Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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,” “believe,” “budget,” “continue,” “could,” “effort,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “target,” “will,” “would,” 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 51. The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss).
Business Environment and Executive Overview
ConocoPhillips is the world’s largest independent E&P company with operations and activities in 13 countries. Our diverse, low cost of supply portfolio includes resource-rich unconventional plays in North America; conventional assets in North America, Europe, and Asia; LNG developments; oil sands in Canada; and an inventory of global conventional and unconventional exploration prospects. Headquartered in Houston, Texas, at March 31, 2022, we employed approximately 9,400 people worldwide and had total assets of $93 billion.
Overview
Commodity prices in the first quarter of 2022 increased to levels not seen since 2014, in part due to impacts associated with the Russian invasion and conflict in Ukraine and sanctions levied against Russia as a result of the conflict. We anticipate that prices will continue to be cyclical and volatile and our view is that a successful business strategy in the E&P industry must be resilient in lower price environments, while also retaining upside during periods of higher prices. As such, we are unhedged, remain highly disciplined in our investment decisions and continue to monitor market fundamentals including the impacts associated with the conflict in Ukraine, OPEC plus supply updates, global demand for our products, oil and gas inventory levels, inflation, supply chain disruptions and the fluctuating global COVID-19 impacts.
The energy macro-environment, including energy transition, continues to evolve. We believe ConocoPhillips will play a valued role in the energy transition. We are guided by our triple mandate that simultaneously calls for us to reliably and responsibly deliver oil and gas production to meet energy transition pathway demand, deliver competitive returns on and of capital, and do so with a resilient and sustainable portfolio enabling us to achieve our net-zero operating emissions ambition. Our triple mandate is supported by financial principles and capital allocation priorities designed to allow us to deliver superior returns through the price cycles. Our financial principles consist of maintaining balance sheet strength, providing peer-leading distributions, making disciplined investments, and demonstrating ESG leadership, all of which are in service to generating competitive financial returns through the price cycles.
In the first quarter, total company production was 1,747 MBOED, resulting in cash provided by operating activities of $5.1 billion, with $0.9 billion returned to shareholders through our ordinary dividend and a VROC and $1.4 billion through share repurchases. We ended the quarter with cash, cash equivalents and short-term investments totaling $7.1 billion.
In May 2022, we announced an increase to our 2022 expected distributions through our three-tier return of capital framework of $2 billion, now totaling $10 billion for the year. This framework includes our ordinary dividend, share repurchases and the VROC tier that was introduced last December. In May, we declared our ordinary dividend of 46 cents per share and a third quarter VROC payment of 70 cents per share.
During the first quarter of 2022, we completed our monetization program for the Cenovus Energy (CVE) common shares that we obtained as partial consideration in a 2017 asset divestiture, selling our remaining 91 million shares and recognizing proceeds of $1.4 billion. Since we began selling shares in May 2021, we have generated total proceeds of $2.5 billion. Proceeds from the disposition of CVE shares were deployed towards share repurchases. See Note 5. | | | | | | | | |
| ConocoPhillips 2022 Q1 10-Q | 30 |
| | | | | |
Management’s Discussion and Analysis | |
Additionally in the first quarter, we demonstrated our commitment to enhancing balance sheet strength by executing a debt refinancing comprised of concurrent transactions including new debt issuances, a cash tender offer and debt exchange offers. Part of the cash consideration in the cash tender and debt exchange offers was satisfied with current cash balances. In aggregate, the transactions reduced the company's total debt by $1.2 billion. The refinancing facilitates our ability to achieve our previously announced $5 billion debt reduction target by the end of 2026 while also reducing the company's annual cash interest expense. See Note 6.
In April 2022, we provided formal notice to holders of our 4.95% Notes due 2026 with principal of $1,250 million that we would retire this debt in full per the provisions in the bond indenture, with settlement scheduled for May 2022. Retirement of this bond will be sourced from cash and further accelerates progress towards our debt reduction target.
As part of our ongoing portfolio high-grading and optimization efforts, in the first quarter of 2022 we closed two transactions in our Asia Pacific segment, further strengthening our diverse, global asset portfolio. This included exercising our preemption right to purchase an additional 10 percent interest in Australia Pacific LNG Pty Ltd (APLNG) for approximately $1.4 billion after customary adjustments, and the sale of our interests in Indonesia for approximately
$0.7 billion after customary adjustments. In addition to these transactions, in the first quarter we entered into a divestiture agreement to sell our interest in noncore assets within our Lower 48 segment for $440 million before customary adjustments, which closed in April 2022. For more information on APLNG, see Note 4 and for more information on acquisition and disposition activity, see Note 3.
In 2021, we announced a target to dispose of $4 to $5 billion in assets by year-end 2023. Through the first quarter of 2022, we have disposed of $1.7 billion in assets, generating approximately $1.0 billion in disposition proceeds. We received $0.8 billion in proceeds in the current period primarily from the sale of our Indonesia assets. The proceeds from these transactions will be used in accordance with the company’s priorities, including returns of capital to shareholders and reduction of total debt.
In February 2022, we reaffirmed our commitment to ESG leadership and excellence. Our Paris-aligned climate-risk commitment includes:
•Net-zero ambition for operational (Scope 1 and 2) emissions by 2050 with active advocacy for a price on carbon to address end-use (Scope 3) emissions;
•Targeting a reduction in gross operated and net equity operational GHG emissions intensity by 40 to 50 percent from 2016 levels by 2030;
•Endorsed the World Bank Zero Routine Flaring Initiative, with the aim to get there by 2025;
•10 percent reduction target for methane emissions intensity by 2025 from a 2019 baseline, in addition to the 65 percent reductions we have made since 2015;
•Adding continuous methane detection devices to our operations, with an initial focus on the larger Lower 48 facilities;
•Allocating capital to our dedicated low carbon technology organization responsible for identifying and prioritizing global emissions reduction initiatives and opportunities associated with the energy transition including CCUS and hydrogen; and
•ESG performance factoring into executive and employee compensation programs.
Operationally, we remain focused on safely executing the business. Production was 1,747 MBOED in the first quarter of 2022, an increase of 220 MBOED from the same period a year ago. After adjusting for closed acquisitions and dispositions, the conversion of previously acquired Concho contracted volumes from a two-stream to a three-stream basis and 2021 Winter Storm Uri impacts, first-quarter 2022 production decreased by 36 MBOED, or 2 percent from the same period a year ago. This decrease was primarily due to downtime and seasonality impacts as new production from the Lower 48 and other development programs more than offset decline.
We re-invested $3.2 billion into the business in the form of capital expenditures and investments during the first quarter of 2022. Excluding our purchase of an additional 10 percent interest in APLNG, over half of the remaining capital expenditures was focused on flexible, short-cycle unconventional plays in the Lower 48 segment where our production is liquids-weighted and has access to both domestic and export markets.
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31 | ConocoPhillips 2022 Q1 10-Q | |
| | | | | |
Management’s Discussion and Analysis | |
Business Environment
Commodity prices are the most significant factor impacting our profitability and related reinvestment of operating cash flows into our business. 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 OPEC plus and other major 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, operational and ESG 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 Henry Hub natural gas:
Brent crude oil prices averaged $101.40 per barrel in the first quarter of 2022, an increase of 67 percent compared with $60.90 per barrel in the first quarter of 2021. WTI at Cushing crude oil prices averaged $94.29 per barrel in the first quarter of 2022, an increase of 63 percent compared with $57.84 per barrel in the first quarter of 2021. Oil prices increased as a result of the ongoing global economic recovery following 2020’s COVID impacts as well as supply disruptions caused by Russia's invasion of Ukraine, OPEC plus supply restraint and continued capital discipline by U.S. E&P companies.
Henry Hub natural gas prices averaged $4.96 per MMBTU in the first quarter of 2022, an increase of 83 percent compared with $2.71 per MMBTU in the first quarter of 2021. Henry Hub prices have increased as healthy domestic demand and record levels of feedgas demand for LNG exports to Europe and Asia offset modest growth in production.
Our realized bitumen price averaged $65.86 per barrel in the first quarter of 2022, an increase of 114 percent compared with $30.78 per barrel in the first quarter of 2021. The increase in the first quarter of 2022 was driven by higher blend price for Surmont sales, largely attributed to a strengthening of WTI price. We continue to optimize bitumen price realizations through the utilization of downstream transportation solutions and implementation of alternate blend capability which results in lower diluent costs.
For the first quarter of 2022 our total average realized price increased to $76.99 per BOE compared with $45.36 per BOE in the first quarter of 2021.
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| ConocoPhillips 2022 Q1 10-Q | 32 |
| | | | | |
Management’s Discussion and Analysis | |
Key Operating and Financial Summary
Significant items during the first quarter of 2022 and recent announcements included the following:
•Announced an increase in expected 2022 returns of capital to shareholders to a total of $10 billion, with the incremental $2 billion to be distributed through share repurchases and VROC tiers.
•Distributed $2.3 billion to shareholders through a three-tier return of capital framework, including $0.9 billion through the ordinary dividend and VROC and $1.4 billion through share repurchases.
•Generated cash provided by operating activities was $5.1 billion.
•Continued to integrate and optimize the recently acquired Permian assets while efficiently and safely executing company-wide capital programs, delivering record production of 1,747 MBOED in the quarter.
•Received 20-year production license extension in the Norway Greater Ekofisk Area from 2028 to 2048.
•Accelerated progress towards the company's debt reduction target while executing debt transactions that will result in lower annual cash interest expense.
•Closed the purchase of an additional 10 percent interest in APLNG for $1.4 billion in cash.
•Divested $1.4 billion of noncore assets during the quarter and an additional $0.4 billion in April.
•Completed monetization of the company's CVE common shares, generating proceeds of $1.4 billion during the quarter with funds applied to share repurchases, and $2.5 billion in total proceeds since May 2021.
•Published Plan for the Net-Zero Energy Transition focused on meeting the company's Triple Mandate objectives: reliably and responsibly meeting energy transition pathway demand, delivering competitive returns on and of capital and achieving our net-zero operational emissions ambitions.
•Ended the quarter with cash and cash equivalents and restricted cash of $6.7 billion and short-term investments of $0.7 billion.
Outlook
Capital, Cost and Production
Second-quarter 2022 production is expected to be 1.67 to 1.73 MMBOED, reflecting the impact of seasonal turnarounds planned in Europe and Canada as well as weather impacts experienced during April in the Bakken. The company's full-year production is expected to be approximately 1.76 MMBOED, reflecting a net reduction of approximately 25 MBOED from acquisitions and dispositions closed as of May 5, 2022.
2022 operating capital guidance has been adjusted to $7.8 billion versus the prior guidance of $7.2 billion, reflecting higher partner-operated spend in Lower 48 and inflationary impacts. This guidance excludes $1.4 billion of capital associated with the closed acquisition of an additional 10 percent interest in APLNG.
Depreciation, Depletion and Amortization
Full-year guidance for DD&A has been decreased to $7.7 billion, reflecting the impact of revised production guidance.
All other guidance items remain unchanged.
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33 | ConocoPhillips 2022 Q1 10-Q | |
Results of Operations
Unless otherwise indicated, discussion of results for the three-month period ended March 31, 2022, is based on a comparison with the corresponding period of 2021.
Consolidated Results
A summary of the company's net income (loss) by business segment follows:
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Alaska | $ | 584 | | 159 | | | |
Lower 48 | 2,790 | | 468 | | | |
Canada | 291 | | 10 | | | |
Europe, Middle East and North Africa | 412 | | 153 | | | |
Asia Pacific | 1,136 | | 317 | | | |
Other International | — | | (4) | | | |
Corporate and Other | 546 | | (121) | | | |
Net income (loss) | $ | 5,759 | | $ | 982 | | | |
Net income (loss) in the first quarter of 2022 increased $4,777 million. First quarter earnings were positively impacted by:
•Higher realized commodity prices.
•Higher sales volumes, primarily due to our Shell Permian acquisition and absence of the unplanned downtime associated with Winter Storm Uri. See Note 3. •Previously unrecognized $515 million tax benefit related to the closing of an IRS audit. See Note 18. •Gain on dispositions primarily due to a $462 million after-tax gain related to the divestiture of our Indonesia assets as well as recognizing higher contingent payments related to prior dispositions in our Canada and Lower 48 segments. See Note 3. •Higher equity in earnings of affiliates, primarily due to higher LNG sales prices.
•Absence of restructuring and transaction expenses of $243 million after-tax related to our Concho acquisition.
•Absence of realized losses on hedges of $233 million after-tax related to derivative positions acquired in our Concho acquisition. See Note 10. •After-tax gain of $62 million associated with refinancing transactions. See Note 6. First quarter 2022 net income increases were partly offset by:
•Higher production and operating expenses and taxes other than income taxes, primarily due to higher prices and sales volumes.
•Absence of a $194 million after-tax gain recognized in conjunction with our Australia-West divestiture completed in 2020. See Note 9.
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| ConocoPhillips 2022 Q1 10-Q | 34 |
Income Statement Analysis
Unless otherwise indicated, all results in Income Statement Analysis are before-tax.
Sales and other operating revenues increased $7,936 million mainly due to higher realized commodity prices and higher sales volumes.
Equity in earnings of affiliates increased $304 million primarily due to higher earnings driven by higher LNG and crude prices as well as higher sales volumes inclusive of the additional 10 percent interest in APLNG we acquired in the quarter.
Gain on dispositions in the first quarter of 2022 increased $584 million primarily due to our Indonesia divestiture and from contingent payments associated with previous dispositions in our Canada and Lower 48 segments. Offsetting the increase in gains was the absence of a $200 million gain associated with our Australia-West divestiture recognized in the first quarter of 2021. See Note 3. Purchased commodities increased $2,268 million primarily due to higher crude and gas prices and volumes.
Production and operating expenses increased $198 million, in line with higher production volumes.
Selling, general and administrative expenses decreased $124 million primarily due to the absence of transaction and restructuring expenses associated with our Concho acquisition in 2021.
DD&A for the three-month period of 2022 decreased $63 million mainly due to lower rates from price-related reserve revisions and impact of assets held for sale offset by higher production volumes.
Taxes other than income taxes increased $444 million caused by higher commodity prices and higher sales volumes.
Other expenses decreased $160 million primarily related to a gain of $127 million associated with extinguishment of debt. See Note 6. See Note 18—Income Taxes for information regarding our Income tax provision and effective tax rate. | | | | | | | | |
35 | ConocoPhillips 2022 Q1 10-Q | |
Summary Operating Statistics
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Average Net Production | | | | |
Crude oil (MBD) | | | | |
Consolidated operations | 903 | | 804 | | | |
Equity affiliates | 12 | | 14 | | | |
Total crude oil | 915 | | 818 | | | |
| | | | |
Natural gas liquids (MBD) | | | | |
Consolidated operations | 216 | | 105 | | | |
Equity affiliates | 7 | | 8 | | | |
Total natural gas liquids | 223 | | 113 | | | |
| | | | |
Bitumen (MBD) | 67 | | 70 | | | |
| | | | |
Natural gas (MMCFD) | | | | |
Consolidated operations | 2,126 | | 2,074 | | | |
Equity affiliates | 1,127 | | 1,081 | | | |
Total natural gas | 3,253 | | 3,155 | | | |
| | | | |
Total Production (MBOED) | 1,747 | | 1,527 | | | |
| | | | | | | | | | |
| Dollars Per Unit |
Average Sales Prices | | | | |
Crude oil (per bbl) | | | | |
Consolidated operations | $ | 94.79 | | 57.18 | | | |
Equity affiliates | 97.20 | | 59.73 | | | |
Total crude oil | 94.82 | | 57.22 | | | |
| | | | |
Natural gas liquids (per bbl) | | | | |
Consolidated operations | 40.95 | | 24.36 | | | |
Equity affiliates | 67.04 | | 48.89 | | | |
Total natural gas liquids | 41.80 | | 26.44 | | | |
| | | | |
Bitumen (per bbl) | 65.86 | | 30.78 | | | |
| | | | |
Natural gas (per MCF) | | | | |
Consolidated operations | 8.81 | | 4.89 | | | |
Equity affiliates | 8.86 | | 3.54 | | | |
Total natural gas | 8.83 | | 4.42 | | | |
| | | | | | | | | | |
| Millions of Dollars |
Exploration Expenses | | | | |
General administrative, geological and geophysical, lease rental, and other | $ | 62 | | 78 | | | |
Leasehold impairment | 6 | | — | | | |
Dry holes | 1 | | 6 | | | |
| $ | 69 | | 84 | | | |
| | | | | | | | |
| ConocoPhillips 2022 Q1 10-Q | 36 |
We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and NGLs on a worldwide basis. At March 31, 2022, our operations were producing in the U.S., Norway, Canada, Australia, China, Malaysia, Qatar and Libya.
Total production of 1,747 MBOED increased 220 MBOED or 14 percent in the first quarter of 2022, primarily due to:
•New wells online in the Lower 48, Norway, Malaysia and Alaska.
•Higher volumes in the Lower 48 due to our Shell Permian acquisition.
•Absence of the impacts from Winter Storm Uri in the Lower 48.
•Conversion of previously acquired Concho contracted volumes from a two-stream to a three-stream basis.
•Purchase of an additional 10 percent interest in APLNG.
Production increases in the first quarter of 2022 were partly offset due to:
•Normal field decline.
•Our Indonesia divestiture that closed in March 2022.
After adjusting for closed acquisitions and dispositions, the conversion of previously acquired Concho contracted volumes from a two-stream to a three-stream basis and 2021 Winter Storm Uri impacts, first-quarter 2022 production decreased by 36 MBOED, or 2 percent from the same period a year ago. This decrease was primarily due to downtime and seasonality impacts as new production from the Lower 48 and other development programs more than offset decline.
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37 | ConocoPhillips 2022 Q1 10-Q | |
Segment Results
Alaska
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income ($MM) | $ | 584 | | 159 | | | |
| | | | |
Average Net Production | | | | |
Crude oil (MBD) | 182 | | 190 | | | |
Natural gas liquids (MBD) | 18 | | 17 | | | |
Natural gas (MMCFD) | 35 | | 8 | | | |
Total Production (MBOED) | 206 | | 208 | | | |
| | | | |
Average Sales Prices | | | | |
Crude oil ($ per bbl) | $ | 95.54 | | 59.56 | | | |
Natural gas ($ per MCF) | 3.92 | | 2.23 | | | |
The Alaska segment primarily explores for, produces, transports and markets crude oil, NGLs and natural gas. As of March 31, 2022, Alaska contributed 18 percent of our consolidated liquids production and 1 percent of our consolidated natural gas production.
Net Income
Earnings from Alaska increased $425 million in the first quarter of 2022. Increases to earnings include:
•Higher realized crude oil prices.
Offsets to the earnings increase include:
•Higher taxes other than income taxes associated with higher realized crude oil prices.
Production
Average production decreased 2 MBOED in the first quarter of 2022. Decreases to production include:
•Normal field decline.
Offsets to the production decreases include:
•Improved performance in the Greater Prudhoe Area and Western North Slope assets.
•New wells online at our Western North Slope assets.
Alpine Gas Release
On March 4, a subsurface gas release was observed at Alpine drill site CD1 well house 5. Operations to control this release were completed on March 28. The well is scheduled to be fully plugged and abandoned in the second quarter to ensure full source remediation.
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| ConocoPhillips 2022 Q1 10-Q | 38 |
Lower 48
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income ($MM) | $ | 2,790 | | 468 | | | |
| | | | |
Average Net Production | | | | |
Crude oil (MBD) | 538 | | 416 | | | |
Natural gas liquids (MBD)* | 191 | | 79 | | | |
Natural gas (MMCFD)* | 1,426 | | 1,319 | | | |
Total Production (MBOED) | 967 | | 715 | | | |
| | | | |
Average Sales Prices | | | | |
Crude oil ($ per bbl)** | $ | 93.55 | | 55.68 | | | |
Natural gas liquids ($ per bbl) | 40.42 | | 23.99 | | | |
Natural gas ($ per MCF)** | 4.63 | | 4.56 | | | |
*Current period includes the conversion of previously acquired Concho two-stream contracts to three-stream initiated in the fourth quarter of 2021.
**Prior period average sales prices, including the impact of hedges settling per initial contract terms in the first quarter of 2021 assumed in our Concho acquisition from 2021, were $51.58 per barrel for crude oil and $4.35 per mcf for natural gas. As of March 31, 2021, we had settled all oil and gas hedging positions acquired from Concho. See Note 10. The Lower 48 segment consists of operations located in the U.S. Lower 48 states, as well as producing properties in the Gulf of Mexico. As of March 31, 2022, the Lower 48 contributed 65 percent of our consolidated liquids production and 67 percent of our consolidated natural gas production.
Net Income
Earnings from the Lower 48 increased $2,322 million in the first quarter of 2022. Increases to earnings include:
•Higher realized crude oil, natural gas and NGL prices.
•Higher sales volumes of crude oil, natural gas and NGLs.
Offsets to the earnings increase include:
•Higher DD&A expenses, production and operating expenses and taxes other than income taxes primarily due to higher production volumes. Partially offsetting the increase in DD&A expenses were lower rates from price-related reserve revisions.
Production
Average production increased 252 MBOED in the first quarter of 2022. Increases to production include:
•New wells online from our development programs in Permian, Eagle Ford and Bakken.
•Higher volumes due to our Shell Permian acquisition. See Note 3. •Conversion of previously acquired Concho contracted volumes from a two-stream to a three-stream basis.
•Absence of the impacts from Winter Storm Uri in the first quarter of 2021.
Offsets to the production increases include:
•Normal field decline.
Assets Held for Sale
In January 2022, we entered into an agreement to sell our interests in certain noncore assets for $440 million, before customary adjustments. This transaction closed in April 2022. Production from these assets averaged approximately 10 MBOED in the three-months ended March 31, 2022. See Note 3. | | | | | | | | |
39 | ConocoPhillips 2022 Q1 10-Q | |
Canada
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income ($MM) | $ | 291 | | 10 | | | |
| | | | |
Average Net Production | | | | |
Crude oil (MBD) | 6 | | 11 | | | |
Natural gas liquids (MBD) | 3 | | 4 | | | |
Bitumen (MBD) | 67 | | 70 | | | |
Natural gas (MMCFD) | 63 | | 91 | | | |
Total Production (MBOED) | 86 | | 100 | | | |
| | | | |
Average Sales Prices | | | | |
Crude oil ($ per bbl) | $ | 82.13 | | 47.41 | | | |
Natural gas liquids ($ per bbl) | 41.83 | | 25.32 | | | |
Bitumen ($ per bbl) | 65.86 | | 30.78 | | | |
Natural gas ($ per MCF) | 3.25 | | 2.37 | | | |
Average sales prices include unutilized transportation costs.
Our Canadian operations mainly consist of the Surmont oil sands development in Alberta and the liquids-rich Montney unconventional play in British Columbia. As of March 31, 2022, Canada contributed 1 percent of our consolidated liquids production and 3 percent of our consolidated natural gas production.
Net Income
Earnings from Canada increased $281 million in the first quarter of 2022. Increases to earnings include:
•Higher after-tax gains on disposition related to contingent payments of $176 million associated with the sale of certain assets to CVE in 2017, compared with $20 million in the same period of 2021. See Note 3. •Higher realized bitumen and crude oil prices.
Offsets to the earnings increase include:
•Lower sales volumes.
Production
Average production decreased 14 MBOED in the first quarter of 2022. Decreases to production include:
•Normal field decline.
•Higher royalty rates across the segment due to higher commodity prices and the exhaustion of well credits.
•Higher downtime and facility upsets at Surmont.
| | | | | | | | |
| ConocoPhillips 2022 Q1 10-Q | 40 |
Europe, Middle East and North Africa
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income ($MM) | $ | 412 | | 153 | | | |
| | | | |
Consolidated Operations | | | | |
Average Net Production | | | | |
Crude oil (MBD) | 113 | | 116 | | | |
Natural gas liquids (MBD) | 4 | | 5 | | | |
Natural gas (MMCFD) | 331 | | 309 | | | |
Total Production (MBOED) | 172 | | 173 | | | |
| | | | |
Average Sales Prices |
|
| | |
Crude oil ($ per bbl) | $ | 94.68 | | 57.75 | | | |
Natural gas liquids ($ per bbl) | 58.67 | | 34.70 | | | |
Natural gas ($ per MCF) | 29.18 | | 5.99 | | | |
The Europe, Middle East and North Africa segment consists of operations principally located in the Norwegian sector of the North Sea and the Norwegian Sea, Qatar, Libya and commercial operations in the U.K. As of March 31, 2022, our Europe, Middle East and North Africa operations contributed 10 percent of our consolidated liquids production and 16 percent of our consolidated natural gas production.
Net Income
Earnings from Europe, Middle East and North Africa increased by $259 million in the first quarter of 2022. Increases to earnings include:
•Higher realized natural gas, crude oil and NGL prices.
•Higher LNG sales prices, reflected in equity in earnings of affiliates.
Consolidated Production
Average consolidated production decreased 1 MBOED in the first quarter of 2022. Decreases to production include:
•Normal field decline.
•Facility capacity constraints in Norway.
Offsets to the production decreases include:
•New wells online and improved performance in Norway.
•Higher gas export in Norway.
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41 | ConocoPhillips 2022 Q1 10-Q | |
Asia Pacific
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income ($MM) | $ | 1,136 | | 317 | | | |
| | | | |
Consolidated Operations | | | | |
Average Net Production | | | | |
Crude oil (MBD) | 64 | | 71 | | | |
| | | | |
Natural gas (MMCFD) | 271 | | 347 | | | |
Total Production (MBOED) | 109 | | 129 | | | |
| | | | |
Average Sales Prices | | | | |
Crude oil ($ per bbl) | $ | 104.84 | | 60.36 | | | |
| | | | |
Natural gas ($ per MCF) | 7.01 | | 5.88 | | | |
The Asia Pacific segment has operations in China, Malaysia, Australia and commercial operations in Singapore and Japan. As of March 31, 2022, Asia Pacific contributed 6 percent of our consolidated liquids production and 13 percent of our consolidated natural gas production.
Net Income
Earnings from Asia Pacific increased $819 million in the first quarter of 2022. Increases to earnings include:
•Gain of $534 million associated with the divestiture of our Indonesia assets. See Note 3. •Higher LNG sales prices, reflected in equity in earnings of affiliates.
•Higher crude oil and natural gas prices.
Offsets to the earnings increase include:
•Absence of a $200 million gain on disposition related to a contingent payment from our Australia-West divestiture in 2020. See Note 9. •Lower sales volumes.
Consolidated Production
Average consolidated production decreased 20 MBOED in the first quarter of 2022. Decreases to production include:
•Divestiture of our Indonesia assets.
•Normal field decline.
Offsets to the production decreases include:
•Bohai Bay development activity in China.
•Increased production in Malaysia associated with development drilling at both Malikai and Siakap North-Petai.
Asset Acquisitions and Dispositions
In the first quarter of 2022, we completed the acquisition of an additional 10 percent interest in APLNG for approximately $1.4 billion after customary adjustments. This increases our ownership in APLNG to 47.5 percent. Also in the first quarter, we completed the divestiture of our subsidiaries that held our Indonesia assets and operations, and based on an effective date of January 1, 2021, we received proceeds of $731 million after customary adjustments. Production from the disposed assets averaged approximately 33 MBOED in the three-months ended March 31, 2022. See Note 3. | | | | | | | | |
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Other International
| | | | | | | | | | |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income (Loss) ($MM) | $ | — | | (4) | | | |
The Other International segment consists of exploration and appraisal activities in Colombia as well as contingencies associated with prior operations in other countries. As a result of recent acquisitions, we refocused our exploration program and announced our intent to pursue managed exits from certain areas.
Earnings from our Other International operations improved $4 million in the first quarter of 2022 compared with the first quarter of 2021.
Corporate and Other
| | | | | | | | | | |
| Millions of Dollars |
| Three Months Ended March 31, | |
| 2022 | 2021 | | |
Net Income (Loss) | | | | |
Net interest expense | $ | (218) | | (270) | | | |
Corporate general and administrative expenses | (79) | | (129) | | | |
Technology | 58 | | 41 | | | |
Other income | 785 | | 237 | | | |
| $ | 546 | | (121) | | | |
Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Net interest expense improved by $52 million in the three-month period of 2022 primarily due to absence of a prior year tax adjustment.
Corporate G&A expenses include compensation programs and staff costs. These expenses decreased by $50 million in the three-month period of 2022 primarily due to the absence of restructuring expenses associated with our 2021 acquisition of Concho Resources Inc. This was partially offset by mark-to-market adjustments associated with certain key employee 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 increased $17 million in the three-month period of 2022 primarily due to higher licensing revenues. See Note 16. 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, holding gains or losses on equity securities, and pension settlement expense. For the three-month period of 2022, “Other” increased $548 million compared with the same period in 2021. During the first quarter of 2022, the IRS closed the 2017 audit of our U.S. federal income tax return. As a result, we recognized a previously unrecognized $474 million federal tax benefit. Also in the first quarter, we recognized an after-tax gain of $62 million associated with the debt restructuring transactions. This was offset by a $101 million tax impact associated with the disposition of our Indonesia assets. See Note 18 for information about the tax benefit, Note 6 for information regarding debt and Note 3 for information on our Indonesia divestiture.
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43 | ConocoPhillips 2022 Q1 10-Q | |
| | | | | |
Capital Resources and Liquidity | |
Capital Resources and Liquidity
Financial Indicators
| | | | | | | | |
| Millions of Dollars |
| March 31 2022 | December 31 2021 |
Cash and cash equivalents | $ | 6,414 | | 5,028 | |
Short-term investments | 730 | | 446 | |
Total debt | 18,746 | | 19,934 | |
Total equity | 49,218 | | 45,406 | |
Percent of total debt to capital* | 28 | % | 31 | |
Percent of floating-rate debt to total debt | 4 | % | 4 | |
*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 quarter of 2022, the primary uses of our available cash were
$3.2 billion to support our ongoing capital expenditures and investments program, $1.4 billion to repurchase common stock, $1.1 billion net to reduce debt as part of refinancing transactions, and $0.9 billion to pay dividends, including the ordinary dividend and a VROC.
At March 31, 2022, we had cash and cash equivalents of $6.4 billion, short-term investments of $0.7 billion, and available borrowing capacity under our credit facility of $5.5 billion, totaling liquidity $12.6 billion. We believe current cash balances and cash generated by operating activities, together with access to external sources of funds as described below in the “Significant Changes in Capital” section, will be sufficient to meet our funding requirements in the near- and long-term, including our capital spending program, acquisitions, dividend payments and debt obligations.
Significant Changes in Capital
Operating Activities
Cash provided by operating activities was $5.1 billion for the first three months of 2022, compared with $2.1 billion for the corresponding period of 2021. The increase in cash provided by operating activities is primarily due to higher realized commodity prices, higher sales volumes mostly due to our acquisition of Shell Permian assets, and the absence of the 2021 settlement of all oil and gas hedging positions acquired from Concho. The increase in cash provided by operating activities was partly offset by the timing of Libya tax and royalty payments occurring in the first quarter of 2022.
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 production volumes, as well as product and location mix, impacts our cash flows. Future production is subject to numerous uncertainties, including, among others, 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; impacts of a global pandemic; weather-related disruptions; and the addition of proved reserves through exploratory success and their timely and cost-effective development. While we actively manage for 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. See the “Capital Expenditures and Investments” section, for information about our capital expenditures and investments.
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| | | | | |
Capital Resources and Liquidity | |
Investing Activities
For the first three months of 2022, we invested $3.2 billion in capital expenditures and investments; $1.4 billion of which was acquisition capital for the additional 10 percent interest in APLNG, the remainder being operating capital. Our 2022 operating plan capital expenditures are currently expected to be $7.8 billion versus the prior guidance of $7.2 billion, reflecting higher partner-operated spend in Lower 48 and inflationary impacts. This guidance excludes $1.4 billion of capital associated with the acquisition of an additional 10 percent interest in APLNG. Our 2021 capital expenditures and investments was $5.3 billion. See the “Capital Expenditures and Investments” section for information about our capital expenditures and investments.
In May 2021, we initiated the monetization of our investment in CVE common shares with the plan to direct proceeds toward our existing share repurchase program. We began disposing of our CVE shares in May 2021, and at March 31, 2022, we have fully divested of our investment for total proceeds, recognizing proceeds of $1.4 billion in the first quarter of 2022. Since inception, we have generated total proceeds of $2.5 billion. See Note 5. Other proceeds from dispositions include the sale of our subsidiaries that held our Indonesia assets and operations for approximately $731 million after customary adjustments and contingent payments associated with previous divestitures. See Note 3. In 2021, we announced a target to dispose of $4 to $5 billion in assets by year-end 2023. Through the first quarter of 2022, we have disposed of $1.7 billion in assets, generating approximately $1.0 billion in disposition proceeds. We received $0.8 billion in proceeds in the current period primarily from the sale of our Indonesia assets. The proceeds from these transactions will be used in accordance with the company’s priorities, including returns of capital to shareholders and reduction of total debt.
We invest in short-term investments as part of our cash investment strategy, the primary objective of which is to protect principal, maintain liquidity and provide yield and total returns; these investments include time deposits, commercial paper, as well as debt securities classified as available for sale. Funds for short-term needs to support our operating plan and provide resiliency to react to short-term price volatility are invested in highly liquid instruments with maturities within the year. Funds we consider available to maintain resiliency in longer term price downturns and to capture opportunities outside a given operating plan may be invested in instruments with maturities greater than one year.
Investing activities in the first three months of 2022 included net purchases of $263 million of investments. We purchased $215 million of short-term instruments and $48 million in long-term instruments. See Note 13. Financing Activities
In February 2022, we refinanced our revolving credit facility from a total aggregate principal amount of $6.0 billion to $5.5 billion with an expiration date of February 2027. The credit facility may be used for direct bank borrowings, the issuance of letters of credit totaling up to $500 million, or as support for our commercial paper program. With no commercial paper outstanding and no direct borrowings or letters of credit, we had access to $5.5 billion in available borrowing capacity under our revolving credit facility at March 31, 2022.
Our debt balance at March 31, 2022, was $18.7 billion compared with $19.9 billion at December 31, 2021. The current portion of debt, including payments for finance leases, is $1.2 billion. Payments will be made using current cash balances and cash generated by operations. In the first quarter of 2022, we executed a debt refinancing comprised of concurrent transactions including new debt issuances, a cash tender offer and debt exchange offers. Part of the cash consideration in the cash tender and debt exchange offers was satisfied with current cash balances. In aggregate, the transactions reduced the company's total debt by $1.2 billion. The refinancing facilitates our ability to achieve our previously announced $5 billion debt reduction target by the end of 2026 while also reducing the company's annual cash interest expense.
The current credit ratings on our long-term debt are:
•Fitch: “A” with a “stable” outlook
•S&P: “A-” with a “stable” outlook
•Moody’s: “A3” with a “positive” outlook
See Note 6 for additional information on debt, revolving credit facility and credit ratings. | | | | | | | | |
45 | ConocoPhillips 2022 Q1 10-Q | |
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Capital Resources and Liquidity | |
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 March 31, 2022 and December 31, 2021, we had direct bank letters of credit of $340 million and $337 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 SEC under which we have the ability to issue and sell an indeterminate number of various types of debt and equity securities.
Capital Requirements
For information about our capital expenditures and investments, see the “Capital Expenditures and Investments” section.
In 2021, as part of our objective to maintain a strong balance sheet, we announced our intention to reduce our total debt by $5 billion by 2026. In the first quarter of 2022, we executed a debt refinancing to facilitate the achievement of our debt reduction target while also lowering our annual cash interest expense and extending the weighted average maturity of our debt portfolio. See Note 6. In April 2022, we provided formal notice to holders of our 4.95% Notes due 2026 with principal of $1,250 million that we would retire this debt in full per the provisions in the bond indenture, with settlement scheduled for May 2022. Retirement of this bond will be sourced from cash and further accelerates progress towards our debt reduction target.
In December 2021, we announced our expected 2022 return of capital program and the initiation of a three-tier return of capital framework. The framework is structured to deliver a compelling, growing ordinary dividend and through-cycle share repurchases. In addition to the ordinary dividend and share repurchases, beginning in December 2021, the framework includes the addition of a discretionary VROC tier. The VROC will provide a flexible tool for meeting our commitment of returning greater than 30 percent of cash from operating activities during periods where commodity prices are meaningfully higher than our planning price range. Our expected 2022 total capital return is $10 billion, an increase of $2 billion from our previously announced target. The incremental amount will be distributed through share repurchases and VROC tiers.
In February 2022, we declared both an ordinary dividend and a second-quarter VROC. The ordinary dividend is $0.46 per share, and was paid on March 1, 2022 to stockholders of record at the close of business on February 14, 2022. The VROC dividend was $0.30 per share, and was paid on April 14, 2022 to shareholders of record on March 31, 2022. On
May 5, 2022, we declared both an ordinary dividend and a third-quarter VROC. The ordinary dividend is $0.46 per share, payable June 1, 2022 to shareholders of record on May 17, 2022. The VROC is $0.70 per share, payable July 15, 2022 to shareholders of record on June 28, 2022.
In late 2016, we initiated our current share repurchase program with Board of Director’s authorization of $25 billion of our common stock. As of March 31, 2022, share repurchases since the inception of our current program totaled 263 million shares and $15.6 billion. In the three months ended March 31, 2022, we repurchased 15.7 million shares for a cost of $1.4 billion. Repurchases are made at management’s discretion, at prevailing prices, subject to market conditions and other factors.
See Part I—Item 1A—Risk Factors – “Our ability to execute our capital return program is subject to certain considerations” in our 2021 Annual Report on Form 10-K.
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| ConocoPhillips 2022 Q1 10-Q | 46 |
| | | | | |
Capital Resources and Liquidity | |
Capital Expenditures and Investments
| | | | | | | | |
| Millions of Dollars |
| Three Months Ended Millions of Dollars |
| 2022 | 2021 |
Alaska | 253 | | 235 | |
Lower 48 | 1,062 | | 718 | |
Canada | 122 | | 33 | |
Europe, Middle East and North Africa | 172 | | 121 | |
Asia Pacific | 1,538 | | 76 | |
Other International | — | | 6 | |
Corporate and Other | 14 | | 11 | |
Capital expenditures and investments | 3,161 | | 1,200 | |
During the first three months of 2022, capital expenditures and investments supported key operating activities and acquisitions, primarily:
•Development activities in the Lower 48, primarily Permian, Eagle Ford and Bakken.
•Appraisal and development activities in Alaska related to the Western North Slope and development activities in the Greater Kuparuk Area.
•Appraisal and development activities in the Montney and optimization of oil sands development in Canada.
•Development and appraisal activities across assets in Norway.
•Continued development activities in China and Malaysia.
•Acquisition capital associated with 10 percent additional interest in APLNG.
Our 2022 operating plan capital expenditures is currently expected to be $7.8 billion compared with $5.3 billion in 2021.
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47 | ConocoPhillips 2022 Q1 10-Q | |
| | | | | |
Capital Resources and Liquidity | |
Guarantor Summarized Financial Information
We have various cross guarantees among our Obligor group; ConocoPhillips, ConocoPhillips Company and Burlington Resources LLC, with respect to publicly held debt securities. ConocoPhillips Company is 100 percent owned by ConocoPhillips. Burlington Resources LLC is 100 percent owned by ConocoPhillips Company. ConocoPhillips and/or ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of Burlington Resources LLC, with respect to its publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several.
The following tables present summarized financial information for the Obligor Group, as defined below:
•The Obligor Group will reflect guarantors and issuers of guaranteed securities consisting of ConocoPhillips, ConocoPhillips Company and Burlington Resources LLC.
•Consolidating adjustments for elimination of investments in and transactions between the collective guarantors and issuers of guaranteed securities are reflected in the balances of the summarized financial information.
•Non-Obligated Subsidiaries are excluded from the presentation.
Transactions and balances reflecting activity between the Obligors and Non-Obligated Subsidiaries are presented below:
Summarized Income Statement Data
| | | | | |
| Millions of Dollars |
| Three Months Ended March 31, 2022 |
Revenues and Other Income | $ | 12,910 | |
Income before income taxes* | 5,355 | |
| |
Net Income | 5,759 | |
*Includes approximately $2.1 billion of purchased commodities expense for transactions with Non-Obligated Subsidiaries.
Summarized Balance Sheet Data
| | | | | | | | |
| Millions of Dollars |
| March 31, 2022 | December 31, 2021 |
Current assets | $ | 9,255 | | 7,689 | |
Amounts due from Non-Obligated Subsidiaries, current | 2,510 | | 1,927 | |
Noncurrent assets | 73,688 | | 69,841 | |
Amounts due from Non-Obligated Subsidiaries, noncurrent | 7,600 | | 7,281 | |
Current liabilities | 8,759 | | 8,005 | |
Amounts due to Non-Obligated Subsidiaries, current | 4,390 | | 3,477 | |
Noncurrent liabilities | 31,523 | | 30,677 | |
Amounts due to Non-Obligated Subsidiaries, noncurrent | 15,033 | | 13,007 | |
Contingencies
We are subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. We accrue for losses associated with legal claims when such losses are considered probable and the amounts can be reasonably estimated. See Note 9. | | | | | | | | |
| ConocoPhillips 2022 Q1 10-Q | 48 |
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Capital Resources and Liquidity | |
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, claims of alleged environmental contamination and damages from historic operations, and climate change. 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 58–60 of our 2021 Annual Report on Form 10-K.
We occasionally receive requests for information or notices of potential liability from the EPA 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 are not owned by us, but allegedly contain waste attributable to our past operations. As of March 31, 2022, there were 15 sites around the U.S. in which we were identified as a potentially responsible party under CERCLA and comparable state laws.
At March 31, 2022, our balance sheet included a total environmental accrual of $184 million, compared with $187 million at December 31, 2021, for remediation activities in the U.S. and Canada. 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.
See Part I—Item 1A—Risk Factors – "We expect to continue to incur substantial capital expenditures and operating costs as a result of our compliance with existing and future environmental laws and regulations" in our 2021 Annual Report on Form 10-K and Note 9 for information on environmental litigation. 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. For 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 61–63 of our 2021 Annual Report on Form 10-K.
See Part 1—Item 1A—Risk Factors – "Existing and future laws, regulations and internal initiatives relating to global climate changes, such as limitations on GHG emissions may impact or limit our business plans, result in significant expenditures, promote alternative uses of energy or reduce demand for our products" in our 2021 Annual Report on Form 10-K and Note 9 for information on climate change litigation. | | | | | | | | |
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Capital Resources and Liquidity | |
Company Response to Climate-Related Risks
The company has responded by putting in place a Sustainable Development Risk Management Standard covering the assessment and registration of significant and high sustainable development risks based on their consequence and likelihood of occurrence. We have developed a company-wide Climate Change Action Plan with the goal of tracking mitigation activities for each climate-related risk included in the corporate Sustainable Development Risk Register.
The risks addressed in our Climate Change Action Plan fall into four broad categories:
•GHG-related legislation and regulation.
•GHG emissions management.
•Physical climate-related impacts.
•Climate-related disclosure and reporting.
Emissions are categorized into three different scopes. Gross operated and net equity Scope 1 and Scope 2 GHG emissions help us understand our climate transition risk.
•Scope 1 emissions are direct GHG emissions from sources that we control or in which we have ownership interest.
•Scope 2 emissions are indirect GHG emissions from the generation of purchased electricity or steam that we consume.
•Scope 3 emissions are indirect emissions from sources that we neither own nor control.
We announced in October 2020 the adoption of a Paris-aligned climate risk framework with the objective of implementing a coherent set of choices designed to facilitate the success of our existing exploration and production business through the energy transition. Given the uncertainties remaining about how the energy transition will evolve, the strategy aims to be robust across a range of potential future outcomes.
In 2022, we published our Plan for the Net-Zero Energy Transition (the ‘Plan’) focusing on meeting energy transition pathway demand, delivering competitive returns on and of capital and achieving our net-zero operational emissions ambitions.
Our Plan describes how we will:
•Build a resilient asset portfolio: Focus on low cost of supply and low greenhouse gas (GHG) intensity resources.
•Commit to near, medium, and long-term targets: Reducing operational (Scope 1 and 2) emissions over which we have ownership and control with an ambition to become a net-zero company for Scope 1 and 2 emissions by 2050. These targets include:
•Strengthening our previously announced operational GHG emissions intensity reduction target to 40-50% by 2030 and expanding it to apply to both a gross operated and net equity basis.
•Meeting a further 10% reduction target for methane emissions intensity by 2025 from our 2019 baseline.
•Aiming to achieve zero routine flaring by 2025.
•Address end-use emissions: Advocate for a well-designed, economy-wide price on carbon that would help shift consumer demand from high-carbon to low-carbon energy sources.
•Pursue transition opportunities: Evaluate potential investments in emerging energy transition and low-carbon technologies.
•In 2021, we established a multi-disciplinary Low-Carbon Technologies organization to identify and evaluate business opportunities that address end-use emissions and early-stage low-carbon technology opportunities that would leverage our existing expertise and adjacencies.
•In the 2022 capital budget, we allocated $200 million to advance energy transition activities, the majority of which will address Scope 1 and 2 emissions reduction projects across our global operations, with the rest allocated for early-stage low-carbon technology opportunities.
•Track the energy transition: Utilize a comprehensive scenario planning process to calibrate and understand alternative energy transition pathways.
•Maintain capital discipline: Use scenario analyses and a fully-burdened cost of supply, including an appropriate cost of carbon, as the primary basis for capital allocation.
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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, objectives of management for future operations and the anticipated impact of the Shell Enterprise LLC (Shell) transaction on the company’s business and future financial and operating results 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,” “believe,” “budget,” “continue,” “could,” “effort,” “estimate,” “expect,” “forecast,” “intend,” “goal,” “guidance,” “may,” “objective,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “target,” “will,” “would” 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 and uncertainties, 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 as a result of any ongoing military conflict, including the conflict between Russia and Ukraine, and the global response to such conflict, or from a public health crisis or from the imposition or lifting of crude oil production quotas or other actions that might be imposed by OPEC 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.
•The potential for insufficient liquidity or other factors, such as those described herein, that could impact our ability to repurchase shares and declare and pay dividends, whether fixed or variable.
•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, inflationary pressures 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.
•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.
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•Potential disruption or interruption of our operations due to accidents, extraordinary weather events, supply chain disruptions, 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, including any sanctions imposed as a result of any ongoing military conflict, including the conflict between Russia and Ukraine.
•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, including litigation directly or indirectly related to the transaction with Concho Resources Inc., 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, including as a result of any ongoing military conflict, including the conflict between Russia and Ukraine.
•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 or investment sentiment.
•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.
•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 Venezuela or PDVSA.
•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 that we will be unable to retain and hire key personnel.
•Unanticipated integration issues relating to the acquisition of assets from Shell, such as potential disruptions of our ongoing business and higher than anticipated integration costs.
•Uncertainty as to the long-term value of our common stock.
•The diversion of management time on integration-related matters.
•The factors generally described in Part I—Item 1A in our 2021 Annual Report on Form 10-K and any additional risks described in our other filings with the SEC.
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| ConocoPhillips 2022 Q1 10-Q | 52 |