01—Abstract
Summary
Summary of the 10-K filed February 21, 2017. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) reported a 2016 net loss attributable to the company of $3.6 billiona ($2.91 per share), compared with a $4.4 billion loss in 2015, as the collapse in commodity prices continued to weigh on results.
Sales and other operating revenues fell 20% to $23.7 billionb, realized prices dropped 17% to $28.35 per BOE, and production averaged 1,569 MBOED, down 1% year over year. Management responded by cutting capital expenditures 52% to $4.9 billion and production and operating expenses 19% to $5.7 billion, while generating $1.3 billion from non-core asset sales. Total debt rose to $27.3 billion, and the company's debt-to-capital ratio climbed to 44% from 38%, reflecting borrowings to fund operations and the dividend.
For investors, the filing shows a company repositioning around a lower-cost, flat-production plan. The 2017 capital budget is $5 billionc, and management said the plan holds production flat at Brent prices at or above $50 per barrel. The company plans $5 billion to $8 billion in asset sales over two years, mainly North American natural gas, and aims to reduce debt to $20 billion by year-end 2019.
Shareholder returns were mixed: the quarterly dividend was cut 66% to $0.25d in early 2016 and then raised 6% to $0.265 in January 2017, and a $3 billion share buyback program was announced in November 2016, with $126 million repurchased by year-end. The filing also highlights reserve pressure and impairment risk. Proved reserves fell to 6.4 billion BOE from 8.2 billion BOE, and the 2016 reserve replacement ratio was negative 194%.
Pre-tax impairments were $139 million for proved properties and $466 million for unproved properties, and management warned of further impairments if prices remain low. Its APLNG investment, carried at $10.1 billion, could fall below book value at March 31, 2017 if oil prices and the Australian dollar outlook remain weak.
02—Key points
Key Highlights
- Net loss attributable to ConocoPhillips of $3.6 billion ($2.91 per share) in 2016, narrower than the $4.4 billion loss in 2015, with the loss driven by lower realized prices (down 17% to $28.35/BOE).
- Capital expenditures cut 52% to $4.9 billion and production and operating expenses reduced 19% to $5.7 billion, with 2017 capital budget set at $5 billion.
- Production of 1,569 MBOED in 2016 (down 1%); 2017 guidance of 1,540 to 1,570 MBOED, implying flat to 2% growth excluding 2016 dispositions.
- Proved reserves declined to 6.4 billion BOE from 8.2 billion BOE, with negative 194% reserve replacement in 2016 due to lower prices.
- Total debt rose to $27.3 billion (debt-to-capital 44% vs. 38%); company targets debt reduction to $20 billion by year-end 2019 and maintaining an investment-grade rating.
- Quarterly dividend cut to $0.25 in early 2016, then raised 6% to $0.265 in January 2017; $3 billion three-year share buyback announced in November 2016.
- $5 billion to $8 billion asset disposition program planned over two years, primarily North American natural gas; $1.3 billion in dispositions closed in 2016.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2016, ConocoPhillips lost $0.15.
- Revenue$23.69B100.0%
- Cost of revenue−$9.99B42.2%
- Gross profit$13.70B57.8%
- Operating costs−$17.31B73.1%
- Operating income−$3.62B15.3%
- Interest, other & tax$-00.0%
- Net income−$3.62B15.3%
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 21, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $23.69B$29.56B | −19.9% |
| Cost of Revenue | $9.99B— | — |
| Gross Profit | $13.70B— | — |
| R&D Expenses | $116.00M$222.00M | −47.7% |
| SG&A Expenses | $473.00M$953.00M | −50.4% |
| Operating Expenses | $29.89B$38.17B | −21.7% |
| Operating Income | -$3.62B-$4.43B | +18.4% |
| Interest Expense | $1.28B$1.13B | +13.2% |
| Net Income | -$3.62B-$4.43B | +18.4% |
| EPS (Basic) | $-2.91$-3.58 | +18.7% |
| EPS (Diluted) | $-2.91$-3.58 | +18.7% |
| Shares Outstanding (Basic) | 1.25M1.24M | +0.3% |
| Shares Outstanding (Diluted) | 1.25M1.24M | +0.3% |
05—Questions
Frequently Asked Questions
Why did ConocoPhillips report a loss in 2016, and how does it compare with 2015?
The company lost $3.6 billion attributable to ConocoPhillips in 2016, versus a $4.4 billion loss in 2015. The loss was driven mainly by lower commodity prices, with realized prices down 17% per BOE. Losses were partly offset by lower exploration expenses, lower impairments (down 94%, from $2.2 billion in 2015 to $139 million in 2016), and reduced production costs. The absence of a $1.5 billion APLNG impairment in 2015 also helped.
Is the dividend safe, and what changed recently?
The dividend was reduced 66% to $0.25 per quarter in early 2016 to preserve balance sheet strength. In January 2017 the board raised it 6% to $0.265 per share, payable March 1, 2017. Management ranks maintaining the existing dividend and growing it as priorities, but the filing notes that dividends depend on the board's discretion and on cash flows at commodity prices that remain volatile.
What is the company's plan to strengthen its balance sheet?
ConocoPhillips plans to divest $5 billion to $8 billion of assets over two years, mainly North American natural gas. It targets debt of $20 billion by year-end 2019 and expects to retire maturing debt and repay its $1.45 billion term loan. In 2016 it issued $4.6 billion of new debt and repaid $2.3 billion. Total debt reached $27.3 billion at year-end, and the company retains a $6.75 billion revolving credit facility with no borrowings outstanding.
What are the main risks flagged in the filing for future earnings and assets?
The filing highlights commodity price exposure, reserve replacement risk (negative 194% in 2016), and potential impairments. Management said it is reasonably likely to record further impairments if prices remain low. APLNG is a specific concern: its fair value was above book at year-end 2016, but management expects it to fall below book value at March 31, 2017 if the outlook for crude and the Australian dollar stays weak. Other risks include Venezuela and Ecuador arbitration outcomes, and an uncertain credit outlook following 2016 rating downgrades.
What growth projects and production outlook should investors watch?
The 2017 plan allocates 46% of capital to development drilling (mainly Lower 48 unconventionals, Norway, Alaska, Canada), 26% to major projects (Alaska, China, Europe, Malaysia, APLNG), 15% to base production, and 13% to exploration. Key projects include the Greater Mooses Tooth unit in Alaska (first oil 2018 and 2020), Penglai 19-3/19-9 Phase 3 (first oil 2018), Clair Ridge (initial production 2018), and Christina Lake Phase G (first production expected in the second half of 2019). Full-year 2017 production guidance excludes Libya and future dispositions.
06—Continue