01—Abstract
Summary
Summary of the 10-K filed February 21, 2012. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) reported full-year 2011 net income attributable to the company of $12.4 billiona ($8.97 diluted EPS), up 9% from $11.4 billion in 2010, on sales and other operating revenues of $244.8 billion (up 29%).
The improvement was driven mainly by higher crude oil and NGL prices in E&P and significantly stronger U.S. refining margins in R&M, partly offset by lower asset-sale gains ($1.6 billionb after-tax in 2011 vs. $4.6 billion in 2010), the absence of LUKOIL equity earnings, and lower production (E&P averaged 1.62 million BOED, down from 1.75 million BOED). Operating cash flow rose 15% to $19.6 billion, and the company returned substantial capital to shareholders through $11.1 billion of buybacks and $3.6 billion of dividends, while reducing debt by about 4% to $22.6 billion (debt-to-capital of 26%). The most significant strategic development is the planned separation of the downstream businesses (refining, marketing, transportation, most of Midstream, Chemicals, and certain power and technology assets) into a standalone company, Phillips 66, via a tax-free distribution of one Phillips 66 share for every two COP shares.
The separation is expected to close in the second quarter of 2012, subject to an IRS private letter ruling and final board approval. Post-separation, ConocoPhillips would become a pure-play exploration and production company. The company guided to a 2012 capital program of $15.5 billionc and 2012 production of about 1.6 million BOED, excluding asset sales, and plans to raise $5-10 billion from additional asset sales in 2012.
Key risks for investors include commodity price volatility (particularly the sharp decline in U.S. refining margins in Q4 2011 and the narrowing of the WTI discount), ongoing international political risk (the 2007 Venezuela and 2009 Ecuador expropriations remain in arbitration, Libya production was suspended for part of 2011, and China's Peng Lai field output was cut by about 14,000 barrels per day after seepage incidents), and execution risk around the separation and the Trainer Refinery closure. Impairments totaled $1.3 billiond before tax in 2011, including the Trainer Refinery and certain Canadian gas properties.
02—Key points
Key Highlights
- Net income attributable to ConocoPhillips rose 9% to $12.4 billion in 2011 ($8.97 diluted EPS), while sales and other operating revenues grew 29% to $244.8 billion.
- Planned separation of downstream businesses into Phillips 66 (one Phillips 66 share per two COP shares) is expected to close in Q2 2012, leaving COP as a pure-play E&P company.
- R&M earnings jumped to $3.75 billion from $192 million, driven by a 126% increase in the U.S. 3:2:1 crack spread and 92% worldwide refinery utilization.
- Operating cash flow increased 15% to $19.6 billion, funding $13.3 billion of capital spending and $11.1 billion of share repurchases.
- Shareholder returns were significant: $11.1 billion in buybacks and $3.6 billion in dividends, with the quarterly dividend raised 20% to $0.66 per share and an additional $10 billion buyback authorized in December 2011.
- E&P production fell to 1.62 million BOED from 1.75 million BOED, reflecting Libya suspensions, the Bohai Bay (China) shutdown, asset dispositions, and field decline, with 2012 guidance of about 1.6 million BOED.
- Asset divestiture program continued, with $10.7 billion generated to date toward a $15–20 billion target for 2010–2012 and a further $5–10 billion planned for 2012, including the Vietnam sale ($1.29 billion) and North Sea asset sales.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 21, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $64.20B$56.22B | +14.2% |
| R&D Expenses | $193.00M$172.00M | +12.2% |
| SG&A Expenses | $865.00M$809.00M | +6.9% |
| Operating Expenses | $50.67B$45.46B | +11.5% |
| Operating Income | $7.13B$10.25B | −30.5% |
| Interest Expense | $1.23B$1.40B | −12.2% |
| Net Income | $12.44B$11.36B | +9.5% |
| EPS (Basic) | $9.04$7.68 | +17.7% |
| EPS (Diluted) | $8.97$7.62 | +17.7% |
| Shares Outstanding (Basic) | 1.38M1.48M | −7.1% |
| Shares Outstanding (Diluted) | 1.39M1.49M | −7.0% |
05—Questions
Frequently Asked Questions
What is the planned Phillips 66 separation and how will it affect shareholders?
ConocoPhillips plans to spin off its refining, marketing, transportation, most Midstream and Chemicals operations, plus certain power and technology assets, into a stand-alone company called Phillips 66. Shareholders would receive one Phillips 66 share for every two COP shares held on the record date. The distribution is intended to be tax-free and is expected to be completed in the second quarter of 2012, subject to an IRS private letter ruling, regulatory approvals and final board approval. The company expects one-time separation costs of about $150 million after tax, of which $25 million was incurred in 2011, and expects to use the cash distribution from Phillips 66 mainly to repay debt, with the remainder directed to buybacks and dividends.
Why did earnings rise in 2011 despite lower asset-sale gains and production?
Earnings rose mainly because of higher crude oil and NGL prices in E&P (WTI averaged $95.05 per barrel, up 20%) and much stronger U.S. refining margins in R&M. Impairments also fell to $1.0 billion after tax from $1.9 billion in 2010. These gains offset lower after-tax gains on asset dispositions ($1.6 billion versus $4.6 billion in 2010), the loss of LUKOIL equity earnings after the divestiture, and lower E&P production volumes.
What are the major risks to ConocoPhillips' outlook?
Key risks include commodity price and refining margin volatility, which weakened sharply in Q4 2011 as the domestic crack spread narrowed. Political and fiscal risk is significant because about 60% of hydrocarbon production comes from outside the U.S. Venezuela and Ecuador expropriations remain in arbitration, Libyan production was disrupted in 2011, and China's Peng Lai 19-3 field output was reduced by about 14,000 barrels per day after the seepage incidents, with future impacts described as not yet known. Other risks include reserve replacement challenges (5-year replacement of 102% excluding LUKOIL and acquisitions), environmental and climate regulation, and execution of the separation and asset sales.
How strong is ConocoPhillips' balance sheet and how is it funding shareholder returns?
At year-end 2011 total debt was $22.6 billion, down about 4% during the year, with a debt-to-capital ratio of 26% versus a target range of 20–25%. Senior long-term debt is rated A1 by Moody's and A by S&P and Fitch. Liquidity is supported by a $7.5 billion revolving credit facility expiring in 2016, a $500 million facility expiring in July 2012, and approximately $6.8 billion of available borrowing capacity at year-end. Cash and equivalents fell to $5.8 billion from $9.5 billion as buybacks ($11.1 billion) exceeded operating cash flow after capital spending. Share repurchase authorizations totaled $15 billion through 2011, with a new $10 billion program authorized in December 2011.
What is the outlook for capital spending and production in 2012?
ConocoPhillips expects a 2012 total capital program of about $15.5 billion, including $14.8 billion of capital expenditures and investments and about $0.7 billion of FCCL principal contributions. About 90% of the expenditure budget is allocated to E&P, with major projects including oil sands in Canada, Lower 48 liquids-rich shale plays (Eagle Ford, Williston, Permian), APLNG coalbed methane in Australia, Kashagan in Kazakhstan, Clair Ridge in the U.K., and Gumusut-Kakap in Malaysia. Production in 2012 is expected to be about 1.6 million BOED, excluding the impact of additional asset dispositions. The company also plans to raise an additional $5–10 billion from asset sales in 2012.
06—Continue