and Bakken.

Continued growth from Canadian oil sands; successful startup of Christina Lake Phase D.

Advanced major growth projects and drilling programs.

Completed turnarounds at major facilities worldwide, as planned.

Increased exploration activity in conventional and unconventional opportunities globally.

Completed sale of NMNG and dilution of interest in Australia Pacific LNG (APLNG).

Outlook

Production for the fourth quarter of 2012 is expected to be higher than the third quarter of 2012, reflecting completion of turnaround activity and ongoing ramp-up in major North American programs, most notably in the Eagle Ford and Canadian oil sands. Full-year 2012 production is estimated to be 1.57 million to 1.58 million barrels of oil equivalent per day. We anticipate continued progress on our major projects and drilling programs in the fourth quarter of 2012, including the evaluation of drilling results on several exploration prospects.

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three- and nine-month periods ended September 30, 2012, is based on a comparison with the corresponding period of 2011.

Consolidated Results

We manage our operations through six operating segments, which are defined by geographic region: Alaska, Lower 48 and Latin America, Canada, Europe, Asia Pacific and Middle East, and Other International. Our LUKOIL Investment represents our prior investment in the ordinary shares of OAO LUKOIL, which was sold in the first quarter of 2011. Corporate and Other represents costs not directly associated with an operating segment, such as most interest expense, corporate overhead, costs related to the separation and certain technology activities, net of licensing revenues.

A summary of income (loss) from continuing operations by business segment follows:

                                                      Millions of Dollars
                                        Three Months Ended            Nine Months Ended
                                           September 30                  September 30
                                       2012           2011           2012           2011

 Alaska                              $     535            502          1,706          1,558
 Lower 48 and Latin America                182            334            556            996
 Canada                                    (31 )           73           (674 )          201
 Europe                                    132            266          1,190          1,265
 Asia Pacific and Middle East              683            482          3,231          2,330
 Other International                       567             53            634            251
 LUKOIL Investment                           -              -              -            239
 Corporate and Other                      (257 )         (215 )         (836 )         (728 )

 Income from continuing operations   $   1,811          1,495          5,807          6,112


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Earnings for ConocoPhillips increased 21 percent in the third quarter of 2012, while earnings for the nine-month period ended September 30, 2012, decreased 5 percent. The improvement in the third quarter of 2012 primarily resulted from:

Higher gains from asset sales of $336 million after-tax, compared with losses of $267 million after-tax in the third quarter of 2011.

Lower production taxes, mainly as a result of lower production volumes.

These items were partially offset by:

Lower prices.

Lower production volumes.

Pension settlement expense of $82 million after-tax. For additional information, see Note 18-Employee Benefit Plans, in the Notes to Consolidated Financial Statements.

The decrease in earnings for the nine-month period of 2012 was primarily due to:

Significantly lower volumes, largely due to dispositions, reduced production in China and higher planned maintenance.

Higher impairments. Non-cash impairments for the nine-month period of 2012 totaled $550 million after-tax.

Lower natural gas and natural gas liquids prices.

The absence of earnings from LUKOIL due to the divestiture of our interest.

Higher operating and selling, general and administrative (SG&A) expenses, which included the pension settlement expense of $82 million after-tax and separation costs of $80 million after-tax.

These items were partially offset by:

Higher gains from asset sales of $1,557 million after-tax, compared with gains of $152 million after-tax in the comparative period of 2011.

Lower production taxes and depreciation, depletion and amortization (DD&A) expenses, mainly as a result of lower volumes.

Higher crude oil and LNG prices.

See the "Segment Results" section for additional information on our segment results.

Income Statement Analysis

Sales and other operating revenues decreased 12 percent in both the third quarter and nine-month period of 2012, mainly due to lower crude oil, natural gas and LNG volumes and lower natural gas and natural gas liquids prices. Higher LNG and crude oil prices partly offset the decrease in the nine-month period of 2012.

Equity in earnings of affiliates for the nine-month period of 2012 increased 24 percent. The increase primarily resulted from:

Improved earnings from Qatar Liquefied Gas Company Limited (3) (QG3), primarily due to higher LNG prices and a $72 million tax-related adjustment, partly offset by lower volumes.

The absence of the $83 million before-tax write-off of our investment associated with the cancellation of the Denali gas pipeline project in the second quarter of 2011.

Higher earnings from FCCL Partnership, mainly as a result of new production from Christina Lake Phases C and D, partly offset by lower bitumen prices.

These increases in equity earnings were partially offset by lower earnings from NMNG, largely due to lower volumes.


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Gain on dispositions for the third quarter and nine-month period of 2012 increased $378 million and $1,253 million, respectively, compared with corresponding periods in 2011. Gains realized in the third quarter of 2012 were primarily due to the disposition of our equity investment in NMNG and the sale of our interest in Block 39 in Peru, which were partly offset by the loss on further dilution of our equity interest in APLNG from 42.5 percent to 37.5 percent. This is compared with a loss in the third quarter of 2011 as a result of the initial dilution of our equity interest in APLNG from 50 percent to 42.5 percent. Additional gains realized in the nine-month period of 2012 mainly resulted from the disposition of our Vietnam business and the Statfjord and Alba fields located in the North Sea, partially offset by the sale of certain E&P assets located in the Lower 48 and the remaining divestiture of our LUKOIL shares in the nine-month period of 2011.

Purchased commodities decreased 19 percent in both the third quarter and nine-month period of 2012, largely as a result of lower U.S. natural gas prices, partly offset by higher purchased volumes.

Production and operating expenses increased 6 percent in the nine-month period of 2012, mostly due to increased operating expenses in China and major turnaround expenses at our Bayu-Undan Field and Darwin LNG facility.

SG&A expenses increased 128 percent and 50 percent in the third quarter and nine-month period of 2012, respectively, mainly as a result of the pension settlement expense. The nine-month period of 2012 also included costs associated with the separation of Phillips 66.

Exploration expenses decreased 18 percent in the third quarter of 2012 and increased 65 percent in the nine-month period of 2012. The decrease in the third quarter of 2012 was mainly due to lower dry hole costs. The increase in the nine-month period was mostly due to the impairment of undeveloped leasehold costs associated with the Mackenzie Gas Project as a result of the indefinite suspension of the project in the first quarter of 2012.

DD&A decreased 7 percent in the nine-month period of 2012, primarily due to lower production volumes as a result of asset dispositions and lower production in China, partially offset by higher production volumes in the Lower 48.

Impairments increased $296 million in the nine-month period of 2012, largely due to the $213 million impairment of capitalized project development costs associated with the Mackenzie Gas Project in the first quarter of 2012, as well as the $78 million increase in the asset retirement obligation for the Don Field in the United Kingdom, which has ceased production. For additional information, see Note 8-Impairments, in the Notes to Consolidated Financial Statements.

Taxes other than income taxes decreased 25 percent and 10 percent in the third quarter and nine-month period of 2012, respectively, mostly due to lower production taxes as a result of lower crude oil production volumes. Lower crude oil prices also contributed to the decrease in the third quarter of 2012.

Interest and debt expense for the third quarter and nine-month period of 2012 decreased 30 percent and 25 percent, respectively, primarily due to higher capitalized interest on projects and lower interest expense due to lower average debt levels.

See Note 21-Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rate.


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