Management's
Discussion and Analysis is the company's analysis of its financial performance and of significant trends that may affect future performance.
It should be read in conjunction with the financial statements and notes.
It contains forward-looking statements including, without limitation,
statements relating to the company's
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 "anticipate," "estimate," "believe," "budget," "continue,"
"could," "intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect,"
"objective," "projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions identify forward-looking statements.
The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws.
Readers are cautioned that such forward-looking statements should be read in conjunction with the company's 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 59.
The terms "earnings" and "loss" as used in Management's Discussion and Analysis
refer to net income (loss)
attributable to
BUSINESS ENVIRONMENT AND EXECUTIVE
OVERVIEW
with operations and activities in 16 countries.
Our diverse, low cost of supply portfolio includes resource-rich
unconventional plays in
conventional
assets in
developments; oil sands assets in
and an inventory of global conventional and unconventional exploration
prospects.
AtJune 30, 2020 , we employed approximately 9,700 people worldwide and had total assets of$63 billion . Overview
The energy landscape changed dramatically in 2020 with
simultaneous demand and supply shocks that drove the industry into a severe downturn.
The demand shock was triggered by COVID-19,
which was declared a global pandemic and caused unprecedented social
and economic consequences.
Mitigation efforts to stop the spread of this contagious disease included stay-at-home orders and business closures that caused sharp contractions in economic activity worldwide.
The supply shock was triggered by disagreements
between
March, which resulted in significant supply coming
onto the market and an oil price war.
These dual demand and supply shocks caused
oil prices to collapse as we exited the first quarter.
As we entered the second quarter, predictions of COVID-19 driven global
oil demand losses intensified, with forecasts of unprecedented demand declines.
Based on these forecasts,
an emergency meeting, and in April they announced a coordinated production cut that was unprecedented in both its magnitude and duration.
The
by 9.7 MMBOD in May and June, 9.6 MMBOD in July, and 7.7 MMBOD from August to December. FromJanuary 2021 toApril 2022 , they agreed to cut production by 5.8 MMBOD.
Additionally, non-
announced organic reductions to production through the
release of drilling rigs, frac crews, normal field decline
and curtailments.
Despite these planned production decreases, the supply cuts were not timely enough to overcome
significant demand decline.
Futures prices for April WTI closed under$20 a barrel for the first time
since 2001, followed by May WTI settling below zero on the
day
before futures contracts expiry, as holders of May futures contracts struggled to
exit positions and avoid taking physical delivery.
As storage constraints approached, spot prices in
April for certain North American landlocked grades of crude oil were in the single digits
or even negative for particularly remote or low-grade crudes, while waterborne priced crudes such as Brent
sold at a relative advantage.
37
Since the start of the severe downturn, we have closely
monitored the market and taken prudent actions in response to this situation.
We entered the year in a position of relative strength, with cash and cash
equivalents
of more than
of
of$6 billion , totaling approximately$14 billion in available
liquidity.
Additionally, we had several entity and asset sales
agreements in place, which generated
in proceeds from dispositions during the first
six-months of 2020.
For more information about the sales of our Australia-West and non-core Lower 48 assets,
see Note 4- Asset Acquisitions and Dispositions in the
Notes to Consolidated Financial Statements.
This relative advantage allowed us to be measured in our response
to the sudden change in business environment.
In March, we announced an initial set of actions
to address the downturn and followed up with additional actions in April.
The combined announcements reflected a reduction
in our 2020 operating plan capital of$2.3 billion , a reduction to our operating costs of
program.
These actions will decrease uses of cash by over
We also established a framework for evaluating and implementing economic curtailments
considering the weakness in oil prices during the
second
quarter of 2020,
which resulted in taking an additional significant
step of curtailing production, predominantly from operated North American assets.
Due to our strong balance sheet, we were in an advantaged
position to forgo some production and cash flow in anticipation
of receiving higher cash flows for those volumes
in the future.
In the second quarter, we curtailed production by an estimated 225 MBOED,
with 145 MBOED of the curtailments from the Lower 48, 40 MBOED from
in
The remainder of the second-quarter curtailments
were primarily in
Other industry operators also cut production and development plans
and as we progressed through the second quarter, stay-at- home restrictions eased, which partially restored
lost demand, and WTI and Brent prices exited the
second
quarter around
While we remain cautious regarding the recent
oil market recovery and continue to monitor
global market conditions and COVID-19 hotspots around the world,
based on our economic criteria, we restored
curtailed
production in
We also brought some curtailed volumes in the Lower 48 back online and expect to be fully restored in September.
At Surmont, we began restoring production in
July, though the ramp will be slower due to planned turnarounds in the
third quarter and limited staffing in the fields as a COVID-19 mitigation measure.
We continue to monitor pricing and evaluate curtailments across our assets on a month- by-month basis.
AtJune 30, 2020 ,
we had
cash equivalents,$4.0 billion in short-term investments, and an undrawn
credit facility of
OnJuly 8, 2020 , we announced a quarterly dividend of42 cents per share
to be distributed on
of
record as of
In
to acquire additional
consideration of approximately$375 million before customary adjustments, plus the assumption of approximately$30 million in financing obligations for associated partially
owned infrastructure.
This acquisition consists primarily of undeveloped properties and includes 140,000
net acres in the liquids-rich Inga Fireweed asset
Montney zone, which is directly adjacent to our existingMontney
position, as well as 15 MBOED of production.
Upon
completion of this transaction, we will have a
acreage position of 295,000 net acres with a 100 percent working interest.
The transaction is subject to regulatory
approval and is expected to close in the third quarter of 2020 with an effective date ofJuly 1, 2020 .
Our expectation is that commodity prices will
remain cyclical and volatile, and a successful
business strategy in the E&P industry must be resilient in
lower price environments, at the same time retaining
upside during periods of higher prices.
While we are not impervious to current market
conditions, our decisive actions over the last several years of focusing on free cash flow generation, high-grading our asset base, lowering the cost of supply of our investment resource base, and strengthening
our balance sheet have put us in a strong relative position compared to our independent E&P peers.
Although recent prices have been extremely volatile,
we
38
remain committed to our core value proposition
principles, namely, to focus on financial returns, maintain a strong balance sheet, deliver compelling returns
of capital, and maintain disciplined capital
investments.
Our workforce and operations have adjusted to
mitigate the impacts of the COVID-19 global
pandemic.
We
have operations in remote areas with confined spaces,
such as offshore platforms, the
Personnel are asked to perform a self-assessment for symptoms
of illness each day and, when appropriate,
are subject to more restrictive measures traveling to and working
on location.
Staffing levels in certain operating locations have been reduced to minimize health risk exposure
and increase social distancing.
A large portion of our office staff have been successfully working remotely, with offices around the world carefully designing
and
executing a flexible, phased reentry, following national, state and local guidelines.
Workforce health and safety remains the overriding driver for our actions
and we have demonstrated our ability
to adapt to local conditions as warranted.
These mitigation measures have thus far been effective
at protecting employees' health and reducing business operation disruptions.
The marketing and supply chain side of our business
has also adapted in response to COVID-19.
Our
commercial organization is managing transportation commitments
considering curtailment measures.
Our
supply chain function is proactively working with
vendors to ensure the continuity of our
business operations, monitor distressed service and materials providers,
capture deflation opportunities, and pursue cost
reduction
efforts.
Operationally, we remain focused on safely executing the business.
In the second quarter of 2020, production of 981 MBOED generated cash from operating activities
of
We invested$0.9 billion into the business in the form of capital expenditures and
paid dividends to shareholders of
Production
decreased 351 MBOED or 26 percent in the second
quarter of 2020, compared to the second quarter
of 2019, primarily due to curtailments and the divestiture
of our
divestiture
of our Australia-West business and several non-core assets in the Lower 48 during the
first six-months of 2020, and the declaration of force majeure inLibya
in
ExcludingLibya , and adjusting for closed dispositions and estimated curtailments,
production in the second quarter of 2020 was slightly
higher
than the same period a year ago.
In the first half of the year we recognized a
billion before and after-tax unrealized loss
on our 208 million Cenovus Energy common shares and$0.4 billion after-tax
in impairments due to low domestic natural
gas
prices.
Persistent low commodity prices may result in
further proved and unproved property impairments, including to certain equity method investments.
[[Image Removed: COP20202q10qp41i0.gif]]
[[Image Removed: COP20202q10qp41i1.gif]]
39 - 1 2 3 4 20 40 60 80 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 WTI/Brent $/Bbl WTI Crude Oil, Brent Crude Oil and Henry Hub Natural Gas Prices Quarterly Averages WTI - $/Bbl Brent - $/Bbl HH - $/MMBTU HH Business Environment
Commodity prices are the most significant
factor impacting our profitability and related reinvestment
of
operating cash flows into our business.
Among other dynamics that could influence world
energy markets and commodity prices are global economic health, supply
or demand disruptions or fears thereof caused
by civil unrest, global pandemics, military conflicts,
actions taken by
oil producing countries, environmental laws, tax regulations,
governmental policies and weather-related
disruptions.
Our
strategy is to create value through price cycles
by delivering on the financial and operational
priorities that underpin our value proposition.
Our earnings and operating cash flows generally
correlate with price levels for crude oil
and natural gas, which are subject to factors external to the company and over
which we have no control.
The following graph depicts the trend in average benchmark prices for WTI
crude oil, Brent crude oil and
gas:
Brent crude oil prices averaged
in the second quarter of 2020,
a decrease of 58 percent compared with$68.82 per barrel in the second quarter
of 2019.
WTI atCushing crude oil prices averaged$27.85 per barrel in the second quarter of 2020,
a decrease of 53 percent compared with
barrel in the second quarter of 2019.
Oil prices fell significantly as producers failed to
reduce output sufficiently or timely enough to offset the demand reduction due to COVID-19.
per MMBTU in the second quarter of 2020,
a decrease of 35 percent compared with$2.64 per MMBTU in the second
quarter of 2019.
Henry Hub prices decreased due to high storage levels and weak domestic and LNG feedstock
demand.
Our realized bitumen price averaged negative
in the second quarter of 2020, a decrease of$60 per barrel compared with$37.20 per barrel
in the second quarter of 2019.
The decrease in the second quarter of 2020 was driven by lower blend price
for Surmont sales, largely attributed to a weakening
WTI
price and a narrowing spread between the local market
and
both pipeline and rail economics.
As a result, we curtailed production, and an increasing
portion of remaining blend sales were directed to the lower priced local market.
In addition, we incurred unutilized transportation
costs which negatively impacted our realized bitumen price.
Our total average realized price was
in the second quarter of 2020, compared
with$50.50 per BOE in the second quarter of 2019.
40
Key Operating and Financial Summary
Significant items during the second quarter
of 2020 included the following:
?
Ended the quarter with cash, cash equivalents and
restricted cash totaling
short-term
investments of$4.0 billion . ?
Produced 981 MBOED excluding
approximately 225 MBOED. ?
Completed the Australia-West divestiture, generating
Distributed$0.5 billion in dividends. ?
In July, announced a planned bolt-on acquisition of adjacent acreage in the liquids-rich
Montney . Outlook Capital and Production
In
plan capital of
In response to the recent oil market downturn, we announced capital
expenditure reductions totaling
This does not include capital for acquisitions.
In
acquisition in the liquids-rich area of theMontney for approximately$0.4 billion .
In the second quarter, we curtailed production by an estimated 225 MBOED,
with 145 MBOED of the curtailments from the Lower 48, 40 MBOED from
in
The remainder of the second-quarter curtailments
were primarily in
Prices rebounded off their second quarter lows, with Brent crude at
the end of June near
on our economic criteria, we restored curtailed production inAlaska
during July.
We also brought some curtailed volumes in the Lower 48 back online and expect to be fully
restored in September.
At Surmont, we began restoring production in July, though the ramp will be slower due to planned turnarounds in the third quarter and limited staffing in the fields as a COVID-19 mitigation measure. We continue to monitor pricing and evaluate curtailments across our assets on a month-by-month
basis.
Estimated curtailments for the third quarter of 2020 are 115 MBOED.
Depreciation, Depletion and Amortization DD&A expense was$1.2 billion in the second quarter
of 2020.
Proved reserves estimates were updated in the current quarter utilizing trailing twelve-month
oil and gas prices, which increased second
quarter DD&A expense by approximately$70 million before-tax.
If oil and gas prices persist at depressed levels,
our reserve estimates may decrease further, which could incrementally increase the rate used to determine DD&A expense on our unit-of-production method properties. 41 RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-
and six-month periods endedJune 30, 2020 , is based on a comparison with the corresponding periods of 2019.
Consolidated Results
A summary of the company's net income (loss)
attributable to
follows: Millions ofDollars Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019Alaska $ (141) 462 (60) 846 Lower 48 (365) 206 (802) 399Canada (86) 100 (195) 222Europe andNorth Africa 11 407 86 614Asia Pacific andMiddle East 662 517 1,060 1,042 Other International (6) 81 22 212 Corporate and Other 185 (193) (1,590) 78 Net income (loss) attributable toConocoPhillips $ 260 1,580 (1,479) 3,413
Net income attributable to
in the second quarter of 2020 decreased
Earnings
were negatively impacted by:
? Lower realized commodity prices. ?
Lower sales volumes, primarily due to production
curtailments across our North American
operated
assets and the divestiture of our
the third quarter of 2019 and Australia-West assets in the second quarter of 2020. ?
The absence of a
related to the recognition of
our
disposedU.K. subsidiaries. ?
The absence of
of certain tax disputes and enhanced oil recovery credits. ?
The release of
in our Corporate segment as a result of the
Australia - West divestiture. ?
The absence of other income of
related to our settlement agreement with Petróleos deVenezuela, S.A. (PDVSA).
Second quarter 2020 net income decreases were partly
offset by:
?
Higher gain on dispositions primarily due to
a
A$521
million higher after-tax unrealized gain on our
Cenovus Energy common shares reflected in other income. ?
Lower production and operating expenses,
primarily due to decreased wellwork and transportation costs associated with production curtailments
across our North American operated assets as well
as
the absence of costs related to our
Lower DD&A primarily due to lower volumes related
to production curtailments and the cessation of DD&A related to our Australia-West divestiture, partly offset by higher DD&A rates due to
price-
related downward reserve revisions.
42
Net loss attributable to
the six-month period ended
Earnings were negatively impacted by:
? Lower realized commodity prices. ?
Lower sales volumes, primarily due to normal field
decline, production curtailments across our
North
American operated assets and the divestiture of our
A
Cenovus Energy common shares in the six-month period of 2020, reflected in other income, as compared to a$373 million after-tax unrealized gain in the six-month period of 2019. ?
Higher impairments of
primarily related to non-core gas assets in our Lower
48
segment.
?
The absence of a
related to the recognition of
our
disposedU.K. subsidiaries. ?
The absence of other income of
related to our settlement agreement withPDVSA . ?
The absence of a
of certain tax disputes and enhanced oil recovery credits. ?
The release of
in our Corporate segment as a result of our Australia- West divestiture.
The decreases in earnings in the six-month period
endedJune 30, 2020 , were partly offset by: ?
Higher gain on dispositions primarily due to
a
divestiture. ?
Lower production and operating expenses,
primarily due to decreased wellwork and transportation costs associated with production curtailments
across our North American operated assets
as well as
the absence of costs related to our
Lower DD&A primarily due to lower volumes related
to production curtailments and the cessation
of
DD&A related to our Australia-West divestiture, partly offset by higher DD&A rates due to
price-
related downward reserve revisions. ?
The absence of impairments related to equity method
investments of$120 million after-tax in the Lower 48, recorded within equity in earnings of affiliates.
See the "Segment Results" section for additional
information. Income Statement Analysis
Sales and other operating revenues for the three-
and six-month periods of 2020 decreased
million and$8,196 million ,
mainly due to lower realized commodity prices
and lower sales volumes due to production curtailments from our North American operated
assets and the divestiture of our
in the third quarter of 2019 and our Australia-West assets in the second quarter of 2020.
Equity in earnings of affiliates for the three-
and six-month periods of 2020 decreased
$96 million and$50 million primarily due to lower earnings from QG3
and APLNG as a result of lower LNG prices and
sales
volumes for both affiliates and lower oil prices at QG3.
Partly offsetting the decrease in equity in earnings of affiliates were the absence of impairments related
to equity method investments in our Lower 48 segment
of
million in the six-month period of 2019.
43
Gain on dispositions for the three-
and six-month periods of 2020 increased
million and$455 million primarily due to a$587 million before-tax gain associated
with our Australia-West divestiture.
For more information, see Note 4-Asset Acquisitions
and Dispositions in the Notes to Consolidated
Financial
Statements.
Other income (loss) for the second quarter of 2020
increased
$521 million higher before-tax unrealized gain on our Cenovus
Energy common shares, partly offset by the absence of
agreement with
Other income in the six-month period of 2020 decreased$1,819 million , primarily due to a$1.14 billion before-tax unrealized loss on our Cenovus Energy common shares compared to a$373 million before-tax unrealized gain on those shares in the six- month period of 2019 and the absence of$236 million
before-tax related to our settlement agreement
with
For discussion of our Cenovus Energy shares, see Note
6-Investment in Cenovus Energy, in the Notes to Consolidated Financial Statements.
For discussion of our
12-Contingencies
and Commitments, in the Notes to Consolidated Financial
Statements.
Purchased commodities for the three- and six-month
periods
of 2020 decreased$1,544 million and$2,558 million , respectively, primarily due to lower crude oil and natural gas volumes purchased and lower natural gas and crude oil prices.
Production and operating expenses for the three-
and six-month periods of 2020 decreased
million and
of our
and lower legal accruals in our Lower 48 and Other International
segments.
Selling, general and administrative expenses decreased
primarily
due to lower costs associated with compensation
and benefits, including mark to market
impacts of certain key employee compensation programs.
DD&A for the three-
and six-month periods of 2020 decreased
$332 million and$467 million , respectively, mainly due to lower production volumes related to
production curtailments and the divestiture
of our
Australia-West and
reserve revisions.
For more information regarding the Australia-West divestiture, see Note 4-Asset Acquisitions
and
Dispositions in the Notes to Consolidated Financial
Statements.
Impairments increased
the six-month period of 2020, primarily due to a
our Lower 48 segment due to a significant
decrease in the outlook for natural gas prices.
See Note 8-Impairments in the Notes to Consolidated
Financial Statements, for additional information.
Foreign currency transaction (gain) loss decreased
million in the six-month period of 2020, primarily
due
to gains recognized from foreign currency derivatives.
See Note 13-Derivative and Financial Instruments
in
the Notes to Consolidated Financial Statements,
for additional information.
See Note 21-Income Taxes, in the Notes to Consolidated Financial Statements,
for information regarding our income tax provision (benefit) and effective tax rate. 44 Summary Operating Statistics Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Average Net Production Crude oil (MBD) 474 702 564 708 Natural gas liquids (MBD) 93 118 108 114 Bitumen (MBD) 34 51 50 57 Natural gas (MMCFD)* 2,277 2,768 2,475 2,804 Total Production (MBOED) 981 1,332 1,1351,346 Dollars Per Unit Average Sales Prices Crude oil (per bbl) 25.10 64.88 38.80 62.14 Natural gas liquids (per bbl) 9.88 21.65 12.63 22.71 Bitumen (per bbl) (23.11) 37.20 (3.09) 35.00 Natural gas (per MCF) 3.22 4.76 3.81 5.39 Millions of Dollars Exploration Expenses General administrative, geological and geophysical, lease rental, and other$ 94 81 215 164 Leasehold impairment - 25 31 42 Dry holes 3 16 39 26$ 97 122 285 232
*Represents quantities available for sale and excludes gas equivalent of natural
gas liquids included above.
We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and NGLs on a
worldwide basis.
At
in the
Total production decreased 351 MBOED or 26 percent in the second quarter of 2020,
primarily due to: ?
Production curtailments, primarily from
our North American operated assets andMalaysia . ? Normal field decline. ?
The divestiture of our
quarter of 2019, our Australia-West assets in the second quarter of 2020, and non-core Lower 48 assets in
the first quarter of 2020. ?
No production in
of the Es Sider export terminal and other
eastern
export terminals after a period of civil unrest.
The decrease in second quarter 2020 production was
partly offset by:
?
New wells online in the Lower 48,
andChina . 45
Total production decreased 211 MBOED or 16 percent in the six-month period of 2020,
primarily due to: ? Normal field decline. ?
Production curtailments, primarily from
our North American operated assets andMalaysia . ?
The divestiture of our
quarter of 2019, our Australia-West assets in the second quarter of 2020, and non-core Lower 48 assets in
the first quarter of 2020. ?
Lower production in
of the Es Sider export terminal and other eastern export terminals after a period of civil unrest
in the first quarter of 2020.
The decrease in production during the six-month period
of 2020 was partly offset by:
?
New wells online in the Lower 48,
Production excluding
the second quarter of 2020, a decrease of
309 MBOED compared with the same period of 2019.
Adjusting for closed dispositions and
decreased
212 MBOED primarily due to production curtailments
and normal field decline, partly offset by new wells
online in the Lower 48,
Excluding closed dispositions, estimated curtailment
impacts of 225 MBOED and
slightly higher compared with the same
period a year ago.
Production excluding
the six-month period of 2020, a decrease
of 173 MBOED compared with the same period of 2019.
Adjusting for closed dispositions and
decreased 79 MBOED primarily due to normal field decline
and production curtailments, partly offset by new wells
online
in the Lower 48,
46 Segment ResultsAlaska Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income (Loss) Attributable toConocoPhillips ($MM)$ (141) 462 (60) 846 Average Net Production Crude oil (MBD) 153 199 175 205 Natural gas liquids (MBD) 13 17 16 17 Natural gas (MMCFD) 8 7 8 7 Total Production (MBOED) 167 217 192 223 Average Sales Prices Crude oil ($ per bbl)$ 26.81 67.57 42.52 65.11 Natural gas ($ per MCF) 2.56 3.19 2.82 3.31
The
and markets crude oil, NGLs and natural gas.
As of
of our worldwide liquids production and less than
1
percent of our worldwide natural gas production.
Earnings from
and
and six-month periods of 2020, respectively, primarily driven by lower realized crude oil prices, lower crude oil sales volumes due to production curtailments at our operated assets on
the
(GKA) andWestern North Slope (WNS)-and the absence of$81 million of tax benefits related to the settlement of certain tax disputes and enhanced
oil recovery credits.
Average production decreased 50 MBOED and 31 MBOED in the three- and six-month
periods of 2020, primarily due to curtailments at our operated assets
on the North Slope-GKA and WNS-and normal
field
decline, partly offset by new wells online at WNS.
Curtailment Update The second quarter 2020 production impact from
curtailments in
40 MBOED.
Based on our economic criteria, we restored curtailed
production in
47 Lower 48 Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income (Loss) Attributable toConocoPhillips ($MM)$ (365) 206 (802) 399 Average Net Production Crude oil (MBD) 166 269 218 257 Natural gas liquids (MBD) 64 82 77 78 Natural gas (MMCFD) 486 593 582 581 Total Production (MBOED) 311 450 392 432 Average Sales Prices Crude oil ($ per bbl)$ 19.87 59.17 32.92 56.31 Natural gas liquids ($ per bbl) 6.95 17.91 9.81 19.20 Natural gas ($ per MCF) 1.18 2.10 1.36 2.41
The Lower 48 segment consists of operations located
in theU.S. Lower 48 states, as well as producing properties in theGulf of Mexico .
As of
41 percent of our worldwide liquids production and 24 percent of our worldwide
natural gas production.
Earnings from the Lower 48 decreased
and
and six-month periods of 2020, respectively, primarily due to lower realized crude oil, NGL and natural gas prices and lower sales volumes due to production curtailments.
The earnings decrease in the three- and six-month
periods of 2020 were partly offset by lower DD&A expense, lower production and operating expenses, and increased equity in earnings of affiliates.
DD&A expense in the second quarter of 2020 decreased
due to lower production volumes, primarily associated with curtailments,
partly offset by higher DD&A rates driven by price-related downward reserve revisions.
In addition to the items detailed above, in the six-month
period of 2020, earnings decreased due to a$399 million after-tax impairment
related to certain non-core gas assets in the
WindRiver Basin operations area, partly offset by the absence of$120 million of impairments in equity method investments.
See Note 8-Impairments and Note 14-Fair
Value
Measurement in the Notes to Consolidated Financial Statements, for additional information
related to the
Total average production decreased 139 MBOED and 40 MBOED in the three-
and six-month periods of 2020, respectively, primarily due to normal field decline, production curtailments
and higher unplanned downtime.
Partly offsetting the production decrease, was new production
from unconventional assets in the Eagle Ford, Permian and Bakken. Curtailment Update The second quarter 2020 production impact from
curtailments in the Lower 48 was estimated
to be 145 MBOED.
Based on our economic criteria, we brought some
curtailed volumes in the Lower 48 back online
in
July and expect to be fully restored by September.
48Canada Three Months Ended Six Months EndedJune 30 June 30 2020 2019** 2020 2019** Net Income (Loss) Attributable toConocoPhillips ($MM)$ (86) 100 (195) 222 Average Net Production Crude oil (MBD) 5 1 4 1 Natural gas liquids (MBD) 2 1 1 - Bitumen (MBD) 34 51 50 57 Natural gas (MMCFD) 40 8 30 8 Total Production (MBOED) 48 54 60 59 Average Sales Prices* Crude oil ($ per bbl) 8.69 - 15.39 - Natural gas liquids ($ per bbl) 1.64 - 1.89 - Natural gas ($ per MCF) 0.79 - 1.05 - Bitumen ($ per bbl) (23.11) 37.20 (3.09) 35.00 *Average sales prices in the second quarter of 2020 include unutilized transportation costs. **Average prices for sales of bitumen excludes additional value realized from the purchase and sale of third-party volumes for optimization of our pipeline capacity betweenCanada and theU.S. Gulf Coast .
Our Canadian operations mainly consist of an oil
sands development in the
northeastern
in western
As ofJune 30, 2020 ,Canada contributed 8 percent of our worldwide liquids production and
less than 1 percent of our worldwide natural
gas production.
Earnings from
and
and six-month periods of 2020, primarily because of lower bitumen price realizations,
production curtailments at Surmont,
the absence of a$41 million gain on dispositions related to a contingent
payment, and the absence of a
benefit
due to a four year phased four percent reduction in
tax rate.
Partly offsetting this decrease in earnings was a$48 million refund from
the
In addition to the items detailed above, in the
six-month period of 2020, earnings decreased due to the absence of a$68 million tax
benefit related to a tax settlement.
Total average production decreased 6 MBOED in the second quarter of 2020, primarily
due to production curtailments at Surmont, partly offset by the absence of a planned turnaround at Surmont and new production from Pad 1 atMontney .
Total average production increased 1 MBOED in the six-month period of 2020, primarily due to first production from Pad 1 at
absence of a planned turnaround at Surmont, partly offset by curtailments
at Surmont.
Curtailment Update The second quarter 2020 production impact from
curtailments in
MBOED net.
Based on our economic criteria, we began to restore
some curtailed production at Surmont
in July.
Planned Acquisition InJuly 2020 , we signed a definitive agreement
to acquire additional
of
approximately
plus the assumption of approximately$30 million in financing obligations for associated partially
owned infrastructure.
This acquisition primarily consists of undeveloped properties and includes 140,000
net acres in the liquids-rich Inga Fireweed asset
Montney zone, which is directly adjacent to our existingMontney
position,
as well as 15 MBOED of production.
Upon
completion of this transaction, we will have a
acreage position of 295,000 net acres with a 100
49
percent working interest.
The transaction is subject to regulatory
approval and is expected to close in the third quarter of 2020 with an effective date ofJuly 1, 2020 .Europe andNorth Africa Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income Attributable toConocoPhillips ($MM)$ 11 407 86 614 Average Net Production Crude oil (MBD) 75 130 84 141 Natural gas liquids (MBD) 5 6 5 8 Natural gas (MMCFD) 264 518 287 560 Total Production (MBOED) 124 223 137 242 Average Sales Prices Crude oil ($ per bbl)$ 32.32 69.65 44.70 66.16 Natural gas liquids ($ per bbl) 16.76 32.00 18.75 31.49 Natural gas ($ per MCF) 2.21 4.42 3.03 5.58
The
of operations principally located in the Norwegian
sector of theNorth Sea and theNorwegian Sea ,Libya and commercial
operations in the
As ofJune 30, 2020 , ourEurope andNorth Africa operations contributed
12 percent of our worldwide liquids production
and 12 percent of our worldwide natural gas production.
Earnings for
quarter of 2019, the absence of aU.S. tax benefit of$234 million associated
with the recognition of
disposedU.K. subsidiaries, and lower crude oil and natural gas realizations.
Average production decreased 99 MBOED and 105 MBOED in the three-
and six-month periods of 2020,
respectively, primarily due to our
lower production inLibya due to a cessation of production following a period
of civil unrest, and normal field decline.
Partly offsetting these decreases in production were the absence of planned
turnarounds at the Greater Ekofisk
Area and new wells online inNorway . Force Majeure inLibya Production ceasedFebruary 12, 2020 due to a forced
shutdown of the Es Sider export terminal
and other eastern export terminals after a period of civil unrest.
It is unknown when exports will resume.
50Asia Pacific andMiddle East Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income Attributable toConocoPhillips ($MM)$ 662 517 1,060 1,042 Average Net Production Crude oil (MBD) Consolidated operations 61 89 70 91 Equity affiliates 14 14 13 13 Total crude oil 75 103 83 104 Natural gas liquids (MBD) Consolidated operations 1 4 2 4 Equity affiliates 8 8 7 7 Total natural gas liquids 9 12 9 11 Natural gas (MMCFD) Consolidated operations 423 578 522 622 Equity affiliates 1,056 1,064 1,046 1,026 Total natural gas 1,479 1,642 1,568 1,648 Total Production (MBOED) 331 388 354 390 Average Sales Prices Crude oil ($ per bbl) Consolidated operations$ 27.98 69.78 43.02 65.93 Equity affiliates 25.32 63.98 38.52 61.94 Total crude oil 27.45 68.91 42.26 65.43 Natural gas liquids ($ per bbl) Consolidated operations 27.90 39.97 33.21 40.05 Equity affiliates 23.93 41.72 32.38 40.09 Total natural gas liquids 24.90 41.05 32.59 40.07 Natural gas ($ per MCF) Consolidated operations 4.74 5.89 5.45 6.14 Equity affiliates 3.90 5.81 4.65 6.53 Total natural gas 4.14 5.84 4.92 6.38
The
operations in
As of
contributed 13 percent of our worldwide liquids production and 63 percent of our worldwide natural gas
production.
Earnings increased
in the three-
and six-month periods of 2020, primarily due to
a
to our Australia-West divestiture and the cessation of DD&A expense associated with our previously held-for-sale Australia-West assets.
Partly offsetting the increase in earnings, were lower oil, LNG and natural gas prices,
lower LNG sales volumes associated with our disposed Australia-West assets, and lower oil sales volumes,
primarily related to curtailments in
51
Average production decreased 57 MBOED and 36 MBOED in the three-
and six-month periods of 2020, primarily due to the divestiture of our Australia-West assets, normal field decline, the expiration
of the Panyu production license inChina , higher unplanned downtime
due to the rupture of a third-party pipeline impacting gas production from the Kebabangan field in
Partly offsetting these production decreases, were new production from development activity atBohai Bay inChina and production increases fromMalaysia , including first oil
from Gumusut Phase 2 in the third quarter of
2019.
Asset Disposition Update In the second quarter of 2020, we completed the divestiture of our Australia-West assets and operations, and based on an effective date ofJanuary 1, 2019 , we received
proceeds of
of the proposed Barossa development project.
Production from the disposed assets averaged 35 MBOED for the six-month period of 2020, and proved reserves were approximately 17 MMBOE at year-end 2019.
For additional information related to this
transaction, see Note 4- Asset Acquisitions and Dispositions. Other International Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income (Loss) Attributable toConocoPhillips ($MM)$ (6) 81 22 212
activities in
Earnings from our Other International operations
decreased
the three- and six- month periods of 2020, respectively.
The decrease in earnings was primarily
due to the absence of recognizing$84 million and$231 million in other income related
to a settlement award with
with prior operations inVenezuela ,
in the three- and six-month periods of 2019, respectively.
See Note 12- Contingencies and Commitments in the Notes to Consolidated Financial Statements, for additional information. 52 Corporate and Other Millions ofDollars Three Months Ended Six Months EndedJune 30 June 30 2020 2019 2020 2019 Net Income (Loss) Attributable toConocoPhillips Net interest expense$ (174) (131) (329) (327) Corporate general and administrative expenses (90) (49) (40) (114) Technology (9) (10) (8) 86 Other income (expense) 458 (3) (1,213) 433$ 185 (193) (1,590) 78
Net interest expense consists of interest and financing
expense, net of interest income and capitalized
interest.
Net interest expense increased by
in the second quarter of 2020, primarily due to
higher interest from an absence of the settlement of certain
tax disputes and lower interest income from lower
cash and cash equivalent balances.
Corporate G&A expenses include compensation
programs and staff costs.
These expenses increased by$41 million and decreased by$74 million in the three-
and six-month periods of 2020, respectively, primarily due to mark to market adjustments associated with certain
compensation programs.
Technology includes our investment in new technologies or businesses, as well as licensing
revenues.
Activities are focused on both conventional and tight
oil reservoirs, shale gas, heavy oil, oil
sands, enhanced oil recovery, as well as LNG.
Earnings from Technology decreased
Other income (expense) or "Other" includes certain
corporate tax-related items, foreign currency
transaction
gains and losses, environmental costs associated
with sites no longer in operation, other costs not directly associated with an operating segment, premiums
incurred on the early retirement of debt, unrealized
holding
gains or losses on equity securities, and pension settlement
expense.
"Other" increased by$461 million in the second quarter of 2020,
primarily due to
unrealized gain on our Cenovus Energy common shares,
partly offset by the release of a
asset related to our Australia-West divestiture.
In the six-month period of 2020, "Other" decreased
by$1,646 million primarily due to a$1,140 million after-tax unrealized loss on our Cenovus
Energy common shares reflected in other income as compared
to a
six-month period of 2019. 53 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of DollarsJune 30 December 31 2020 2019 Short-term debt$ 146 105 Total debt 14,998 14,895 Total equity 31,493 35,050 Percent of total debt to capital* 32 % 30 Percent of floating-rate debt to total debt 5 % 5 *Capital includes total debt and total equity.
To meet our short-
and long-term liquidity requirements, we look
to a variety of funding sources, including cash generated from operating activities,
our commercial paper and credit facility programs,
and our ability to sell securities using our shelf registration
statement.
During the first six months of 2020, the primary uses of
our available cash were
our ongoing capital expenditures and investments
program,
and$913 million to pay dividends.
During the first six months of 2020, our cash and cash
equivalents decreased by$2,181 million to$2,907 million .
We entered the year with a strong balance sheet including cash and cash equivalents
of over$5 billion , short- term investments of$3 billion , and an undrawn
credit facility of
approximately$14 billion of liquidity.
This strong foundation allowed us to be measured
in our response to the sudden change in business environment we experienced in the first
quarter of 2020.
In response to the recent oil market downturn, we announced the following capital,
operating cost and share repurchase reductions.
We reduced our 2020 operating plan capital expenditures by a
total of
percent of the original guidance.
We suspended our share repurchase program for the remainder of 2020, further
reducing cash outlays by approximately
in 2020.
We are also reducing our operating costs by approximately$0.6 billion , or roughly ten percent
of the original 2020 guidance.
Collectively, these actions represent a reduction in 2020 cash uses of over$5
billion versus the original operating plan.
We also established a framework for evaluating and implementing economic curtailments
considering the weakness in oil prices during the second quarter of
2020, which resulted in taking an additional
significant step of curtailing production, predominantly from operated
North American assets.
Due to our strong balance sheet, we were in an advantaged position to forgo some production and cash flow in anticipation of receiving higher cash flows for those volumes in the future.
We ended the second quarter with cash and cash equivalents of
investments of$4.0 billion , and an undrawn credit facility of$6 billion ,
totaling
We believe current cash balances and cash generated by operations, the recent
adjustments to our operating plan, together with
access
to external sources of funds as described below in
the "Significant Sources of Capital"
section, will be sufficient to meet our funding requirements in the near- and long-term, including our capital spending program, dividend payments and required debt payments.
Significant Sources of Capital
Operating Activities
Cash provided by operating activities was
million for the first six months of 2020, compared
with
The decrease in cash provided by operating activities
is
primarily due to lower realized commodity prices,
production curtailments and the divestiture
of ourU.K. and Australia-West assets. 54 Our short-
and long-term operating cash flows are highly
dependent upon prices for crude oil, bitumen, natural gas, LNG and NGLs.
Prices and margins in our industry have historically
been volatile and are driven by market conditions over which we have no control.
Absent other mitigating factors, as these prices
and margins fluctuate, we would expect a corresponding change
in our operating cash flows.
The level of absolute production volumes, as well
as product and location mix, impacts our cash flows.
Production levels are impacted by such factors as
the volatile crude oil and natural gas
price environment, which may impact investment decisions; the
effects of price changes on production sharing and variable- royalty contracts; acquisition and disposition of fields;
field production decline rates; new technologies; operating efficiencies; timing of startups and major turnarounds; political instability; global pandemics and associated demand decreases; weather-related disruptions; and the addition of proved reserves through exploratory success and their timely and cost-effective
development.
While we actively manage these factors, production levels can cause variability in cash
flows, although generally this variability has not
been as significant as that caused by commodity prices.
To maintain or grow our production volumes, we must continue to add to our
proved reserve base.
Due to recent capital reductions, our reserve replacement
efforts could be delayed thus limiting our ability
to replace depleted reserves. Investing Activities Proceeds from asset sales in the first six months
of 2020 were
compared with$0.7 billion in the corresponding period of 2019.
In the second quarter of 2020, we completed
the divestiture of ourAustralia - West assets and operations.
Based on an effective date of
closing adjustments, we received cash proceeds of$765 million in
the second quarter with another
payment due upon final investment decision of the proposed Barossa
development project.
In the first quarter of 2020, proceeds from asset sales were$549 million , which included
the sale of our Niobrara interests and
and
See Note 4-Asset Acquisitions and Dispositions in the Notes to Consolidated
Financial Statements, for additional information
on
these transactions.
Proceeds from asset sales in the first six months
of 2019 were
which consisted primarily of$350 million from the sale of our 30 percent interest in
the Greater Sunrise Fields and deposits
of$268 million related to anApril 2019 agreement to sell
two ConocoPhillips
Commercial Paper and Credit Facilities We have a revolving credit facility totaling$6.0 billion , expiring inMay 2023 . Our revolving credit facility may be used for direct bank borrowings, the issuance
of letters of credit totaling up to
as
support for our commercial paper program.
The revolving credit facility is broadly syndicated
among financial institutions and does not contain any material
adverse change provisions or any covenants
requiring
maintenance of specified financial ratios or credit
ratings.
The facility agreement contains a cross-default provision relating to the failure to pay principal or interest on other debt obligations of$200 million or more byConocoPhillips , or any of its consolidated subsidiaries. The amount of the facility is not subject to redetermination prior to its expiration date.
Credit facility borrowings may bear interest at a margin above
rates offered by certain designated banks in theLondon interbank market or at a margin above the overnight federal funds rate or prime rates offered by certain designated banks inthe United States .
The agreement calls for commitment fees
on available, but unused, amounts.
The agreement also contains early termination
rights if our current directors or their approved successors cease to be a majority of the
Board of Directors.
The revolving credit facility supports the
Company$6.0 billion commercial paper program, which is primarily a funding source for short-term
working capital needs.
Commercial paper maturities are generally limited to 90 days. 55
We had no commercial paper outstanding at
We had no direct outstanding borrowings or letters of credit
under the revolving credit facility at
December 31, 2019 .
Since we had no commercial paper outstanding
and had issued no letters of credit, we had
access to$6.0 billion in borrowing capacity under our revolving
credit facility at
We may consider issuing commercial paper in the future to supplement
our cash position as appropriate.
Despite recent volatility and price weakness for energy issuers
in the debt capital markets, we believe the company continues to have access to the markets
based on the composition of our balance sheet
and asset portfolio.
In
long-term debt and revised its outlook to "negative" from "stable."
In
Our current rating from Fitch is "A" with a "stable" outlook.
We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby
impact our access to liquidity, in the event of a downgrade of our credit rating.
If our credit rating were downgraded, it could
increase the cost of corporate debt available to us and potentially restrict
our access to the commercial paper and debt capital
markets.
If our credit rating were to deteriorate to a level prohibiting
us from accessing the commercial paper and
debt capital markets, we would still be able to access funds
under our revolving credit facility.
Certain of our project-related contracts, commercial
contracts and derivative instruments contain
provisions
requiring us to post collateral.
Many of these contracts and instruments permit
us to post either cash or letters of credit as collateral.
At
direct bank letters of credit of$196 million and$277 million , respectively, which secured performance obligations related to various purchase commitments incident to the ordinary conduct of
business.
In the event of credit ratings downgrades, we may be required to post additional letters of
credit.
Shelf Registration
We have a universal shelf registration statement on file with the
we have the ability to issue and sell an indeterminate amount of various
types of debt and equity securities.
Off-Balance Sheet Arrangements
As part of our normal ongoing business operations
and consistent with normal industry practice,
we enter into numerous agreements with other parties to pursue
business opportunities, which share costs
and apportion risks among the parties as governed by the agreements.
For information about guarantees, see Note 11-Guarantees, in
the Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Capital Requirements
For information about our capital expenditures
and investments, see the "Capital Expenditures"
section.
Our debt balance at
million, compared with
atDecember 31, 2019 .
Maturities of debt for the remainder of 2020,
and for each of the years 2021 through 2024,
are:$81 million ,$255 million ,$971 million ,$229 million
and
On
dividend of
The dividend was paid onMarch 2, 2020 ,
to stockholders of record at the close of business
on
OnApril 30, 2020 , we announced a quarterly dividend of$0.42 per share.
The dividend was paid on
of
record at the close of business on
On
we announced a quarterly dividend of$0.42 per share, payableSeptember 1, 2020 ,
to stockholders of record at the close of business
onJuly 20, 2020 .
In late 2016, we initiated our current share repurchase
program.
As ofJune 30, 2020 , we had announced a total authorization to repurchase$25 billion of our
common stock.
As of
56
repurchased
In the first quarter of 2020, we repurchased
an additional$726 million of shares.
On
price downturn, we announced we were suspending our share repurchase program.
Since our share repurchase program began in November
2016, we have repurchased 184 million shares at a cost of$10.4
billion through
Capital Expenditures Millions ofDollars Six Months EndedJune 30 2020 2019Alaska $ 732 780 Lower 48 1,130 1,770Canada 142 232Europe andNorth Africa 251 339Asia Pacific andMiddle East 188 219 Other International 63 1 Corporate and Other 19 25 Capital expenditures and investments$ 2,525 3,366
During the first six months of 2020, capital expenditures
and investments supported key exploration and development programs, primarily: ?
Development,
appraisal and exploration activities in
the Lower 48, includingEagle Ford , Permian Unconventional and Bakken. ?
Appraisal,
exploration and development activities
inAlaska related to theWestern North Slope ; development activities in the Greater Kuparuk
Area and the Greater Prudhoe Area.
?
Development and exploration activities across
assets inNorway . ?
Appraisal activities in the liquids-rich portion
of the
of oil sands development. ?
Continued development in
?
Lease acquisition and exploration activities
in
In
plan capital expenditures of
In
response to the recent oil market downturn, we announced
reductions to this plan totaling
or
approximately 35 percent.
The capital reductions are sourced to the segments
in the amount of$1.4 billion to Lower 48,$0.4 billion toAlaska ,$0.2 billion
to
and exploration.
This does not include capital for acquisitions.
In
to acquire additional
consideration of approximately$375 million before customary adjustments, plus the assumption of approximately$30 million in financing obligations for associated partially
owned infrastructure.
This acquisition primarily consists of undeveloped properties and includes 140,000
net acres in the liquids-rich Inga Fireweed asset
Montney zone, which is directly adjacent to our existingMontney
position, as well as 15 MBOED of production.
Upon
completion of this transaction, we will have a
acreage position of 295,000 net acres with a 100 percent working interest.
The transaction is subject to regulatory
approval and is expected to close in the third quarter of 2020 with an effective date ofJuly 1, 2020 . 57 Contingencies
A number of lawsuits involving a variety of claims
arising in the ordinary course of business
have been filed againstConocoPhillips .
We also may be required to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain
chemical, mineral and petroleum substances
at various active and inactive sites.
We regularly assess the need for accounting recognition or disclosure of these contingencies.
In the case of all known contingencies (other
than those related to income taxes), we accrue
a
liability when the loss is probable and the amount
is reasonably estimable.
If a range of amounts can be reasonably estimated and no amount within the range
is a better estimate than any other amount,
then the minimum of the range is accrued.
We do not reduce these liabilities for potential insurance or third-party recoveries.
We accrue receivables for insurance or other third-party recoveries when applicable.
With respect to income-tax-related contingencies, we use a
cumulative probability-weighted loss accrual
in cases where sustaining a tax position is less than certain.
Based on currently available information, we believe
it is remote that future costs related to known
contingent
liability exposures will exceed current accruals by
an amount that would have a material
adverse impact on our consolidated financial statements.
As we learn new facts concerning contingencies,
we reassess our position both with respect to accrued liabilities
and other potential exposures.
Estimates particularly sensitive to future changes include contingent liabilities
recorded for environmental remediation, legal and
tax matters.
Estimated future environmental remediation
costs are subject to change due to such factors as
the uncertain magnitude of cleanup costs, the unknown time
and extent of such remedial actions that
may be required, and the determination of our liability in proportion
to that of other responsible parties.
Estimated future costs related to legal and tax matters are subject to
change as events evolve and as additional
information becomes available during the administrative and litigation
processes.
For information on other contingencies, see Note 12-Contingencies
and Commitments, in the Notes to Consolidated
Financial Statements.
Legal and Tax Matters We are subject to various lawsuits and claims including but not limited to matters
involving oil and gas royalty and severance tax payments, gas measurement and
valuation methods, contract disputes,
environmental
damages, climate change, personal injury, and property damage.
Our primary exposures for such matters relate to alleged royalty and tax underpayments
on certain federal, state and privately owned
properties and claims of alleged environmental contamination
from historic operations.
We will continue to defend ourselves vigorously in these matters.
Our legal organization applies its knowledge, experience
and professional judgment to the specific characteristics of our cases, employing a litigation
management process to manage and monitor the
legal
proceedings against us.
Our process facilitates the early evaluation and quantification
of potential exposures in individual cases.
This process also enables us to track those cases that
have been scheduled for trial and/or mediation.
Based on professional judgment and experience
in using these litigation management tools and available information about current developments
in all our cases, our legal organization regularly assesses
the
adequacy of current accruals and determines if
adjustment of existing accruals, or establishment
of new accruals, is required.
Environmental
We are subject to the same numerous international, federal, state and local environmental
laws and regulations as other companies in our industry.
For a discussion of the most significant
of these environmental laws and regulations, including those with associated remediation obligations, see the "Environmental" section in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 60-62 of our 2019 Annual Report on Form 10-K.
We occasionally receive requests for information or notices of potential liability
from theEPA and state environmental agencies alleging that we are
a potentially responsible party under the Federal
Comprehensive
Environmental Response, Compensation and Liability
Act (CERCLA) or an equivalent state statute.
On
occasion, we also have been made a party to cost
recovery litigation by those agencies or by private
parties.
These requests, notices and lawsuits assert potential
liability for remediation costs at various sites
that typically
58
are not owned by us, but allegedly contain waste attributable
to our past operations.
As ofJune 30, 2020 , there were 15 sites around theU.S.
in which we were identified as a potentially responsible
party under CERCLA and comparable state laws.
At
sheet included a total environmental accrual of
million for remediation activities in the
We expect to incur a substantial amount of these expenditures within the next 30 years.
Notwithstanding any of the foregoing, and as with
other companies engaged in similar businesses, environmental costs and liabilities are inherent
concerns in our operations and products, and there
can be no assurance that material costs and liabilities
will not be incurred.
However, we currently do not expect any material adverse effect upon our results of operations or financial position as a result of compliance with current environmental laws and regulations. Climate Change Continuing political and social attention to the
issue of global climate change has resulted in
a broad range of proposed or promulgated state, national and international
laws focusing on GHG reduction.
These proposed or promulgated laws apply or could apply in countries
where we have interests or may have interests
in the future.
Laws in this field continue to evolve, and while
it is not possible to accurately estimate either
a timetable for implementation or our future compliance costs
relating to implementation, such laws, if
enacted, could have a material impact on our results of operations and
financial condition.
Examples of legislation and precursors for possible regulation that do or could affect our operations include: ? TheEPA 's
and
1,
2010, that triggered regulation of GHGs under the
Clean Air Act, may trigger more climate-based claims for damages, and may result in longer agency review time for development projects. ?
to reduce 2025 GHG emissions by at least 26 percent, 2030 GHG emissions by at least 50 percent, and 2050 GHG emissions by at least 90 percent of the levels of GHG
emissions that existed in 2005.
For other examples of legislation or precursors for
possible regulation and factors on which
the ultimate impact on our financial performance will depend, see the
"Climate Change" section in Management's Discussion and Analysis of Financial Condition and Results of Operations
on pages 63-65 of our 2019 Annual Report on Form 10-K.
In
of the
international
policy institute founded in collaboration with business
and environmental interests to develop a carbon dividend plan.
Participation in the CLC provides another
opportunity for ongoing dialogue about carbon pricing and framing the issues in alignment with our
public policy principles.
We also belong to and fund Americans For Carbon Dividends, the education
and advocacy branch of the CLC.
Beginning in 2017, cities, counties, and state governments
in
Rhode
Island,
including
damages and equitable relief to abate alleged climate change impacts.
these
lawsuits.
The lawsuits brought by the Cities of
Oakland andNew York were dismissed by federal district courts.
The
The Ninth Circuit ruled that theSan Francisco andOakland cases (and otherCalifornia
cases) should proceed in state court, with that
decision
subject to appeal.
Lawsuits filed by the cities and counties in
Washington , andHawaii are currently stayed pending resolution of the Ninth Circuit
appeals.
Lawsuits filed inMaryland andRhode Island are proceeding in state court while rulings in those
matters, on the issue of whether the
matters should proceed in state or federal court, are on appeal.
Several
oil and gas companies, includingConocoPhillips , seeking compensatory damages in connection
with historical oil and gas operations in
The lawsuits
59
are stayed pending an appeal with the Fifth Circuit
on the issue of whether they will proceed in federal
or state court.
these lawsuits. CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements
within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange
Act of 1934.
All statements other than statements of historical fact included or incorporated by reference
in this report, including, without limitation,
statements
regarding our future financial position, business
strategy, budgets, projected revenues, projected costs and plans, and objectives of management for future operations,
are forward-looking statements.
Examples of forward-looking statements contained in this report
include our expected production growth and
outlook on the business environment generally, our expected capital budget and capital expenditures,
and discussions concerning future dividends.
You can often identify our forward-looking statements by the words "anticipate," "estimate," "believe," "budget," "continue," "could,"
"intend," "may," "plan," "potential," "predict," "seek," "should," "will," "would," "expect," "objective,"
"projection," "forecast," "goal," "guidance," "outlook," "effort," "target" and similar expressions.
We based the forward-looking statements on our current expectations, estimates
and projections about ourselves and the industries in which we operate in
general.
We caution you these statements are not guarantees of future performance as they involve
assumptions that, while made in good faith,
may prove to be incorrect, and involve risks and uncertainties
we cannot predict.
In addition, we based many of these forward- looking statements on assumptions about future events
that may prove to be inaccurate.
Accordingly, our actual outcomes and results may differ materially from
what we have expressed or forecast in the forward- looking statements.
Any differences could result from a variety of factors,
including, but not limited to, the following: ?
The impact of public health crises, including pandemics
(such as COVID-19) and epidemics and any related company or government policies or
actions.
?
Global and regional changes in the demand, supply, prices, differentials or other market
conditions
affecting oil and gas, including changes resulting from a public
health crisis or from the imposition or lifting of crude oil production quotas or other
actions that might be imposed by
and other producing countries and the resulting company
or third-party actions in response to such changes. ?
Fluctuations in crude oil, bitumen, natural gas,
LNG and NGLs prices, including a prolonged
decline
in these prices relative to historical or future
expected levels. ?
The impact of significant declines in prices for crude
oil, bitumen, natural gas, LNG and NGLs,
which
may result in recognition of impairment charges on our
long-lived assets, leaseholds and nonconsolidated equity investments. ?
Potential failures or delays in achieving expected
reserve or production levels from existing
and future oil and gas developments, including due to operating hazards, drilling risks and the inherent uncertainties in predicting reserves and reservoir
performance.
?
Reductions in reserves replacement rates, whether
as a result of the significant declines in commodity prices or otherwise. ?
Unsuccessful exploratory drilling activities
or the inability to obtain access to exploratory acreage. ?
Unexpected changes in costs or technical requirements
for constructing, modifying or operating E&P facilities. ?
Legislative and regulatory initiatives
addressing environmental concerns, including initiatives addressing the impact of global climate change or further
regulating hydraulic fracturing, methane emissions, flaring or water disposal. ?
Lack of, or disruptions in, adequate and reliable
transportation for our crude oil, bitumen, natural
gas, LNG and NGLs. 60 ?
Inability to timely obtain or maintain permits,
including those necessary for construction, drilling and/or development, or inability to make capital
expenditures required to maintain compliance
with
any necessary permits or applicable laws or regulations. ?
Failure to complete definitive agreements and feasibility
studies for, and to complete construction of, announced and future E&P and LNG development in a timely manner (if at all) or on budget. ?
Potential disruption or interruption of our operations
due to accidents, extraordinary weather
events,
civil unrest, political events, war, terrorism, cyber attacks,
and information technology failures, constraints or disruptions. ?
Changes in international monetary conditions and
foreign currency exchange rate fluctuations. ?
Changes in international trade relationships,
including the imposition of trade restrictions
or tariffs relating to crude oil, bitumen, natural gas, LNG, NGLs and any materials or products (such as aluminum and steel) used in the operation of our
business.
?
Substantial investment in and development use
of, competing or alternative energy sources, including as a result of existing or future environmental
rules and regulations. ?
Liability for remedial actions, including removal
and reclamation obligations, under existing
and
future environmental regulations and litigation. ?
Significant operational or investment changes imposed
by existing or future environmental
statutes
and regulations, including international agreements
and national or regional legislation and regulatory measures to limit or reduce GHG emissions. ?
Liability resulting from litigation or our failure
to comply with applicable laws and regulations.
?
General domestic and international economic and
political developments, including armed
hostilities;
expropriation of assets; changes in governmental
policies relating to crude oil, bitumen, natural
gas,
LNG and NGLs pricing, regulation or taxation;
and other political, economic or diplomatic developments. ? Volatility in the commodity futures markets. ?
Changes in tax and other laws, regulations (including
alternative energy mandates), or royalty rules applicable to our business. ?
Competition and consolidation in the oil and gas
E&P industry. ?
Any limitations on our access to capital or increase
in our cost of capital, including as a result
of
illiquidity or uncertainty in domestic or international
financial markets. ?
Our inability to execute, or delays in the completion,
of any asset dispositions or acquisitions
we elect to pursue. ?
Potential failure to obtain, or delays in obtaining, any
necessary regulatory approvals for
pending or future asset dispositions or acquisitions,
or that such approvals may require modification
to the terms of the transactions or the operation of our remaining
business.
?
Potential disruption of our operations as a result
of pending or future asset dispositions or acquisitions, including the diversion of management time and attention. ?
Our inability to deploy the net proceeds from any
asset dispositions that are pending or
that we elect to undertake in the future in the manner and timeframe we currently anticipate, if at all. ?
Our inability to liquidate the common stock issued
to us by Cenovus Energy as part of our sale of certain assets in westernCanada at prices we deem acceptable, or at all. ?
The operation and financing of our joint ventures. ?
The ability of our customers and other contractual
counterparties to satisfy their obligations to
us,
including our ability to collect payments when
due from the government of
?
Our inability to realize anticipated cost savings and
capital expenditure reductions. ?
The inadequacy of storage capacity for our products,
and ensuing curtailments, whether voluntary
or
involuntary, required to mitigate this physical constraint. ?
The risk factors generally described in Part II-Item
1A in this report, in Part I-Item 1A in our 2019 Annual Report on Form 10-K, and any additional
risks described in our other filings with
theSEC . 61 Item 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Information about market risks for the six months
ended
from that discussed under Item 7A in our 2019 Annual Report on Form 10-K. Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure information required
to be disclosed in reports we file or submit under the Securities
Exchange Act of 1934, as amended (the Act),
is recorded, processed, summarized and reported within the
time periods specified in
and that such information is accumulated and communicated
to management, including our principal
executive and principal financial officers, as appropriate, to allow timely decisions
regarding required disclosure.
As ofJune 30, 2020 , with the participation of our management, our Chairman
and Chief Executive Officer (principal executive officer) and our Executive Vice President and Chief Financial Officer (principal financial
officer) carried out an evaluation, pursuant to Rule 13a-15(b) of
the Act, of
and procedures (as defined in Rule 13a-15(e) of the Act).
Based upon that evaluation, our Chairman and
Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded our disclosure
controls and procedures were operating effectively as ofJune 30, 2020 .
There have been no changes in our internal
control over financial reporting, as defined in
Rule 13a-15(f) of the Act, in the period covered by this report that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS
There are no new material legal proceedings
or material developments with respect to matters
previously
disclosed in Item 3 of our 2019 Annual Report on
Form 10-K. Item 1A. RISK FACTORS
Other than the risk factors set forth below, there have been no material
changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal
year ended
Our business has been, and will continue to
be, affected by the coronavirus (COVID-19) pandemic.
The COVID-19 outbreak and the measures put
in place to address it have negatively impacted
the global economy, disrupted global supply chains, reduced global demand for oil and gas, and created significant volatility and disruption of financial and commodity
markets.
Public health officials have recommended or mandated certain precautions to mitigate
the spread of COVID-19, including limiting non-essential
gatherings
of people, ceasing all non-essential travel
and issuing "social or physical distancing" guidelines,
"shelter-in-
place" orders and mandatory closures or reductions
in capacity for non-essential businesses.
The full impact of the COVID-19 pandemic remains uncertain
and will depend on the severity, location and duration of the effects and spread of the disease, the effectiveness and duration
of actions taken by authorities to contain the virus or treat its effect, and how quickly and to what extent
economic conditions improve.
According to theNational Bureau of Economic Research , as a result
of the pandemic and its broad reach across the
entire
economy, the
We have already been impacted by the COVID-19 pandemic.
See Management's Discussion and Analysis of Financial Condition and Results of Operations, for
additional information on how we have
been impacted and the steps we have taken in response.
62
Our business is likely to be further negatively
impacted by the COVID-19 pandemic. These impacts
could
include but are not limited to:
?
Continued reduced demand for our products
as a result of reductions in travel and commerce; ?
Disruptions in our supply chain due in part to scrutiny
or embargoing of shipments from infected areas or invocation of force majeure clauses in commercial contracts due to restrictions imposed as a result of the global response to the pandemic; ?
Failure of third parties on which we rely, including our suppliers, contract
manufacturers, contractors, joint venture partners and external business partners, to meet their obligations to the company, or significant disruptions in their ability to
do so, which may be caused by their own financial
or
operational difficulties or restrictions imposed in
response to the disease outbreak; ?
Reduced workforce productivity caused by, but not limited to, illness, travel
restrictions, quarantine, or government mandates; ?
Business interruptions resulting from a significant
amount of our employees telecommuting
in
compliance with social distancing guidelines and
shelter-in-place orders, as well as the implementation of protections for employees continuing to commute for work, such as personnel screenings and self-quarantines before or after travel; and ? Voluntary
or involuntary curtailments to support oil prices
or alleviate storage shortages for our products.
Any of these factors, or other cascading effects of the
COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact
our revenues and damage our financial condition,
results
of operations, cash flows and liquidity position.
The pandemic continues to progress and evolve,
and the full extent and duration of any such impacts cannot
be predicted at this time because of the sweeping
impact of the COVID-19 pandemic on daily life around the world.
We have been negatively affected and are likely to continue to be negatively affected by the recent
swift and sharp drop in commodity prices.
The oil and gas business is fundamentally a commodity
business and prices for crude oil, bitumen,
natural gas, NGLs and LNG can fluctuate widely depending
upon global events or conditions that affect supply and demand.
Recently, there has been a precipitous decrease in demand for oil globally, largely caused by the dramatic decrease in travel and commerce resulting
from the COVID-19 pandemic.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations, for additional information
on
commodity prices and how we have been impacted.
There is no assurance of when or if commodity
prices will return to pre-COVID-19 levels.
The speed and extent of any recovery remains uncertain
and is subject to various risks, including the duration, impact and actions taken to stem the proliferation of the COVID-19 pandemic, the extent to which those nations party
to the
to increase production of crude oil, bitumen, natural gas, NGLs
and LNG, and other risks described in this
Quarterly
Report on Form 10-Q or in our Annual Report
on Form 10-K for the fiscal year ended
Even after a recovery, our industry will continue to be exposed to the effects of changing
commodity prices given the volatility in commodity price drivers
and the worldwide political and economic
environment
generally, as well as continued uncertainty caused by armed hostilities
in various oil-producing regions around the globe.
Our revenues, operating results and future rate
of growth are highly dependent on the prices
we
receive for our crude oil, bitumen, natural gas, NGLs
and LNG.
Many of the factors influencing these prices are beyond our control.
Lower crude oil, bitumen, natural gas, NGL and LNG
prices may have a material adverse effect on our revenues, operating income, cash flows and liquidity, and may also affect the amount
of dividends we elect to declare and pay on our common stock.
As a result of the recent market downturn, we
have suspended our share repurchase program.
Lower prices may also limit the amount of reserves
we can produce economically, thus adversely affecting our proved reserves, reserve replacement
ratio and accelerating the reduction in our
63
existing reserve levels as we continue production
from upstream fields.
Prolonged lower crude oil prices may affect certain decisions related to our operations, including
decisions to reduce capital investments
or decisions to shut-in production.
Due to ongoing uncertainty and volatility, we are suspending all further
guidance for 2020, including guidance related to capital
expenditures and production and our previous
2020 guidance should not be relied upon.
Significant reductions in crude oil, bitumen, natural
gas, NGLs and LNG prices could also
require us to reduce our capital expenditures, impair the carrying value
of our assets or discontinue the classification
of certain assets as proved reserves.
In the first six-month period of 2020, we recognized
several impairments, which are described in Note 8-Impairments.
If the outlook for commodity prices remain
low relative to their historic levels, and as we continue to optimize our investments
and exercise capital flexibility, it is reasonably likely we will incur future impairments to long-lived assets
used in operations, investments in nonconsolidated entities accounted for under the equity method and unproved
properties.
If oil and gas prices persist at depressed levels, our reserve estimates may
decrease further, which could incrementally increase the rate used to determine DD&A expense on our unit-of-production
method properties.
See Management's Discussion and Analysis for further examination of DD&A
rate impacts versus comparative periods.
Although it is not reasonably practicable to quantify the impact
of any future impairments or estimated change to our
unit-of-
production at this time, our results of operations
could be adversely affected as a result.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
Issuer Purchases ofEquity Securities Millions of Dollars Period Total Number of Shares Purchased * Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or ProgramsApril 1-30, 2020 - $ - -$ 14,649 May 1-31, 2020 - - - 14,649June 1-30, 2020 - - - 14,649 - $ - -
*There were no repurchases of common stock from company employees in connection with the company's broad-based employee incentive plans.
In late 2016, we initiated our current share repurchase
program.
As ofJune 30, 2020 , we had announced a total authorization to repurchase$25 billion of our
common stock.
As ofDecember 31, 2019 , we had repurchased$9.6 billion of shares.
In the first quarter of 2020, we repurchased
an additional$726 million of shares.
On
downturn, we announced we were suspending our share repurchase program.
Acquisitions for the share repurchase program
are made at management's discretion, at prevailing prices, subject to market conditions
and other factors.
Except as limited by applicable legal requirements, repurchases may be increased, decreased
or discontinued at any time without prior notice.
Shares of stock repurchased under the plan are
held as treasury shares.
See the "Our ability to declare and pay dividends and repurchase shares is subject to
certain considerations" section in Risk Factors
on pages 21-22 of our 2019 Annual Report on Form 10-K. 64 Item 6. EXHIBITS 10.1*
Letter Agreement with
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.
32*
Certifications pursuant to 18 U.S.C. Section 1350. 101.INS* Inline XBRL Instance Document. 101.SCH* Inline XBRL Schema Document. 101.CAL* Inline XBRL Calculation Linkbase Document. 101.LAB* Inline XBRL Labels Linkbase Document. 101.PRE* Inline XBRL Presentation Linkbase Document. 101.DEF* Inline XBRL Definition Linkbase Document. 104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * Filed herewith.
65
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