01—Abstract
Summary
Summary of the 10-K filed February 20, 2018. Cited figures are marked; the original filing is the authoritative source.
ConocoPhillips (COP) closed 2017 as the world's largest independent exploration and production company by proved reserves and production of liquids and natural gas, operating in 17 countries.
The year was defined by a large portfolio reshaping: roughly $16 billiona of asset dispositions, most notably the sale of its 50% stake in the FCCL oil sands partnership and western Canada gas assets to Cenovus Energy, plus the San Juan Basin and Panhandle sales in the Lower 48. Those proceeds funded a $7.6 billion debt reduction (ending total debt at $19.7 billion), $3 billion of share repurchases, and $1.3 billion in dividends. Reported results remained weak, with a net loss attributable to ConocoPhillips of $855 million, though this improved from a $3.6 billion loss in 2016.
The loss was driven by $6.6 billionb of pre-tax impairments, including $3.97 billion in the Lower 48 and a $2.4 billion impairment of the APLNG equity investment, partly offset by a $2.1 billion pre-tax disposition gain and a $852 million tax benefit from the Tax Cuts and Jobs Act. Operationally, production excluding Libya was 1,356 MBOED, down roughly 13% year over year on reported volumes because of dispositions. Underlying production, which strips out closed and planned dispositions and Libya, rose 3%, and the company guided 2018 production to 1,195 to 1,235 MBOED, about 5% growth on that underlying base.
Year-end proved reserves were 5.0 billion BOE, but the reserve replacement ratio was negative 168% including dispositions, while the organic replacement ratio was 200%. Realized prices rose about 38% to $39.19c per BOE as oil and gas prices recovered. Cash from operations rose 61% to $7.1 billion and exceeded capital spending by $2.5 billion.
Looking ahead, management set a 2018 capital budget of $5.5 billion, targeted reducing debt to $15 billiond by year-end 2019, and planned to repurchase about $3 billion of shares through 2019 plus an additional $1.5 billion through 2020. The quarterly dividend was raised to $0.285 per share, and the company agreed to acquire Alaska assets for $400 million. Key risks include commodity price volatility, further impairment exposure if prices stay low, the Venezuela and Ecuador arbitrations, and the expected adoption of the new lease accounting standard in 2019.
02—Key points
Key Highlights
- Asset dispositions generated about $16 billion in total consideration in 2017, including $11.0 billion in cash plus Cenovus shares from the FCCL and western Canada gas sale, and $2.5 billion from the San Juan Basin sale.
- Debt was cut by $7.6 billion to $19.7 billion at year-end, with a stated target of $15 billion by year-end 2019 and a Moody's upgrade to Baa1.
- Net loss attributable to ConocoPhillips narrowed to $855 million (-$0.70 per share) from a $3.6 billion loss in 2016, despite $6.6 billion of pre-tax impairments.
- Underlying production grew 3% year over year (19% on a per debt-adjusted share basis) after excluding closed dispositions and Libya; reported production fell 12% to 1,377 MBOED.
- Year-end proved reserves were 5.0 billion BOE, with organic reserve replacement of 200%, although total replacement was negative 168% because of divestitures.
- Shareholder returns were increased: the quarterly dividend rose to $0.285 per share, $3 billion of buybacks were completed in 2017, and an additional $2.0 billion is planned for 2018.
- Cash from operations rose 61% to $7.1 billion, and the 2018 capital budget was set at $5.5 billion, with production guided to 1,195 to 1,235 MBOED.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 20, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $29.11B$23.69B | +22.8% |
| Cost of Revenue | $12.47B$9.99B | +24.8% |
| Gross Profit | $16.63B$13.70B | +21.4% |
| R&D Expenses | $100.00M$116.00M | −13.8% |
| SG&A Expenses | $427.00M$473.00M | −9.7% |
| Interest Expense | $1.11B$1.28B | −12.9% |
| Net Income | -$855.00M-$3.62B | +76.3% |
| EPS (Basic) | $-0.70$-2.91 | +75.9% |
| EPS (Diluted) | $-0.70$-2.91 | +75.9% |
| Shares Outstanding (Basic) | 1.22M1.25M | −2.0% |
| Shares Outstanding (Diluted) | 1.22M1.25M | −2.0% |
05—Questions
Frequently Asked Questions
Why did ConocoPhillips post a net loss in 2017 despite higher commodity prices?
The loss was driven mainly by $6.6 billion of pre-tax impairments, including $3.97 billion in the Lower 48 (San Juan Basin and Barnett write-downs) and a $2.4 billion impairment of its APLNG equity investment. Those charges outweighed the higher realized prices, the $2.1 billion pre-tax gain on the Canada disposition, and the $852 million tax benefit from U.S. tax reform. The net loss was $855 million, versus $3.6 billion in 2016.
How is the company using proceeds from asset sales?
The company's stated cash allocation priorities are to fund capital that maintains flat production and the existing dividend, grow the dividend, reduce debt to maintain a strong investment grade rating, repurchase shares, and invest strategically in growth. In 2017, about $7.9 billion went to debt repayment, $3 billion to share buybacks, $1.3 billion to dividends, and $4.6 billion to capital spending.
What is the outlook for production and capital spending in 2018?
Full-year 2018 production is guided to 1,195 to 1,235 MBOED, excluding Libya, which represents about 5% growth over 2017 underlying production adjusted for dispositions. The 2018 capital budget is $5.5 billion, including $3.5 billion of sustaining capital and $2 billion for accretive short-cycle unconventional programs, major projects and exploration. About 51% of spending is planned for development drilling, mainly in the Lower 48 unconventional plays.
What are the main risks investors should monitor?
Key risks include commodity price volatility, which can drive future impairments if prices remain low relative to historical levels; the company's dividend and buyback capacity, which depends on cash flow and Board discretion; reserve replacement, which is challenged by divestitures and lower prices; international political and legal exposure, including the Venezuela expropriation arbitration and the Ecuador settlement; and a $0.9 billion revaluation of deferred taxes plus a potential future cash tax position as the U.S. tax changes take effect.
06—Continue