01—Abstract
Summary
Summary of the 10-K filed February 25, 2010. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) closed 2009 with net income attributable to the company of $4.858 billiona, or $3.24 diluted EPS, a sharp turnaround from a $17.0 billion loss in 2008 that was driven by $32.9 billion of noncash impairments (goodwill and LUKOIL).
Results were still squeezed by the commodity downturn: sales and other operating revenues fell 38% to $149.3 billionb, operating cash flow dropped 45% to $12.5 billion, and E&P earnings excluding the goodwill charge fell about 70%. Refining was the weakest segment, with R&M earning only $37 million on 84% worldwide capacity utilization, and U.S. R&M posting a $192 million loss. Dividends paid were $2.8 billion, and the board declared a $0.50 quarterly dividend in February 2010, up from $0.47.
Management is pursuing a balance-sheet repair plan. It intends to raise about $10 billionc from asset dispositions over two years, with proceeds targeted to debt reduction toward a 20-25% debt-to-capital target. Total debt was $28.7 billion at year-end, a 31% debt-to-capital ratio versus 33% in 2008.
The 2010 total capital program is budgeted at $11.2 billiond, down from $12.5 billion in 2009, with the upstream share at 85%. Liquidity appears adequate: $7.85 billion of revolving credit facilities, a $6.35 billion commercial paper program, and an A1/A rating. Production averaged 2.29 million BOE per day in 2009 and is guided to about 2.2 million in 2010, reflecting planned dispositions.
Proved reserves rose to 8.36 billion BOE excluding LUKOIL (about 10.3 billion including it), and the reserve replacement ratio was 141%. Key risks for investors include the Ecuador and Venezuela expropriations (the Venezuela ICSID arbitration is pending), Alaska and Canada fiscal changes, the Qatargas 3 and Kashagan project timelines, the Chukchi Sea lease appeal, and the LUKOIL equity stake, which is reported on estimated figures and faces an audit-adjustment lag. The 2010 Form 10-K/A with LUKOIL financial statements is due by June 30, 2010.
02—Key points
Key Highlights
- Net income attributable to ConocoPhillips of $4.86B ($3.24 diluted EPS) in 2009, versus a $17.0B loss in 2008 that included $32.9B of noncash goodwill and LUKOIL impairments.
- Revenues fell 38% to $149.3B and operating cash flow fell 45% to $12.5B as crude (WTI averaged $61.69) and natural gas prices dropped sharply; Henry Hub gas averaged $3.99/MMBtu, down 56%.
- Asset disposition program targets about $10B in proceeds over two years, with debt reduction as the priority; the company is also cutting its 2010 capital budget to $11.2B from $12.5B.
- Refining margins were weak: R&M earned $37M in 2009 versus $2.3B in 2008, and worldwide refinery utilization fell to 84% from 90%.
- Total debt rose to $28.7B (31% debt-to-capital, against a 20-25% target), and the company has $7.85B of undrawn revolving credit facilities with A1/A ratings.
- Proved reserves reached 8.36 billion BOE excluding LUKOIL (2.3 million BOE/day production in 2009), with a 141% reserve replacement ratio; the 2010 production guide is about 2.2 million BOE/day.
- Political and expropriation risk is elevated: Ecuador assets were fully expropriated in 2009 ($51M charge) and the Venezuela arbitration remains pending, with the Alaska Alpine CD5 permit denied and under appeal.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 25, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $149.34B$240.84B | −38.0% |
| R&D Expenses | $190.00M$209.00M | −9.1% |
| SG&A Expenses | $1.83B$2.23B | −17.9% |
| Operating Expenses | $41.89B— | — |
| Operating Income | $3.72B— | — |
| Interest Expense | $1.49B$1.19B | +24.9% |
| Net Income | $4.41B-$16.35B | +127.0% |
| EPS (Basic) | $2.96$-10.73 | +127.6% |
| EPS (Diluted) | $2.94$-10.73 | +127.4% |
| Shares Outstanding (Basic) | 1.49B1.52B | −2.3% |
| Shares Outstanding (Diluted) | 1.50B1.52B | −1.7% |
05—Questions
Frequently Asked Questions
Why did ConocoPhillips report a $17 billion loss in 2008 but a profit in 2009?
The 2008 loss was driven by noncash impairments of $25.4B for the entire E&P goodwill balance and $7.4B on the LUKOIL investment, both recorded in the fourth quarter as commodity prices and market capitalization collapsed. 2009 had no comparable charges, so earnings recovered to $4.86B even though commodity prices and refining margins were lower year over year.
How is ConocoPhillips planning to reduce its debt?
Management intends to raise roughly $10B from asset sales over 2010-2011, including its remaining U.S. retail marketing and other properties, and direct proceeds to debt reduction. The aim is to bring debt-to-capital back to the 20-25% target from 31% at year-end 2009, while it also trimmed its 2010 capital program to $11.2B.
Is the dividend at risk, and what is the current payout?
Dividends were $1.91 per share in 2009 ($2.8B total), and the company declared a $0.50 quarterly dividend in February 2010, up from $0.47. Cash flow covered the dividend in 2009, but operating cash flow fell 45% to $12.5B, so coverage depends on commodity prices and the asset sale program. Buybacks were $8.2B in 2009 and were funded partly by debt.
What are the biggest risks to the reserve base and future production?
Key risks include expropriation (Venezuela and Ecuador), fiscal take increases (Alaska production taxes, Alberta royalties), permit delays (Alaska Alpine CD5 denied in February 2010), and LNG and major project timing (Qatargas 3 first LNG in 2H 2010, Kashagan first production late 2012). Reserves are also sensitive to price, since PSC and bitumen reserves fall as prices rise.
How significant is the LUKOIL investment to ConocoPhillips?
The 20% (20.09% estimated shares outstanding) LUKOIL stake is accounted for under the equity method and contributed $1.66B of 2009 earnings. Its carrying value of $6.9B is well below the $9.7B market value at December 31, 2009. Because LUKOIL reports later, equity earnings are estimated and adjusted in later periods, and the company must file LUKOIL's audited financials by amendment by June 30, 2010.
06—Continue