Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
COP > SEC Filings for COP > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for CONOCOPHILLIPS | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CONOCOPHILLIPS


30-Apr-2013

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 47.

Due to the separation of our downstream businesses in 2012 and our intention to sell our interest in the North Caspian Sea Production Sharing Agreement (Kashagan) and our Nigerian and Algerian businesses, which are 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 production and proved reserves. Headquartered in Houston, Texas, we have operations and activities in 30 countries. At March 31, 2013, we had approximately 17,100 employees worldwide and total assets of $118 billion.

Discontinued Operations

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 (collectively, our "Downstream business"), were transferred to Phillips 66. Results of operations related to Phillips 66 for the period ended March 31, 2012, have been classified as discontinued operations. As part of our strategic asset disposition program, in the fourth quarter of 2012, we agreed to sell our interest in Kashagan and our Nigerian and Algerian businesses. Results of operations related to Kashagan, Nigeria and Algeria have been classified as discontinued operations in all periods presented in this Form 10-Q. For additional information, see Note 3-Discontinued Operations, in the Notes to Consolidated Financial Statements.

Overview

As an independent E&P company, we are solely focused on exploring for, developing and producing crude oil and natural gas globally. Our portfolio primarily includes legacy assets in North America, Europe, Asia and Australia; growing North American shale and oil sands businesses; several major international developments; and a global exploration program. Our value proposition to our shareholders is to deliver production and cash margin growth, competitive returns on capital, and a compelling dividend, while keeping our fundamental commitment to safety, operating excellence and environmental stewardship. We expect to achieve our value proposition through portfolio optimization, investments in high-margin developments, applying technical capability and maintaining financial flexibility.


Table of Contents

In the first quarter of 2013, we achieved production of 1,596 thousand barrels of oil equivalent per day (MBOED), including production from discontinued operations of 41 MBOED. Additionally, we generated $4.6 billion in cash from continuing operations, paid dividends on our common stock of $0.8 billion, funded a $3.6 billion capital program and continued to progress the asset disposition program. For the first quarter of 2013, we have generated proceeds from dispositions of approximately $1.1 billion, which mainly included the sale of certain properties in the Cedar Creek Anticline, located in North Dakota and Montana; our 24.5 percent interest in the N Block, located offshore Kazakhstan; and our 10 percent interest in the Interconnector Pipeline, located in Europe. The previously announced sales of Kashagan, Nigeria and Algeria are anticipated to close in 2013 and generate approximately $8.5 billion in expected proceeds.

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, maintain existing fields, and construct pipelines and liquefied natural gas (LNG) facilities. We use a disciplined approach to select the appropriate projects which will provide the most attractive investment opportunities, with a continued focus on higher-margin liquids plays and limited investment in North American conventional natural gas. As investments bring more liquids production online, we expect a corresponding shift in our production
mix. However, there are often long lead times from the time we make an investment to the time the investment is operational and begins generating financial returns. In the near-term, we will fund a portion of our capital program with the proceeds from strategic asset dispositions. Over the next five years, our investment in high-margin developments should position us to deliver 3 to 5 percent annual production volume and margin growth, enabling us to fund our capital program organically.

Business Environment

In recent years, the business environment for the energy industry has experienced many challenges which have influenced our operations and profitability, largely due to factors beyond our control, such as the recent financial crisis, geopolitical events or fears thereof, environmental laws, tax regulations, governmental policies, and weather-related disruptions. These factors generally influence the supply and demand of crude oil and natural gas. The most significant factor impacting our profitability and related reinvestment of our operating cash flows into our business is commodity prices. The prices for commodity products are supply- and demand-based and can be very volatile; therefore, to navigate through the volatility, our strategy is to maintain a core portfolio of low-risk, high-return development programs associated with legacy assets, coupled with a portfolio of development opportunities which offer high-margin growth, such as unconventional plays, deepwater exploration and 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
                                                                       March 31
                                                                      2013           2012

Market Indicators
WTI (per barrel)                                             $       94.29         102.99
Dated Brent (per barrel)                                            112.55         118.49
U.S. Henry Hub first of month (per million British
thermal units)                                                        3.34           2.72

Industry crude prices for WTI decreased 8 percent in the first quarter of 2013, compared with the same period in 2012, while Brent prices decreased 5 percent in the first quarter of 2013. Global oil prices weakened during the first quarter of 2013, mainly as a result of weak global economic growth and increasing North American oil supply.


Table of Contents

Henry Hub natural gas prices increased 23 percent in the first quarter of 2013, compared with the same period in 2012. The increase was due to a colder winter in 2013 compared to 2012, which increased U.S. natural gas consumption by over 5 billion cubic feet per day in the first quarter of 2013 versus the first quarter of 2012.

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 34 percent in the first quarter of 2013, compared with the same period of 2012. Our realized bitumen price was $39.23 in the first quarter of 2013, compared with $60.66 in the first quarter of 2012 and $48.32 in the fourth quarter of 2012, decreases of 35 percent and 19 percent, respectively. We expect bitumen prices to strengthen in the second quarter of 2013, compared to the first quarter of 2013.

Key Operating and Financial Highlights

Significant highlights during the first quarter of 2013 included the following:

- Achieved first quarter total production of 1,596 MBOED, including continuing operations of 1,555 MBOED and discontinued operations of 41 MBOED.

- Eagle Ford, Bakken and Permian combined production increased by 42 percent compared to the first quarter of 2012.

- Oil sands production averaged 109 MBOED, up 30 percent compared to the first quarter of 2012.

- Major projects on schedule for fourth-quarter startup.

- Realized the first sale of oil from the deepwater Gumusut Field.

- Announced Coronado and Shenandoah discoveries in the deepwater Gulf of Mexico.

- Continued building the Gulf of Mexico exploration portfolio.

- Entered Colombia to explore La Luna Shale.

- Completed the sale of Cedar Creek Anticline properties for $989 million.

Outlook

Consistent with prior guidance, second quarter 2013 production from continuing operations is expected to be 1,440 to 1,470 MBOED, reflecting previously announced planned downtime and turnaround activity. Production from discontinued operations is expected to be approximately 40 MBOED in the second quarter of 2013. Full-year 2013 production from continuing operations is expected to be 1,485 to 1,520 MBOED.


Table of Contents

RESULTS OF OPERATIONS

Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2013, is based on a comparison with the corresponding period of 2012.

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

                                                   Millions of Dollars
                                                   Three Months Ended
                                                        March 31
                                                        2013         2012

           Alaska                              $         543          620
           Lower 48 and Latin America                    133          255
           Canada                                        133         (549)
           Europe                                        431          389
           Asia Pacific and Middle East                  932        1,754
           Other International                            14           21
           Corporate and Other                          (162 )       (311)

           Income from continuing operations   $       2,024        2,179

Earnings for ConocoPhillips decreased 7 percent in the first quarter of 2013. The decrease primarily resulted from:

- Lower gains from asset sales. Earnings for the first quarter of 2013 included a $270 million after-tax benefit associated with asset dispositions, compared with gains of $938 million after-tax in the first quarter of 2012.

- Lower crude oil, bitumen and natural gas liquids prices.

- Higher depreciation, depletion and amortization (DD&A) expenses, mainly due to higher volumes in the Lower 48 and China.

These items were partially offset by:

- Lower impairments. Non-cash impairments in the first quarter of 2013 totaled $1 million after-tax, compared with impairments in the first quarter of 2012 of $520 million after-tax.

- Higher natural gas prices.

- Lower production taxes, primarily as a result of lower production volumes and prices in Alaska.

- Higher sales, largely due to higher bitumen and LNG sales.

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


Table of Contents

Income Statement Analysis

Sales and other operating revenues decreased 3 percent in the first quarter of 2013, mainly due to lower crude oil, natural gas liquids and bitumen prices, partly offset by higher natural gas prices.

Equity in earnings of affiliates decreased 26 percent in the first quarter of 2013. The decrease primarily resulted from:

- Lower earnings from FCCL Partnership, mainly as a result of lower bitumen prices, partly offset by higher bitumen volumes.

- Lower earnings from Lane Energy Poland Sp.z o.o., primarily due to expenses related to a dry hole.

- Lower earnings from Phoenix Park Gas Processors Limited, mostly due to lower natural gas liquids prices.

These decreases in equity earnings were partially offset by higher earnings from Qatar Liquefied Gas Company Limited (3) (QG3), largely due to higher LNG prices and volumes.

Gain on dispositions decreased $882 million in the first quarter of 2013. Gains in the first quarter of 2013 primarily resulted from the disposition of our interest in the Interconnector Pipeline in Europe, partly offset by a loss on the disposition of certain properties located in the Cedar Creek Anticline in the Lower 48. Gains in the first quarter of 2012 mainly reflected the $937 million gain on sale of our Vietnam business.

Purchased commodities decreased 4 percent in the first quarter of 2013, largely as a result of lower purchased natural gas volumes, partly offset by higher natural gas prices.

Production and operating expenses increased 8 percent in the first quarter of 2013, mostly due to higher operating expenses in the Lower 48 and Canada.

Selling, general and administrative expenses decreased 49 percent in the first quarter of 2013, mainly as a result of lower costs related to compensation and benefit plans and the absence of costs associated with the separation of Phillips 66.

Exploration expenses decreased 59 percent in the first quarter of 2013, mostly due to the absence of the first quarter 2012 impairment of undeveloped leasehold costs associated with the Mackenzie Gas Project as a result of the indefinite suspension of the project. This decrease was partly offset by higher geological and geophysical expenses in the Lower 48 and expenses associated with the deferral of the Chukchi Sea exploration program in Alaska.

DD&A increased 15 percent in the first quarter of 2013. The increase was mostly associated with higher production volumes in the Lower 48 and China, as well as higher unit-of-production rates associated with year-end 2012 price-related reserve revisions.

Impairments decreased $212 million in the first quarter of 2013. The first quarter of 2012 included a $213 million impairment of capitalized project development costs associated with the Mackenzie Gas Project. For additional information, see Note 9-Impairments, in the Notes to Consolidated Financial Statements.

Taxes other than income taxes decreased 19 percent in the first quarter of 2013, mainly as a result of lower production taxes due to lower crude oil production volumes and prices in Alaska.

Interest and debt expense decreased 32 percent in the first quarter of 2013, primarily due to lower interest expense from lower average debt levels and higher capitalized interest on projects.

See Note 22-Income Taxes, in the Notes to Consolidated Financial Statements, for information regarding our provision for income taxes and effective tax rate.


Table of Contents

Summary Operating Statistics



                                                                 Three Months Ended
                                                                      March 31
                                                                   2013             2012

Average Net Production
Crude oil (MBD)*                                                    626              624
Natural gas liquids (MBD)                                           159              163
Bitumen (MBD)                                                       109               84
Natural gas (MMCFD)**                                             3,962            4,261


Total Production (MBOED)                                          1,555            1,581


                                                                  Dollars Per Unit
Average Sales Prices
Crude oil (per barrel)                                     $     105.97           111.88
Natural gas liquids (per barrel)                                  42.95            55.03
Bitumen (per barrel)                                              39.23            60.66
Natural gas (per thousand cubic feet)                              5.84             5.61

                                                                Millions of Dollars
Exploration Expenses
General administrative; geological and geophysical; and
lease rentals                                              $        241              157
Leasehold impairment                                                 32              512
Dry holes                                                             4                6

                                                           $        277              675

Excludes discontinued operations.

*Thousands of barrels per day.

**Millions of cubic feet per day. Represents quantities available for sale and excludes gas equivalent of natural gas liquids included above.

We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and natural gas liquids on a worldwide basis. At March 31, 2013, our continuing operations were producing in the United States, Norway, the United Kingdom, Canada, Australia, offshore Timor-Leste in the Timor Sea, Indonesia, China, Malaysia, Qatar, Libya and Russia.

In the first quarter of 2013, average production from continuing operations decreased 2 percent compared with the first quarter of 2012, while average liquids production increased 3 percent over the same period. The decrease in total average production primarily resulted from normal field decline, the impact from asset dispositions and higher unplanned downtime. These decreases were largely offset by additional production from major developments, mainly from shale plays in the Lower 48 and the ramp-up of production from new phases at FCCL; higher production in China; increased drilling programs, mostly in western Canada, the Lower 48 and Norway; and the resumption of production in Libya.


Table of Contents

Segment Results

Alaska



                                                                  Three Months Ended
                                                                       March 31
                                                                    2013               2012


Income From Continuing Operations (millions of dollars)   $          543                620


Average Net Production
Crude oil (MBD)                                                      190                208
Natural gas liquids (MBD)                                             18                 18
Natural gas (MMCFD)                                                   56                 59


Total Production (MBOED)                                             218                236


Average Sales Prices
Crude oil (dollars per barrel)                            $       110.79             112.20
Natural gas (dollars per thousand cubic feet)                       5.20               4.68

The Alaska segment primarily explores for, produces, transports and markets crude oil, natural gas liquids and natural gas. As of March 31, 2013, Alaska contributed 23 percent of our worldwide liquids production and 2 percent of our natural gas production.

Alaska operations reported earnings of $543 million in the first quarter of 2013, a 12 percent decrease compared with the same period in 2012. The decrease in earnings was largely due to lower volumes, partly offset by lower production taxes, which resulted from lower crude oil production volumes and prices. Higher exploration expenses, mainly related to cancellation fees for contracts associated with the deferral of the Chukchi Sea exploration program, and lower crude oil prices also contributed to the decrease in earnings.

Production averaged 218 MBOED in the first quarter of 2013, a decrease of 8 percent compared with the first quarter of 2012. The reduction was mainly due to normal field decline.

Chukchi Sea

In April 2013, we announced our 2014 Chukchi Sea exploration drilling plans are on hold given the uncertainties of evolving federal regulatory requirements and operational permitting standards. Once these requirements are clarified and better defined, we will re-evaluate our Chukchi Sea drilling plans.


Table of Contents

Lower 48 and Latin America



                                                                 Three Months Ended
                                                                      March 31
                                                                   2013              2012


Income From Continuing Operations (millions of dollars)   $         133               255


Average Net Production
Crude oil (MBD)                                                     148               117
Natural gas liquids (MBD)                                            87                84
Natural gas (MMCFD)                                               1,441             1,502


Total Production (MBOED)                                            475               451


Average Sales Prices
Crude oil (dollars per barrel)                            $       93.69             99.00
Natural gas liquids (dollars per barrel)                          29.58             44.90
Natural gas (dollars per thousand cubic feet)                      3.19              2.65

As of March 31, 2013, Lower 48 and Latin America contributed 26 percent of our worldwide liquids production and 36 percent of our natural gas production. The Lower 48 and Latin America segment primarily consists of operations located in the U.S. Lower 48 states.

Lower 48 and Latin America operations reported earnings of $133 million in the first quarter of 2013, a 48 percent decrease compared with the same period in 2012. First quarter 2013 earnings were impacted by a $60 million after-tax loss on the disposition of certain Cedar Creek Anticline properties. In addition, the decrease in earnings was primarily the result of lower crude oil and natural gas liquids prices; higher DD&A, mostly due to higher crude oil and natural gas liquids production; and higher operating and exploration expenses. These decreases were partially offset by higher crude oil volumes and higher natural gas prices.

Average production in the Lower 48 increased 5 percent in the first quarter of 2013, while average liquids production increased 17 percent over the same period. New production, primarily from the Eagle Ford, Bakken and Permian areas, and improved drilling and well performance more than offset normal field decline. However, unfavorable weather conditions and unplanned downtime partially offset the increase in production.

Gulf of Mexico Exploration

In the first quarter of 2013, we confirmed a significant oil discovery from the Shenandoah appraisal well in the deepwater Gulf of Mexico. We hold a 30 percent working interest in Shenandoah. Additionally, we announced a deepwater discovery from the Coronado wildcat exploration well, which will require further appraisal. We hold a 35 percent working interest in Coronado.

Asset Dispositions

In April 2013, we sold certain properties located in southwest Louisiana, which generated proceeds of $95 million in the second quarter of 2013.

Colombia

In the first quarter of 2013, we entered into a farm-in agreement with Canacol Energy Ltd. to acquire a 70 percent working interest in the Santa Isabel Block located in Colombia. We expect to drill our first exploration well in Colombia's La Luna Shale in the second quarter of 2013.


Table of Contents

Canada



                                                                Three Months Ended
                                                                     March 31
                                                                  2013              2012


Income (Loss) From Continuing Operations (millions of
dollars)                                                 $         133              (549)


Average Net Production
Crude oil (MBD)                                                     14                13
Natural gas liquids (MBD)                                           26                25
Bitumen (MBD)
Consolidated operations                                             13                11
Equity affiliates                                                   96                73

Total bitumen                                                      109                84
Natural gas (MMCFD)                                                806               863


Total Production (MBOED)                                           283               266


Average Sales Prices
Crude oil (dollars per barrel)                           $       72.85             83.85
Natural gas liquids (dollars per barrel)                         50.15             54.13
Bitumen (dollars per barrel)
Consolidated operations                                          36.78             64.95
Equity affiliates                                                39.52             60.04
. . .
  Add COP to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for COP - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.