01—Abstract
Summary
Summary of the 10-K filed February 23, 2016. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) reported a steep downturn for 2015 as commodity prices collapsed.
Sales and other operating revenues fell 44% to $29.6 billiona, and the company posted a loss from continuing operations of $4.4 billion ($3.58 per share), driven by lower realized prices (average realized price of $34.34 per BOE, down 47%), $2.2 billion of proved property and equity-investment impairments (including a $1.5 billion write-down of its APLNG stake), $1.9 billion of unproved property impairments, and $4.2 billion of exploration expense. Production held up better, averaging 1,589 MBOED (up 3% including Libya, and 4% excluding it on a comparable basis), supported by major project startups such as APLNG Train 1, Surmont 2, and Eldfisk II. Cash flow from continuing operations fell 54% to $7.6 billion, and the company ended the year with $2.4 billion of cash against $24.9 billion of total debt, up from $22.6 billion.
Management responded aggressively. The 2016 capital budget was cut to $6.4 billionb from $7.7 billion (a 37% reduction versus 2015 actual capex of $10.1 billion), the company targets $1 billion of operating cost savings versus 2014, and it expects to sell up to $1 billion of non-core assets annually. The quarterly dividend was reduced 66%, from $0.74 to $0.25 per share, to preserve balance-sheet strength.
The company also disclosed a 2016 production outlook that is flat with 2015's 1,525 MBOED base (excluding dispositions), and that Moody's downgraded its senior rating to A2 in August 2015 while S&P placed the company on CreditWatch with negative implications in February 2016. The filing highlights meaningful risk. Organic reserve replacement was only 10%c in 2015, total proved reserves fell to 8.18 billion BOE from 8.91 billion, and the company warned that further impairments are reasonably likely if prices stay low.
CFO Jeff Sheets is retiring, with Don Wallette taking over as CFO on April 1, 2016. Investors should weigh the company's large, diversified, low-cost-of-supply asset base and self-help levers against the near-term pressure on earnings, cash flow, reserves, and the dividend.
02—Key points
Key Highlights
- Revenue fell 44% to $29.6B and the company reported a $4.4B loss from continuing operations ($3.58/share), with average realized price down 47% to $34.34/BOE.
- Impairments and write-downs were heavy: $2.2B on proved properties and equity investments (including a $1.5B APLNG write-down) and $1.9B on unproved properties, with exploration expense rising to $4.2B.
- Production grew 3% to 1,589 MBOED, driven by major projects (APLNG, Surmont 2, Eldfisk II, Gumusut) and tight oil growth in the Lower 48.
- 2016 capex cut 37% to $6.4B (from $10.1B in 2015), with a target of $1B in operating cost reductions versus 2014 and up to $1B per year of non-core asset sales.
- Quarterly dividend cut 66% to $0.25/share (from $0.74) to preserve balance-sheet strength; 2015 dividends paid totaled $3.7B.
- Operating cash flow from continuing operations fell 54% to $7.6B; year-end cash was $2.4B against total debt of $24.9B (debt-to-capital rose to 38% from 30%).
- Organic reserve replacement was just 10% in 2015 and total proved reserves declined to 8.18 billion BOE from 8.91 billion; the CFO is retiring and Don Wallette will succeed him on April 1, 2016.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 23, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $29.56B$52.52B | −43.7% |
| R&D Expenses | $222.00M$263.00M | −15.6% |
| SG&A Expenses | $953.00M$735.00M | +29.7% |
| Operating Expenses | $38.17B$46.13B | −17.2% |
| Operating Income | -$4.43B$5.74B | −177.2% |
| Interest Expense | $1.13B$1.06B | +6.3% |
| Net Income | -$4.43B$6.87B | −164.5% |
| EPS (Basic) | $-3.58$5.54 | −164.6% |
| EPS (Diluted) | $-3.58$5.51 | −165.0% |
| Shares Outstanding (Basic) | 1.24M1.24M | +0.4% |
| Shares Outstanding (Diluted) | 1.24M1.25M | −0.3% |
05—Questions
Frequently Asked Questions
Why did ConocoPhillips report a loss in 2015?
The loss of $4.4 billion was driven mainly by lower commodity prices, which cut realized prices by 47%. It was compounded by large non-cash charges: $2.2 billion of proved property and equity investment impairments (including $1.5 billion on its APLNG stake), $1.9 billion of unproved leasehold impairments, and higher dry hole and exploration costs. Partly offsetting these were a $555 million U.K. tax-rate benefit and a $583 million gain on asset sales.
Is the dividend safe after the 66% cut?
The company cut the quarterly dividend to $0.25 per share from $0.74 to protect its balance sheet and provide flexibility through the downturn. The board sets the dividend each quarter with no fixed payout ratio, so further changes are possible. At the reduced rate, the dividend is far less of a cash drain, though 2015 cash flow from continuing operations ($7.6B) still did not fully cover the $3.7B dividend plus $10.1B capex and investments, which required asset sales and new borrowing.
How is ConocoPhillips funding its capital program and what does its debt look like?
In 2015 the company funded its program with $7.6B of operating cash flow, $2.0B of asset sale proceeds, and $2.5B of new notes issued in May 2015. Total debt rose to $24.9B and debt-to-capital rose to 38% from 30%. The company has a $7.0B revolving credit facility (about $6.2B available after $803M of commercial paper) that has no ratings triggers. Moody's downgraded it to A2 in August 2015, and S&P placed it on CreditWatch negative in February 2016. Management expects to pursue financing in 2016 to partially refinance long-term borrowings.
What is the production and reserves outlook?
Full-year 2015 production from continuing operations was 1,589 MBOED. For 2016, management expects production to be flat with 2015's 1,525 MBOED base, which excludes 64 MBOED from completed dispositions, with first-quarter 2016 guidance of 1,540 to 1,580 MBOED. Proved reserves fell to 8.18 billion BOE from 8.91 billion, and organic reserve replacement was only 10% in 2015, reflecting low prices and reduced capex. Reserves are sensitive to commodity prices because they are calculated using 12-month average prices.
What are the biggest risks to the investment case?
The main risks are continued low oil and gas prices, which could trigger further impairments that management describes as reasonably likely; declining reserves if reserve replacement stays weak; and credit rating downgrades, which could raise borrowing costs. Other risks include exposure to international political and fiscal risk (about 54% of 2015 hydrocarbon production and 61% of proved reserves are outside the U.S.), the Venezuela and Ecuador expropriation arbitrations, Libya civil unrest, and the leadership transition as CFO Jeff Sheets retires. Offsetting these are the company's low cost-of-supply portfolio and its capital flexibility.
06—Continue