01—Abstract
Summary
Summary of the 10-K filed March 2, 2004. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) reported a sharp earnings recovery for fiscal 2003, with net income of $4,735 milliona (diluted EPS $6.91) versus a net loss of $295 million in 2002.
The improvement was driven mainly by a full year of combined Conoco and Phillips operations following the August 2002 merger, higher crude oil ($27.47b/bbl, up 14%) and natural gas ($4.07/mcf, up 47%) prices, and much stronger U.S. refining margins, with refinery utilization at 96%. Exploration and Production (E&P) produced $4,302 million of net income, while Refining and Marketing (R&M) contributed $1,272 million, and Corporate and Other absorbed $877 million of losses, including discontinued operations and merger costs. Balance sheet deleveraging was a clear priority.
Management reduced balance sheet debt by roughly $4.8 billion in 2003 (to $17.8 billionc, including about $2.8 billion of debt added by the FIN 46 consolidation), lowering the debt-to-capital ratio to 34% with a target of about 30%. Operating cash flow rose to $9,356 million from $4,978 million, and asset sales brought in about $2.7 billion during the year against a raised target of $4.5 billion for 2004. Dividends were increased to $0.43 per quarter, and the company's credit ratings were A3 (Moody's), A- (S&P), and A- (Fitch).
Looking ahead, the 2004 capital budget is $6.9 billiond (about 12% above 2003 spending), with 78% directed to E&P, and the company expects production in 2004 to be roughly flat after adjusting for asset dispositions. Key growth projects include Bayu-Undan LNG, Hamaca heavy oil, Kashagan in Kazakhstan, Qatargas 3, and Surmont oil sands. Investors should weigh the heavy dependence on commodity prices and refining margins, a sizable environmental accrual of $1.1 billion, and goodwill of $15.1 billion that could be impaired if market conditions deteriorate.
02—Key points
Key Highlights
- Net income of $4,735 million (diluted EPS $6.91) in 2003, a turnaround from a $295 million net loss in 2002.
- Balance sheet debt cut by about $4.8 billion in 2003 to $17.8 billion; debt-to-capital ratio at 34%, with a target of about 30%.
- Operating cash flow of $9,356 million in 2003, up from $4,978 million, supported by higher commodity prices and refining margins.
- Worldwide production averaged 1,590,000 BOE per day in 2003, up 49% from 2002, largely due to the merger; finding and development costs were $5.35 per BOE.
- Refining utilization of 96% in U.S. refineries, with 2.7 million barrels per day of product output and an average capacity of 2.6 million barrels per day worldwide.
- Asset disposition program: $2.7 billion of proceeds in 2003 and a 2004 target of $4.5 billion, including Petrovera sale and sale of Mobil-branded East Coast marketing assets.
- 2004 capital budget of $6.9 billion, with 78% allocated to E&P, and the dividend raised to $0.43 per quarter.
03—Questions
Frequently Asked Questions
Why did ConocoPhillips swing from a loss in 2002 to a large profit in 2003?
The swing was driven mainly by a full year of combined Conoco and Phillips operations after the August 2002 merger, which added production and refining volumes. Higher crude oil and natural gas prices, stronger U.S. refining margins, and lower impairments and merger costs also contributed. The 2002 results included about $1.1 billion of after-tax impairments and loss accruals tied to retail marketing assets classified as discontinued operations, along with $557 million of merger costs.
How is the company managing its debt and balance sheet?
Management used free cash flow after dividends and capital spending, plus asset sale proceeds, to reduce debt by about $4.8 billion in 2003. Balance sheet debt was $17.8 billion at year end, which includes roughly $2.8 billion added by FIN 46 consolidation of synthetic lease and similar structures. The target debt-to-capital ratio is about 30%, and the company has $4 billion in bank facilities supporting its commercial paper program.
What are the main risks investors should consider?
Earnings are highly sensitive to commodity prices: management estimates that a $1 per barrel change in crude oil prices affects annual net income by about $170 million, and a 25 cent per barrel change in refining margins affects it by about $125 million. Other risks include goodwill of $15.1 billion that could be impaired if market conditions weaken, environmental accruals of $1.1 billion, pending EPA enforcement matters, and exposure to political instability in Venezuela, where operations contributed about $150 million to 2003 net income.
What growth projects could drive future production and earnings?
Key projects include the Bayu-Undan gas recycle and LNG development in the Timor Sea (first LNG cargo expected in early 2006), the Hamaca heavy-oil upgrader in Venezuela (expected to lift net production to about 71,000 barrels per day), Kashagan in Kazakhstan, the Ekofisk growth project and Clair field in the North Sea, Surmont oil sands in Canada (first oil targeted for 2006), and Qatargas 3 LNG (startup around 2009). Management expects 2004 production to be roughly flat with 2003 after adjusting for asset dispositions.
How did shareholder returns and dividends look in 2003?
The company paid cash dividends of $1.63 per share in 2003, up from $1.48 in 2002, with the quarterly rate raised to $0.43 in the fourth quarter. Total dividends paid were $1.1 billion. The stock traded between $45.14 and $66.04 during 2003 and closed the year at $65.57. Basic EPS was $6.96, and the company had about 59,165 stockholders of record as of January 31, 2004.
04—Continue