10-QPeriod: Q2 FY2018

CONOCOPHILLIPS Quarterly Report for Q2 Ended Jun 30, 2018

Filed July 31, 2018For Securities:COP

Summary

ConocoPhillips (COP) reported a significant turnaround in its financial performance for the six months ended June 30, 2018, compared to the same period in 2017. Net income attributable to ConocoPhillips surged to $2.53 billion, a stark contrast to the $2.85 billion net loss reported in the prior year. This improvement was driven by higher realized commodity prices, a substantial decrease in impairment charges (largely absent in 2018 compared to significant charges in 2017), lower depreciation, depletion, and amortization (DD&A) expenses, and a reduction in interest and debt expense due to a lower debt balance. The company also continued to execute on its capital allocation priorities, including increasing its dividend, repurchasing shares, and reducing debt ahead of schedule. Operationally, the company saw increased production in key areas like Alaska and the Lower 48, with overall production growing on a debt-adjusted share basis. ConocoPhillips demonstrated financial discipline by generating strong operating cash flow that more than covered capital expenditures, dividends, and share repurchases. Strategic acquisitions, particularly in Alaska, and announced divestitures, such as its UK Clair Field interest for a potential non-cash gain, highlight the company's active portfolio management. The company raised its full-year production guidance and adjusted its capital expenditure guidance upwards to reflect these activities.

Financial Statements
Beta

Key Highlights

  • 1Net income attributable to ConocoPhillips turned positive, reaching $2.53 billion for the six months ended June 30, 2018, a significant improvement from a $2.85 billion net loss in the prior year period.
  • 2The company successfully reduced its debt by $4.7 billion during the first six months of 2018, achieving its $15 billion debt reduction target 18 months ahead of schedule.
  • 3ConocoPhillips increased its quarterly dividend by 7.5% and announced a further expansion of its share repurchase program, signaling strong confidence in its financial position and future cash flow generation.
  • 4Total production, excluding Libya, for the second quarter of 2018 was 1,211 MBOED, with underlying production (excluding dispositions) growing 5% year-over-year.
  • 5The company completed a bolt-on acquisition in Alaska's Western North Slope and announced agreements to acquire further interests in the Greater Kuparuk Area in Alaska, while also agreeing to sell its UK Clair Field interest.
  • 6Sales and other operating revenues increased by 21% year-over-year for the six-month period, driven by higher realized commodity prices across all commodities.
  • 7Significant reductions in impairment charges, which totaled $6.5 billion in the first six months of 2017, compared to only $23 million in the same period of 2018, were a key driver of the improved net income.

Frequently Asked Questions

The primary driver was a significant rebound in profitability due to higher realized commodity prices, coupled with a substantial reduction in impairment charges from $6.5 billion in the first six months of 2017 to only $23 million in the same period of 2018. Lower depreciation, depletion, and amortization (DD&A) expenses, and reduced interest and debt expenses also contributed to the improved net income.

ConocoPhillips demonstrated strong financial discipline by reducing its debt by $4.7 billion, achieving its $15 billion debt reduction target 18 months ahead of schedule. Simultaneously, the company returned capital to shareholders by increasing its quarterly dividend by 7.5% and significantly expanding its share repurchase program, demonstrating confidence in future cash flow generation.

Operationally, ConocoPhillips saw growth in key areas like Alaska and the Lower 48. Underlying production, excluding divestitures, grew by 5% year-over-year in the second quarter. The company also made strategic moves, including acquiring assets in Alaska and announcing agreements to acquire further Alaskan interests and divest its UK Clair Field stake. Production guidance for the full year was also increased.

ConocoPhillips' strategy for allocating future cash flows prioritizes investing capital to maintain flat production and pay the existing dividend, followed by growing the dividend, reducing debt to a strong investment-grade level, repurchasing shares, and finally, strategically investing for growth. This disciplined approach aims to create value through commodity price cycles.