31
During the three-and nine-month periods ended September 30, 2020,our valuation allowance increased by
$
33
million and $
264
million, respectively.The change to our U.S. valuation allowancefor both periods
relates primarily to the fair value measurement of ourCenovus Energy common shares and our expectationof
the tax impact related to incremental capitalgains and losses.
Note 22—Announced Acquisition of ConchoResources Inc.
On
October 19, 2020
, we announced a definitive agreement (theMerger Agreement) to acquire
Concho
Resources Inc.
(Concho) in an all-stock transaction valuedat $
9.7
billion based upon closing share prices on
October 16, 2020.Under the terms of the transaction,which has been unanimously approved by the boardof
directors of each company, each share of Concho common stock willbe exchanged for a fixed ratio of
1.46
shares of ConocoPhillips common stock.We will also assume the debt balances of Concho, which were
approximately $
3.9
billion at September 30, 2020.
ConocoPhillips and Concho shareholders, regulatory clearance, and other customary closing conditions. If the
Merger Agreement is terminated under certain circumstances, 32Millionswe may be required to pay a termination fee of DollarsThree Months Ended March 31, 2020Statement of Cash FlowsConocoPhillipsConocoPhillipsCompanyBurlingtonResources LLCAll OtherSubsidiariesConsolidatingAdjustmentsTotalConsolidatedCash Flows From Operating ActivitiesNet Cash Provided by (Used in) Operating Activities(85)450(277)252,401412,105Cash Flows From Investing ActivitiesCapital expenditures and investments-(197)(14)(1,452)14(1,649)Working capital changes associated with investing activities-(9)-90-81Proceeds from asset dispositions-140-409-549Purchases of investments-(1,207)-272-(935)Long-term advances/loans—related parties-(10)--10-Collection of advances/loans—related parties-71-66(71)66Intercompany cash management1,225(48)(11)(1,166)--Other---(44)-(44)Net Cash Provided by (Used in) Investing Activities1,225(1,260)(25)(1,825)(47)(1,932)Cash Flows From Financing ActivitiesIssuance of debt---10(10)-Repayment of debt---(95)71(24)Issuance of company common stock43---(41)2Repurchase of company common stock(726)----(726)Dividends paid(458)----(458)Other1--(11)(14)(24)Net Cash Used in Financing Activities(1,140)--(96)6(1,230)Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restrictedmillion, including if the proposed Merger is terminated Cashbecause our board of directors has changed its-recommendation in respect of the stockholderproposal relating to the Merger.In addition, we may be required--(122)-(122)Net Changeto reimburse Concho for its expenses in Cash, Cash Equivalents and Restricted Cashan amount-(1,537)-358-(1,179)Cash, cash equivalents and restricted cash at beginning of period-3,443-1,919-5,362Cash, Cash Equivalents and Restricted Cash at End of Period-142.51,906-2,277-4,183Statement of Cash FlowsThree Months Ended March 31, 2019Cash Flows From Operating ActivitiesNet Cash Provided by (Used in) Operating Activities$(62)(117)(16)3,448(359)2,894Cash Flows From Investing ActivitiesCapital expenditures and investments-(208)-(1,429)-(1,637)Working capital changes associated with investing activitiesmillion if the Merger Agreement is-18-89-107Proceeds from asset dispositions-142---142Purchasesterminated because of short-term investments---(1)-(1)Long-term advances/loans—related partiesa failure of our stockholders -(19)--19-Collection of advances/loans—related parties-69-82(89)62Intercompany cash management1,16320516(1,384)--Other-(150)---(150)Net Cash Provided by (Used in) Investing Activities1,1635716(2,643)(70)(1,477)Cash Flows From Financing ActivitiesIssuance of debt---19(19)-Repayment of debt-(20)-(88)89(19)Issuance of company common stock(1)---(37)(38)Repurchase of company common stock(752)----(752)Dividends paid(350)--(396)396(350)Other2--(16)-(14)Net Cash Used in Financing Activities(1,101)(20)-(481)429(1,173)Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restrictedto approve the stockholder proposal. CashSee Item 1A. “Risk-Factors” for further discussion of risks relatedto the Concho acquisition.
$
equal to $
32
Item 2.MANAGEMENT’S DISCUSSION ANDANALYSIS 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’splans, strategies, objectives, expectationsand 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 page54. 57.
The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss)
attributable to ConocoPhillips.
BUSINESS ENVIRONMENT AND EXECUTIVE OVERVIEW
ConocoPhillips is an independent E&P company with operations and activities in 1715 countries. Our diverse,
low cost of supply portfolio includes resource-rich unconventional plays in North America; conventional
assets in North America, Europe Asia and Australia;Asia; LNG LNG developments; oil sands assets in Canada;and an
inventory of
global conventional and unconventional exploration exploration prospects. At March 31,September 30, 2020, we employed
approximately 10,4009,800 people worldwide and had total assets of $65$63 billion.
Announced Acquisition of Concho Resources Inc.and Paris-AlignedClimate Risk Strategy
On October 19, 2020, we announced entry intoa definitive agreement to acquire ConchoResources Inc.
(Concho) in an all-stock transaction valued at $9.7billion based upon closing share priceson October 16,
2020.Under the terms of the transaction, each outstandingshare of common stock of Concho willbe
converted into the right to receive 1.46 shares of ConocoPhillipscommon stock.We will also assume the debt
balances of Concho, which were approximately $3.9billion at September 30, 2020.The combined companies
are expected to capture $500 million of annualcost and capital savings by 2022, whichwould be sourced from
lower general and administrative costs and a reductionin our future global new ventures explorationprogram.
The transaction is anticipated to close in the firstquarter of 2021, subject to the approvalof both
ConocoPhillips and Concho shareholders, regulatoryclearance, and the satisfaction or waiver ofother
customary closing conditions.See Item 1A. “Risk Factors” for furtherdiscussion of risks related to the
Concho acquisition.
We also announced the adoption of a Paris-aligned climate risk framework as part ofour continued
commitment to ESG excellence.This comprehensive climate risk strategyshould enable us to sustainably
meet global energy demand while delivering competitivereturns through the energy transition.We have set a
target to reduce our gross operated (scope 1 and 2) emissionsintensity by 35 to 45 percent from 2016 levelsby
2030, with an ambition to achieve net zero by2050 for operated emissions.We are advocating for reduction
of scope 3 end-use emissions intensity throughour support for a U.S. carbon price and reaffirmedour
commitment to the Climate Leadership Council.We have joined the WorldBank Flaring Initiative to work
towards zero routine flaring of gas by 2030.We are committed to take ESG leadership to the next level as the
first U.S.-based oil and gas company to adopt a Paris-alignedclimate risk strategy.
33
Overview
The energy landscape changed dramatically in the first2020 with quarter of 2020 with simultaneous demand andsupply
shocks that drove
the industry into a severe downturn. The demand shock was triggered by SARS-CoV-2, orCOVID-19,COVID-19, which was declared a flexibility, if warranted.cash flows for those volumes in the future. As we enteredIn the second quarter, predictionswe curtailed production by an estimated 225 MBOED,with 145 MBOED of COVID-19 driven globaltheForecasts estimated that demand for the monthsCanada. The remainder of April and May could be 10 to 35 MMBODthe second-quarter curtailments below normal.were primarily in Malaysia. Other industryBased on these forecasts, OPEC plus nations heldan emergency meeting,operators also cut production and development plans and on April 12as we progressed through the second quarter, stay-at-th
global pandemicand caused unprecedented socialand economic
consequences. Mitigation efforts to stop the
spread of this contagiousdisease included stay-at-homeorders
and business closures that caused sharp
contractionsin economic activity worldwide. The supply shock was
triggered by disagreementsbetween
OPEC andRussia, beginning in early March, which resulted in significant
supply coming onto the marketand
an oil pricewar. These dual demand and supply shocks caused oil oil prices
to collapse as we exited the first
quarter.
As we entered the second quarter, predictions of COVID-19 driven globaloil demand losses intensified, with
forecasts of unprecedented demand declines.Based on these forecasts, OPEC plus nations heldan emergency
meeting, and in April they announced a coordinatedproduction cut that was unprecedented in both its
magnitude and duration.The OPEC plus agreement spans from May 2020until April 2022, with the volume
of production cuts easing over time.Additionally, non-OPEC plus countries, including the U.S., Canada,
Brazil and other G-20 countries, announced organic reductionsto production through the release of drilling
rigs, frac crews, normal field decline and curtailments.Despite these planned production decreases, thesupply
cuts were not timely enough to overcome significantdemand decline.Futures prices for April WTI closed
under $20 a barrel for the first time since2001, followed by May WTI settling below zeroon the day before
futures contracts expiry, as holders of May futures contracts for Brent and WTIstruggled to exiting March near $20exit positions and avoid taking
physical delivery.As storage constraints approached, spot prices inApril for certain North American
landlocked grades of crude oil were in the single digitsor even negative for particularly remote or low-grade
crudes, while waterborne priced crudes such as Brentsold at a relative advantage.The extreme volatility
experienced in the first half of the year settled downin the third quarter, with crude oil prices stabilizing
around $40 per barrel, a level not seenbarrel.since 2002. our response to the sudden change in business environment. Onshare repurchases would be reduced to $250 millionframework for evaluating and implementing economic per quarter from a plan of $750 million per quarter,production curtailments considering the weakness inoilstarting inprices during the second quarter of 2020.2020, which resulted These two actions represented a reduction toin taking an additional significant step of voluntarilybillion in 2020.operated North American assets. At that time,Due to our strong balance sheet,we stated we would continuewere in an advantaged position to monitor the marketforgo some production and exercise additionalcash flow in anticipation of receiving higher
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 $5 billion, short-term investments of $3 billion, and an undrawn credit facility of $6 billion,
totaling approximately $14 billion in available liquidity. Additionally, we had several entity and asset sales
agreements in place, which generated $1.3 billionin proceeds from dispositions during the firstnine-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 theNotes to Consolidated Financial Statements.This relative
advantage allowed us to be measured in our response in
In March, 18, 2020, we announced an initial set of actionsto address the downturn and followed up with additional
actions in April.The combined announcements reflected a reductionin
our 2020 operating plan capital of $700 million,$2.3
billion, a reduction to our operating costs of or about ten percent.$600 million and suspension of our share repurchaseprogram.
These actions will decrease uses of cash by approximately$5 billion in 2020. We also announced that our plannedestablished a
curtailing production, predominantly from cash outlays of $2.2
curtailments from the Lower 48, 40 MBOED from oil demand losses intensified.Alaska and 30 MBOED from our Surmont operation in
home restrictions eased, which partially restored they announced alost demand, and WTI and Brent prices exited thesecond
quarter around $40 per barrel.Based on our economic criteria, we began restoringproduction from voluntary
curtailments in July, and with oil stabilizing around $40 per barrel, we endedour curtailment program during
the third quarter.Curtailments in the third quarter averaged approximately90 MBOED, with 65 MBOED
attributable to the Lower 48 and 15 MBOED toSurmont.
34
approximately $382 million,subject to customary post-closing adjustments.As part of the agreement, we
assumed approximately $31 million in both its magnitude financingobligations for associated partially owned infrastructure.This
acquisition consisted primarily of undeveloped propertiesand duration.included140,000 net acres in the liquids-rich
Inga Fireweed asset Montney zone, which isdirectly adjacent to our existing Montney position.We now have
a Montney acreage position of 295,000 net acreswith a 100 percent working interest.
On September 30, 2020, we announced our intentto resume share repurchases; however, we recently
announced the pending acquisition of Concho andour suspension of share repurchases untilafter the
transaction closes.We ended the third quarter with over $12 billion of liquidity, comprised of $2.5 billion in
cash and cash equivalents, $4.0 billion in short-terminvestments, and available borrowings under our credit
facility of $5.7 billion.On October 9, 2020, we announced an increaseto our quarterly dividend from 42 cents
per share to 43 cents per share. The OPEC plus
Our expectation is that commodity prices for April WTI closed under $20will a barrel for the first time since 2001, followedby May WTI
remain cyclical and volatile, and a successful business strategy
in the exploration andproductionE&P industry must
be resilient inlower price environments, whileat the same time retaining retaining upside during
periods of higher prices. While we are
not impervious to current marketconditions, our decisiveactions 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 portfolio, resource base,
and strengthening our balance sheet haveput usin a strong
relative position compared to our independent E&P independent
prices have fallen significantly,been volatile, we
remain committed to our core value proposition principles, namely, to
focus on financial returns, maintain a
strong balancesheet, deliver compelling returnsof capital, and maintain disciplined capital and maintain
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, spaces, such as offshore platforms, and the North Slope of Alaska,
Curtis Island in Australia, western Canada and Slope of
asked to perform a self-assessment for symptoms questionnaires
more restrictive measures traveling to and workingon location. Staffing levels in
certain operating locations
have been reduced tominimize health risk exposure and free up bed space for
staff are workinghave continued to work successfully remotely, with only business essentialemployees accessing
offices around the world.world carefullydesigning and
executing a flexible, phased reentry, following national, state and local guidelines. These actions mitigation measures
have thus far been effective at protecting employees’reducing business operation disruptions.Workforce health and safety remains
warranted.
The marketing and supply chain side of our business havehas also adapted in response to COVID-19. Our
commercial organization is managingmanaged transportation commitments consideringduring our voluntary curtailment measures.program. Our
Our supply chain function is proactively working with with vendors to ensure the continuity of our business
operations, monitor distressed service and materials business operations.
providers, capture deflation opportunities, and pursue 35cost 1,2891,067 MBOED generated cash fromprovided by operating activities activities of $2.1$0.9 billion. We re-invested $1.6invested $1.1 billion back into2019, and the declaration of force majeure in Libya. 2019. AdjustedAdjusting for estimated curtailments of approximately90production increased 52MBOED, a decrease of 46 MBOED or four percent.4 percentcompared with the third quarter of 2019.This decrease was Financially, low prices resulted in over $2 billion of after-tax non-cash charges in the first quarter of 2020.
reduction efforts.
Operationally, we remain focused on safely executing the business. In the firstthird quarter of 2020, productionof
the business in the form of capital expenditures, repurchasedincluding $0.70.4 billion of shares,acquisition capital, and paid
dividends to
shareholders of $0.5 billion. Production decreased 72299 MBOED or five22 percent in the firstthird quarter
of 2020,
compared to the first quarter of 2019, primarilydue to the disposition of our U.K. assets inthe third quarter of
MBOED, closed acquisitions and pending dispositions and Libya, third quarter 2020 productionwould have been 1,155
primarily due to normal field decline, partly offset by newwells online in the Lower 48, Canada and China.
Production from Libya averaged 1 MBOED as itremained in force majeure during the thirdquarter.Force
majeure was lifted in October and plans to resumeproduction and exports are ongoing.
35
-
1
2
3
4
20
40
60
80
Q3'18
Q4'18
Q1'19
Q2'19
Q3'19
Q4'19
Q1'20
Q2'20
Q3'20
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 world energy markets and
commodity prices are global economic health, supply or demand disruptions or fears thereof caused caused by civil
unrest, global pandemic orpandemics, 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 and operational priorities that
underpin our value proposition.
Our earnings and operating cash flows generally correlate with industry price levels for crude oil oil and natural gas, which
following graph depicts
the trend in average benchmarkprices for WTIcrude oil, Brent crude oil and Henry Hub natural and Henry
Brent crude oil prices averaged $50.31$43.00 per barrel in the firstthird quarter of 2020,a decrease of 2031 percent
compared with $63.20$61.94 per barrel in the firstthird quarter of 2019. WTI at Cushing crude oil prices averaged $46.06 per
third quarter of 2019. Oil prices decreasedare lower due to simultaneous demandhigh inventory levels and supply shockscontractions in the first quarter ofeconomic activity
Henry Hub natural gas prices averaged $1.95$1.98 per MMBTU in the firstthird quarter of 2020, a decrease of 38 percent11
percent compared with $3.15$2.23 per MMBTU in the firstthird quarter of 2019. Current period Henry Hub prices are
depressed due to high storage levels and seasonallyweak demand.
Our realized bitumen price averaged $5.90$15.87 per barrel in the firstthird quarter of 2020, a decrease of 8251 percent
compared with $33.15$32.54 per barrel in the firstthird quarter of 2019. The decrease in the firstthird quarter of 2020 was
driven by a lower blend price for Surmont sales, largely attributedto a weaker WTI pricesprice and a weakeningnarrower
spread between the local market and U.S. sales WCS differential to WTI at Hardisty.points, which challenged both pipeline and rail We continue to optimize
addition, we incurred unutilized transportation solutions and implementation
Our total average realized price was $38.81$30.94 per BOE in the firstthird quarter of 2020, compared with with $50.59$47.07 per
BOE in the firstthird quarter of 2019, due to simultaneous2019.