31
During the three- and six-monthnine-month periods ended JuneSeptember 30, 2020, our valuation allowance decreasedincreased by
$
million, for the same periods of 2019.respectively. The change to our U.S. valuation allowance for both periods relates
relates primarily to the fair value measurement of our Cenovus Cenovus Energy common shares and our expectationof
the tax
impact related to incremental capitalgains and losses.
October 19, 2020 ConocoPhillips received
, we announced a definitive agreement (theMerger Agreement) to acquire
Concho
Resources Inc.
(Concho) in an all-stock transaction valuedat $
October 16, 2020.Under the terms of earnings andthe 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 $
ConocoPhillips and Concho shareholders,regulatory clearance, and other customaryclosing conditions.If the
Merger Agreement is terminated under certain circumstances,we may be required to pay a termination fee of
$
recommendation in respect of the stockholderproposal relating to the Merger.In addition, we may be required
to reimburse Concho for its expenses in an amountequal to $
terminated because of
32
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,”
“estimate,” “believe,” “budget,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,”
“seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,”
“outlook,” “effort,” “target” and similar expressions identify forward-looking statements. The company does
not undertake to update, revise or correct any of the forward-looking information unless required to do so
under the federal securities laws. Readers are cautioned that such forward-looking statements should be read
in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE
PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995,” beginning on page 59.57.
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 1615 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 assets in Canada; and an inventory of
global conventional and unconventional exploration prospects. At JuneSeptember 30, 2020, we employed approximately
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 2020 with simultaneous demand and supply shocks that drove
the industry into a severe downturn. The demand shock was triggered by COVID-19, which was declared a
global pandemic and caused unprecedented social and economic consequences. Mitigation efforts to stop the
spread of this contagious disease included stay-at-home orders and business closures that caused sharp
contractions in economic activity worldwide. The supply shock was triggered by disagreements between
OPEC and Russia, beginning in early March, which March, which resulted in significant supply comingonto the marketand
an oil price war. These dual demand and supply shocks caused oil prices to collapse as we exited the first
quarter.
As we entered the second quarter, predictions of COVID-19 driven global oil demand losses intensified, with
forecasts of unprecedented demand declines. Based on these forecasts, OPEC plus nations held an emergency
meeting, and in April they announced a coordinated production cut that was unprecedented in both its
magnitude and duration. The OPEC plus countries agreed to cut productionagreement spans from May 2020 by 9.7 MMBOD in May and June,
physical delivery. As storage constraints approached, spot prices in April for certain North American
landlocked grades of crude oil were in the single digits or even negative for particularly remote or low-grade
crudes, while waterborne priced crudes such as Brent sold at a relative advantage.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.
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 billion in proceeds from dispositions during the first six-monthsnine-months of
2020. For more information about the sales of our Australia-West and non-core Lower 48 assets, see Note 4—
Asset Acquisitions and Dispositions in the Notes to Consolidated Financial Statements. This relative
advantage allowed us to be measured in our response to the sudden change in business environment.
In March, we announced an initial set of actions to address the downturn and followed up with additional
actions in April. The combined announcements reflected a reduction in our 2020 operating plan capital of $2.3
billion, a reduction to our operating costs of $600 million and suspension of our share repurchase program.
These actions will decrease uses of cash by overapproximately $5 billion in 2020. We also established a
framework for
evaluating and implementing economic curtailments production curtailments considering the weakness inoil
prices during thesecond
quarter of 2020, which resulted which resulted in taking an additional significantstep of voluntarily
curtailing production, predominantly fromfrom operated North American assets. Due to our strong balance sheet, While we remain cautious regarding the recentoil market recovery and continue to monitorglobal marketconditions and COVID-19 hotspots around the world,basedBased on our economic criteria, we restoredbegan restoring curtailedproduction from voluntaryproductioncurtailments in Alaska during July.July, and with oil stabilizing around $40 per barrel, we ended We also brought some curtailed volumesour curtailment program duringexpect 15 MBOED to be fully restored in September. At Surmont, we began restoring production inJuly, though the ramp
we were in an advantagedposition to
forgo some productionand cash flow in anticipationof receiving higher
cash flows for those volumesin the
future.
In the second quarter, we curtailed production by an estimated 225 MBOED, with 145 MBOED of the
curtailments from the Lower 48, 40 MBOED from Alaska and 30 MBOED from our Surmont operation in
Canada. The remainder of the second-quarter curtailments were primarily in Malaysia. Other industry
operators also cut production and development plans and as we progressed through the second quarter, stay-at-
home restrictions eased, which partially restored lost demand, and WTI and Brent prices exited the second
quarter around $40 per barrel.
the third quarter.Curtailments in the third quarter averaged approximately90 MBOED, with 65 MBOED
attributable to the Lower 48 back online and
Surmont.
In JulyAugust 2020, we signed a definitivecompleted the agreement to acquire additional Montney acreage for cash consideration of
approximately $375$382 million, before customary adjustments, plussubject to customary post-closing adjustments.As part of the assumption ofagreement, we
assumed approximately $30$31 million
in financingobligations for associated partiallyowned infrastructure. This
acquisition consistsconsisted primarily of
undeveloped properties and includes 140,000 and included140,000 net acres in the liquids-rich
Inga Fireweed asset Montney zone, which is Montney zone,
percent working interest. The transaction is subject to regulatory
On September 30, 2020, we announced our intentto resume share repurchases; however, we recently
announced the pending acquisition of Concho and is expected to close inour 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
facility of $5.7 billion.On October 9, 2020, withwe announced an effective dateincreaseto our quarterly dividend from 42 cents
per share to 43 cents per share.The dividend is payable on December 1, 2020to shareholders of July 1,record as of
October 19, 2020.
Our expectation is that commodity prices will remain cyclical and volatile, and a successful business strategy
in the E&P industry must be resilient in lower price environments, at the same time retaining upside during
periods of higher prices. While we are not impervious to current market conditions, our decisive actions over
the last several years of focusing on free cash flow generation, high-grading our asset base, lowering the cost
of supply of our investment resource base, portfolio,and strengtheningour balance sheet haveput us in a strong relative
relative position compared to our independent E&Ppeers. Although recent prices have been extremely volatile,we
remain committed to our core value proposition principles, namely, to focus on financial returns, maintain a
strong balance sheet, deliver compelling returns of capital, and maintain disciplined capital investments.
Our workforce and operations have adjusted to mitigate the impacts of the COVID-19 global pandemic. We
have operations in remote areas with confined spaces, such as offshore platforms, the North Slope of Alaska,
Curtis Island in Australia, western Canada and Indonesia, where viruses could rapidly spread. Personnel are
asked to perform a self-assessment for symptoms of illness each day and, when appropriate, are subject to
more restrictive measures traveling to and working on location. Staffing levels in certain operating locations
have been reduced to minimize health risk exposure and increase social distancing. A large portion of our office
executing a flexible, phased reentry, following national, state and local guidelines. These mitigation measures
have thus far been effective at reducing business operationdisruptions.Workforce health and
safety remains
the overriding driver for our actionsand we havedemonstrated our abilityto adapt to localhealth and reducing business operation disruptions. of 9811,067 MBOED generated cash fromprovided by operating activities activities of $0.2$0.9 billion. We invested $0.9$1.1 billion into thequarter of 2020, compared to the secondthird quarter of 2019. Adjusting for estimated curtailments of 2019,approximately90
conditions as
warranted. These mitigation measures have thus far been effectiveat protecting employees’
The marketing and supply chain side of our business has 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 ourbusiness operations,
operations, monitor distressed service and materials providers, providers, capture deflation opportunities, and pursue cost reductioncost
reduction efforts.
Operationally, we remain focused on safely executing the business. In the secondthird quarter of 2020, productionof
the business in the form of capital expenditures, andincluding $0.4 billion of acquisition capital, and paid
dividends to shareholders of $0.5 billion. Production
decreased 351299 MBOED or 2622 percentin the secondthird quarter
MBOED, closed acquisitions and dispositionsand Libya, third quarter 2020 productionwould have been 1,155
MBOED, a decrease of 46 MBOED or 4 percentcompared with the third quarter of 2019.This decrease was
primarily due to curtailments and the divestiturenormal field decline, partly offset by new of our U.K. assets in the third quarter of 2019, thedivestiture
majeure was lifted in October and adjusting for
exports are ongoing.
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 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 and operational priorities that
underpin our value proposition.
Our earnings and operating cash flows generally correlate with price levels for crude oil and natural gas, which
are subject to factors external to the company and over which we have no control. The following graph depicts
the trend in average benchmark prices for WTI crude oil, Brent crude oil and Henry Hub natural gas:
Brent crude oil prices averaged $29.20$43.00 per barrel in the secondthird quarter of 2020, a decrease of 5831 percent
compared with $68.82$61.94 per barrel in the second quarterthird quarter of 2019. WTI at Cushing crude oil prices averaged
$27.8540.93 per barrel in the secondthird quarter of 2020, a decrease of 5327 percent compared with $59.80 per $56.44 per barrel in the
due to COVID-19 restrictions.
Henry Hub natural gas prices averaged $1.71$1.98 per MMBTU in the secondthird quarter of 2020, a decrease of 3511
percent compared with $2.64$2.23 per MMBTU in the secondthird quarter of 2019. Current period Henry Hub prices decreasedare
depressed due to
high storage levels and weak domestic and LNG feedstockseasonally weak demand.
Our realized bitumen price averaged negative $23.11$15.87 per barrel in the secondthird quarter of 2020, a decrease of 51percent
third quarter of 2020 was
driven by a lower blend pricefor Surmont sales, largely attributedto a weakeningweaker WTI
price and a narrowing narrower
spread between the local marketand U.S. salespoints, which challenged both pipeline and rail both pipeline
negatively impacted our realizedbitumen price.
Our total average realized price was $23.09$30.94 per BOE BOE in the secondthird quarter of 2020, compared with with $50.50$47.07 per
BOE in the secondthird quarter of 2019.
36
Key Operating and Financial Summary
Significant items during the secondthird quarter of 2020 of 2020and recent announcements included the following:
●
Produced 1,066 MBOED excluding Libya in the thirdquarter;curtailed approximately 90 MBOED.
●
Distributed $0.5 billion in dividends and announcedan increase to the quarterly dividend.
●
Ended the quarter with cash, cash equivalents and restricted cash totaling $3.2 $2.8billion andshort-term
investments of $4.0 billion.
●
framework to achieve net zerooperated emissions by 2050.
●
Completed the Australia-West divestiture, generating $0.8 billion in proceeds.
billion.
●
Announced agreement to acquire Concho in anall-stock transaction for 1.46 shares of ConocoPhillips
common stock per share of Concho.
Outlook
Capital and Production
In February 2020, we announced 2020 operating plan capital of $6.5 billion to $6.7 billion. In response to the
year 2020 operating plan capital is now expectedto be $4.3 billion.This does not include approximately $0.5
liquids rich area of the Montney for approximately $0.4 billion.Montney.
2020 production of 1,115 to 1,125 MBOED. in
Depreciation, Depletion and Amortization
DD&A expense was $1.2$4.0 billion in the second quarternine-month period of 2020. Proved reserves estimates were updatedin the
depressed levels, our reserve estimates may our reserve
to determine DD&A expense
on our unit-of-productionmethod properties.
Impairments
In October 2020, we announced an agreement to acquireConcho, thereby significantly expanding our
unconventional acreage position in the Permian Basin.The planned addition of unproved propertiesin the
Delaware and Midland Basins would reduce ourneed for resource additions through organic exploration,and
we expect to decrease capital allocated to our globalnew ventures exploration program going forward.An
evaluation of our exploration program is ongoingand may result in future impairments.This transaction is
anticipated to close in the firstquarter of 2021, subject to the approval of both ConocoPhillipsand Concho
shareholders, regulatory clearance, and other customaryclosing conditions.