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| COP > SEC Filings for COP > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
Management's Discussion and Analysis contains forward-looking statements
including, without limitation, statements relating to our plans, strategies,
objectives, expectations, and intentions, that are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995. The
words "intends," "believes," "expects," "plans," "scheduled," "should,"
"anticipates," "estimates," and similar expressions identify forward-looking
statements. We do not undertake to update, revise or correct any of the
forward-looking information. Readers are cautioned that such forward-looking
statements should be read in conjunction with the disclosures under the heading
"CAUTIONARY STATEMENT FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" beginning on page 49.
The terms "earnings" and "loss" as used in Management's Discussion and Analysis
refer to net income (loss) attributable to ConocoPhillips.
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
ConocoPhillips is an international, integrated energy company. We are the
third-largest integrated energy company in the United States, based on market
capitalization. At September 30, 2009, we had approximately 30,100 employees and
total assets of $152 billion.
The energy industry continued to be characterized by economic volatility during
the third quarter and first nine months of 2009. The price of West Texas
Intermediate (WTI) benchmark crude oil peaked during mid-2008 at almost $150 per
barrel, and fell sharply throughout the remainder of the year to the
low-$30-per-barrel range. Since the end of 2008, crude oil prices have trended
upward, with WTI averaging $68.19 per barrel in the third quarter of 2009, or
$8.65 higher than the second quarter of 2009. The improvement in crude oil
prices during 2009 was influenced by expectations of stabilization and eventual
recovery of the world economy.
In the United States, industry natural gas prices for Henry Hub decreased during
the third quarter of 2009, averaging $3.39 per million British thermal units,
down $0.12 compared with the second quarter of 2009, and down $6.86 compared
with the third quarter of 2008. Domestic natural gas prices trended downward
mostly due to continued strong natural gas production in the Lower 48, primarily
as a result of unconventional natural gas production, and lower demand due to
the U.S. recession. As a result of the changes in supply and demand, natural gas
storage levels are higher than both the five-year average and the levels at the
end of the third quarter of 2008.
Against this economic backdrop, our Exploration and Production (E&P) segment had
earnings of $978 million in the third quarter of 2009. This compares with E&P
earnings of $725 million in the second quarter of 2009 and $3,928 million in the
third quarter of 2008.
Global refining margins remained weak in the third quarter of 2009, as demand,
particularly for distillates, continued to be suppressed by the global economic
slowdown. In addition, the compressed differential in prices for high-quality
crude oil, compared with those of lower-quality crude oil, reduced margins for
those refineries configured to capitalize on the ability to process
lower-quality crudes. Weak refining margins significantly impacted our Refining
and Marketing (R&M) segment, which reported earnings of $99 million in the third
quarter of 2009, compared with a loss of $52 million in the second quarter of
2009 and earnings of $849 million in the third quarter of 2008.
Our LUKOIL Investment segment had earnings of $545 million in the third quarter
of 2009, compared with $682 million in the second quarter of 2009, and
$438 million in the third quarter of 2008. For the nine-month periods, our
equity earnings from LUKOIL were $1,275 million in 2009, compared with
$1,922 million in 2008. These results indicate LUKOIL was also negatively
impacted by lower commodity prices and refining margins.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three- and nine-month
periods ended September 30, 2009, is based on a comparison with the
corresponding periods of 2008.
Consolidated Results
A summary of earnings (loss) by business segment follows:
Millions of Dollars
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Exploration and Production (E&P) $ 978 3,928 2,403 10,814
Midstream 62 173 216 472
Refining and Marketing (R&M) 99 849 252 2,033
LUKOIL Investment 545 438 1,275 1,922
Chemicals 104 46 194 116
Emerging Businesses (2 ) 35 - 55
Corporate and Other (283 ) (281 ) (699 ) (646 )
Net income attributable to ConocoPhillips $ 1,503 5,188 3,641 14,766
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Earnings were $1,503 million in the third quarter of 2009, compared with
$5,188 million in the third quarter of 2008. For the nine-month periods ended
September 30, 2009 and 2008, earnings were $3,641 million and $14,766 million,
respectively. The decrease from both 2008 periods was primarily the result of:
• Substantially lower prices for crude oil, natural gas and natural gas
liquids in our E&P segment.
• Lower results from our R&M segment, reflecting lower refining margins.
See the "Segment Results" section for additional information on our segment
results.
Income Statement Analysis
Sales and other operating revenues decreased 43 percent in the third quarter of
2009 and 46 percent in the nine-month period, while purchased crude oil, natural
gas and productsdecreased 44 percent and 48 percent, respectively. These
decreases were mainly the result of significantly lower prices for petroleum
products, crude oil, natural gas and natural gas liquids.
Equity in earnings of affiliates decreased 16 percent in the third quarter of
2009, primarily due to reduced earnings from DCP Midstream, LLC. Equity earnings
decreased 43 percent in the nine-month period, reflecting reduced earnings from
LUKOIL; DCP Midstream; FCCL Partnership; Merey Sweeny, L.P. (MSLP); Malaysian
Refining Company Sdn. Bhd.; and WRB Refining LLC. The decreases were mainly the
result of lower commodity prices and refining margins.
Other income decreased 37 percent during the first nine months of 2009. The
decrease was primarily due to 2008 gains related to asset dispositions in our
E&P and R&M segments.
Production and operating expenses decreased 17 percent in the third quarter of
2009 and 14 percent in the nine-month period. Contributing to these decreases
were lower utilities costs, favorable foreign exchange impacts, and our emphasis
on cost reduction.
Selling, general and administrative expenses decreased 17 percent in both
comparative periods of 2009, mostly due to reduced expenses as a result of
disposition of U.S. and international marketing assets.
Exploration expenses increased 45 percent in the third quarter of 2009,
predominantly due to higher dry hole costs.
Taxes other than income taxes decreased 25 percent in the third quarter of 2009
and 31 percent in the nine-month period, primarily due to lower production taxes
resulting from lower crude oil prices, as well as reduced excise taxes on
petroleum product sales.
Interest and debt expense increased 41 percent and 39 percent in the third
quarter and first nine months of 2009 as a result of a higher average debt
level, partially offset by lower interest rates. Interest expense also increased
in the nine month period as a result of lower capitalized interest.
Segment Results
E&P
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Millions of Dollars
Net Income (Loss) Attributable to ConocoPhillips
Alaska $ 356 556 1,004 1,859
Lower 48 (29 ) 1,050 (168 ) 2,948
United States 327 1,606 836 4,807
International 651 2,322 1,567 6,007
$ 978 3,928 2,403 10,814
Dollars Per Unit
Average Sales Prices
Crude oil (per barrel)
United States $ 66.22 118.90 53.43 110.26
International 67.56 110.84 55.85 108.94
Total consolidated 67.01 114.20 54.80 109.53
Equity affiliates* 58.07 88.32 48.85 81.74
Worldwide E&P 65.92 112.19 54.15 107.84
Natural gas (per thousand cubic feet)
United States 2.99 8.64 3.27 8.66
International 4.26 9.13 4.81 9.14
Total consolidated 3.69 8.91 4.14 8.93
Equity affiliates* 2.57 - 2.26 -
Worldwide E&P 3.67 8.91 4.10 8.93
Natural gas liquids (per barrel)
United States 32.45 68.84 28.28 64.53
International 37.48 68.78 33.06 67.46
Total consolidated 34.62 68.81 30.33 65.85
Worldwide E&P 34.62 68.81 30.33 65.85
Millions of Dollars
Worldwide Exploration Expenses
General administrative; geological and
geophysical; and lease rentals $ 153 149 383 465
Leasehold impairment 71 60 163 179
Dry holes 162 58 308 220
$ 386 267 854 864
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* Excludes our equity share of LUKOIL, which is reported in the LUKOIL Investment segment.
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Thousands of Barrels Daily
Operating Statistics
Crude oil produced
Alaska 218 218 236 239
Lower 48 91 85 92 92
United States 309 303 328 331
Europe 207 221 223 205
Asia Pacific 110 87 114 88
Canada 24 25 24 24
Middle East and Africa 75 73 75 78
Other areas - 9 5 9
Total consolidated 725 718 769 735
Equity affiliates*
Canada 45 32 40 29
Russia and Caspian 59 31 54 21
829 781 863 785
Natural gas liquids produced
Alaska 11 13 16 16
Lower 48 77 74 75 73
United States 88 87 91 89
Europe 14 15 17 19
Asia Pacific 18 19 17 17
Canada 23 24 24 25
Middle East and Africa 3 3 2 3
146 148 151 153
Millions of Cubic Feet Daily
Natural gas produced**
Alaska 105 102 93 100
Lower 48 1,938 1,971 1,992 1,989
United States 2,043 2,073 2,085 2,089
Europe 702 847 850 918
Asia Pacific 726 648 719 617
Canada 1,063 1,061 1,101 1,072
Middle East and Africa 124 122 119 114
Other areas - 18 - 19
Total consolidated 4,658 4,769 4,874 4,829
Equity affiliates*
Asia Pacific 88 - 86 -
4,746 4,769 4,960 4,829
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Mining operations
Syncrude produced 25 24 21 21
* Excludes our equity share of LUKOIL, which is reported in the LUKOIL Investment segment. ** Represents quantities available for sale. Excludes gas equivalent of natural gas liquids shown above.
The E&P segment explores for, produces, transports and markets crude oil,
natural gas and natural gas liquids on a worldwide basis. It also mines deposits
of oil sands in Canada to extract bitumen and upgrade it into a synthetic crude
oil. At September 30, 2009, our E&P operations were producing in the United
States, Norway, the United Kingdom, Canada, Australia, offshore Timor-Leste in
the Timor Sea, Indonesia, China, Vietnam, Libya, Nigeria, Algeria, and Russia.
Earnings from the E&P segment decreased 75 percent and 78 percent in the third
quarter and first nine months of 2009, primarily due to substantially lower
crude oil, natural gas and natural gas liquids prices. This decrease was
partially offset by lower Alaska and Lower 48 production taxes due to lower
prices, higher international volumes and improved operating costs. See the
"Business Environment and Executive Overview" section for additional information
on industry crude oil and natural gas prices.
U.S. E&P
Earnings from our U.S. E&P operations decreased 80 percent in the third quarter
and 83 percent in the first nine months of 2009 due to significantly lower crude
oil, natural gas and natural gas liquids prices, partially offset by lower
production taxes and lower operating costs.
U.S. E&P production on a barrel-of-oil-equivalent (BOE) basis averaged 737,000
BOE per day in the third quarter of 2009; this compares with 736,000 in the
third quarter of 2008. Less unplanned downtime and improved well performance
were mostly offset by field decline.
International E&P
Earnings from our international E&P operations decreased 72 percent in the third
quarter and 74 percent in the first nine months of 2009, primarily as a result
of significantly lower crude oil, natural gas and natural gas liquids prices,
partially offset by higher volumes and lower operating costs.
International E&P production averaged 1,029,000 BOE per day in the third quarter
of 2009, an increase of 4 percent from 988,000 in the third quarter of 2008. The
increase was predominantly due to new production in China, Russia, Australia,
Canada, Vietnam, the United Kingdom and Norway. In addition, production
increased due to less unplanned downtime and impacts from the royalty framework
in Alberta, Canada. These increases were partially offset by field decline and
planned downtime. Our Syncrude mining operations produced 25,000 barrels per day
in the third quarter of 2009, compared with 24,000 barrels per day in the third
quarter of 2008.
Midstream
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Millions of Dollars
Net Income Attributable to ConocoPhillips* $ 62 173 216 472
* Includes DCP Midstream-related earnings: $ 26 153 128 408
Dollars Per Barrel
Average Sales Prices
U.S. natural gas liquids*
Consolidated $ 34.66 67.39 30.23 65.23
Equity affiliates 28.89 60.46 26.26 59.82
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* Based on index prices from the Mont Belvieu and Conway market hubs that are weighted by natural gas liquids component and location mix.
Thousands of Barrels Daily
Operating Statistics*
Natural gas liquids extracted 194 176 185 190
Natural gas liquids fractionated** 164 181 166 166
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* Includes our share
of equity
affiliates, except
LUKOIL, which is
reported in the
LUKOIL Investment
segment.
** Excludes DCP
Midstream.
The Midstream segment purchases raw natural gas from producers and gathers
natural gas through an extensive network of pipeline gathering systems. The
natural gas is then processed to extract natural gas liquids from the raw gas
stream. The remaining "residue" gas is marketed to electrical utilities,
industrial users and gas marketing companies. Most of the natural gas liquids
are fractionated-separated into individual components like ethane, butane and
propane-and marketed as chemical feedstock, fuel or blendstock. The Midstream
segment consists of our 50 percent equity investment in DCP Midstream, LLC, as
well as our other natural gas gathering and processing operations, and natural
gas liquids fractionation and marketing businesses, primarily in the United
States and Trinidad.
Earnings from the Midstream segment decreased 64 percent and 54 percent in the
third quarter and first nine months of 2009. The decrease in the third quarter
was primarily due to lower natural gas liquids prices experienced by equity
affiliates DCP Midstream and Phoenix Park Gas Processors Limited, slightly
offset by higher volumes. Earnings for the nine-month period of 2009 were also
impacted by lower natural gas liquids prices, partially offset by the
recognition of an $88 million after-tax benefit in the first quarter of 2009
resulting from a DCP Midstream subsidiary converting subordinated units to
common units.
R&M
Three Months Ended Nine Months Ended
September 30 September 30
2009 2008 2009 2008
Millions of Dollars
Net Income Attributable to ConocoPhillips
United States $ 73 524 133 1,546
International 26 325 119 487
$ 99 849 252 2,033
Dollars Per Gallon
U.S. Average Wholesale Prices*
Gasoline $ 2.04 3.21 1.77 3.00
Distillates 1.90 3.56 1.66 3.41
* Excludes excise taxes.
Thousands of Barrels Daily
Operating Statistics
Refining operations*
United States
Crude oil capacity 1,986 2,008 1,986 2,008
Crude oil processed 1,841 1,813 1,762 1,837
Capacity utilization (percent) 93 % 90 89 91
Refinery production 2,017 1,975 1,918 2,020
International
Crude oil capacity 671 670 671 670
Crude oil processed 541 505 531 557
Capacity utilization (percent) 81 % 75 79 83
Refinery production 548 523 541 562
Worldwide
Crude oil capacity 2,657 2,678 2,657 2,678
Crude oil processed 2,382 2,318 2,293 2,394
Capacity utilization (percent) 90 % 87 86 89
Refinery production 2,565 2,498 2,459 2,582
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* Includes our share of equity affiliates, except LUKOIL, which is reported in the LUKOIL Investment segment.
Petroleum products sales volumes
United States
Gasoline 1,188 1,089 1,136 1,095
Distillates 906 858 860 880
Other products 420 365 375 384
2,514 2,312 2,371 2,359
International 626 634 622 645
3,140 2,946 2,993 3,004
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The R&M segment's operations encompass refining crude oil and other feedstocks into petroleum products (such as gasoline, distillates and aviation fuel); buying, selling and transporting crude oil; and buying, transporting, distributing and marketing petroleum products. R&M has operations mainly in the United States, Europe and the Asia Pacific Region.
R&M reported earnings of $99 million during the third quarter of 2009, compared
with earnings of $849 million in the same period of 2008. The decrease in
earnings was primarily due to lower U.S. and international refining margins and
lower international marketing margins, partially offset by positive foreign
currency exchange impacts and lower domestic utility costs.
R&M's earnings for the first nine months of 2009 and 2008 were $252 million and
$2,033 million, respectively. Earnings decreased primarily as a result of
significantly lower U.S. and international refining margins, lower refining and
marketing volumes, lower international marketing margins and a lower net benefit
from asset rationalization efforts. These decreases were partially offset by
lower utilities and maintenance costs and positive foreign currency exchange
impacts.
U.S. R&M
In the third quarter of 2009, our U.S. R&M operations reported earnings of
$73 million, compared with earnings of $524 million in the same period of 2008.
Earnings for the first nine months of 2009 and 2008 were $133 million and
$1,546 million, respectively.
Our U.S. refining capacity utilization rate was 93 percent in the third quarter
of 2009, compared with 90 percent in the same quarter of 2008. The current-year
rate was mainly affected by run reductions due to market conditions, while the
prior-year rate was impacted by downtime associated with hurricanes.
International R&M
International R&M reported earnings of $26 million in the third quarter of 2009
and earnings of $119 million in the first nine months of 2009. This compares
. . .
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