facts and
circumstances surrounding each typeof indemnity. In cases where the indemnification term is is
indefinite, we
will reverse the liability when we have information information the liability is essentially relieved or amortize relieved or
over an appropriate timeperiod as the fair valueof our indemnificationexposure
declines. Although it is
reasonably possible future payments may exceed may exceed amounts recorded, due to the nature ofof the indemnifications,
it is not possible to makea reasonable estimateof the maximumpotential amount of futurefuture payments. For
additional information about environmental liabilities, liabilities, see Note 12—9—Contingencies and
Commitments.
14
Note 12—9—Contingencies and Commitments
A number of lawsuits involving a variety of claims arising in the ordinary course of business have been filed
against ConocoPhillips. We also may be required to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various active
and inactive sites. We regularly assess the need for accounting recognition or disclosure of these
contingencies. In the case of all known contingencies (other than those related to income taxes), we accrue a
liability when the loss is probable and the amount is reasonably estimable. If a range of amounts can be
reasonably estimated and no amount within the range is a better estimate than any other amount, then the low
end of the range is accrued. We do not reduce these liabilities for potential insurance or third-party recoveries.
We accrue receivables for insurance or other third-party recoveries when applicable. With respect to income
tax-related contingencies, we use a cumulative probability-weighted loss accrual in cases where sustaining a
tax position is less than certain.
Based on currently available information, we believe it is remote that future costs related to known contingent
liability exposures will exceed current accruals by an amount that would have a material adverse impact on our
consolidated financial statements. As we learn new facts concerning contingencies, we reassess our position
both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future
changes include contingent liabilities recorded for environmental remediation, tax and legal matters.
Estimated future environmental remediation costs are subject to change due to such factors as the uncertain
magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and
the determination of our liability in proportion to that of other responsible parties. Estimated future costs
related to tax and legal matters are subject to change as events evolve and as additional information becomes
available during the administrative and litigation processes.
Environmental
We are subject to international, federal, state and local environmental laws and regulations. When we prepare
our consolidated financial statements, we record accruals for environmental liabilities based on management’s
best estimates, using all information that is available at the time. We measure estimates and base liabilities on
currently available facts, existing technology, and presently enacted laws and and regulations, taking into account
stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior
experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by
the U.S. EPA or other organizations. We consider unasserted claims in our determination of environmental
liabilities, and we accrue them in the period they are are both probable and reasonably estimable.
Although liability of those potentially responsible for environmental remediation costs is generally joint and
several for federal sites and frequently so for other sites, we are usually only one of many companies cited at a
particular site. Due to the joint and several liabilities, we could be responsible for all cleanup costs relatedto
any site at which we have been designated as a potentially responsible party. We have been successful to date
in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially
responsible are still under investigation by theEPA or the agency concerned. Prior to actual cleanup, those
potentially responsible normally assess the site conditions, apportion responsibility and determine the
appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability.
Where it appears that other potentially responsible parties may be financially unable to bear their proportional
share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly.
As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these
environmental obligations are mitigated by indemnifications made by others for our benefit, and some of the
indemnifications are subject to dollar limits and time limits.
We are currently participating in environmental assessments and cleanups at numerous federal Superfund and
comparable state and international sites. After an assessment of environmental exposures for cleanup and
other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business
combination, which we record on a discounted basis) basis) for planned investigation and remediation activities activities for
sites where it is probable future costs will be incurred and these costs can be reasonably estimated. We have
not reduced these accruals for possible insurance recoveries.
15
At September 30, 2020,March 31, 2021, our consolidated balance sheet included included a total environmental accrual of $
compared with $
We
expect to
incur a substantial amount of these expenditureswithin the next 30 years.
involved in
additional environmental assessments, cleanups cleanups and proceedings.
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 on certain federal, state and privately owned properties properties and
claims of alleged environmental contamination from historic operations. We will continue to defend ourselves
vigorously in these matters.
Our legal organization applies its knowledge, experience and professional judgment to the specific
characteristics of our cases, employing a litigation management process to manage and monitor the legal
proceedings against us. Our process facilitates the early evaluation and quantification 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.
We have contingent liabilities resulting from throughput agreements with pipeline and processing companies
not associated with financing arrangements. Under these agreements, we may be required to provide any such
company with additional funds through advances and penalties for fees related to throughput capacity not
utilized. In addition, at September 30, 2020,March 31, 2021, we had performance obligations secured by letters of credit of
$
In 2007, ConocoPhillips was unable to reach agreement with respect to the empresa mixta structure mandated
by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company,
Petróleos de Venezuela, S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’
interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In
response to this expropriation, ConocoPhillips initiated international arbitration on November 2, 2007, 2007, with the
ICSID. On September 3, 2013, an ICSID arbitration tribunal held that Venezuela unlawfully expropriated
ConocoPhillips’ significant oil investments in June 2007. On January 17, 2017, the Tribunal reconfirmed the
decision that the expropriation was unlawful. In March 2019, the Tribunal unanimously ordered the
government of Venezuela to pay ConocoPhillips approximately $
8.7
government’s unlawful expropriation of the company’s investments in Venezuela in 2007. ConocoPhillips has
filed a request for recognition of the award in several jurisdictions. On August 29, 2019, the ICSID Tribunal
issued a decision rectifying the award and reducing it by approximately $
227
at $
8.5
automatically stayed enforcement of the award. Annulment proceedings are underway.
In 2014, ConocoPhillips filed a separate and independent arbitration under the rules of the ICC against
PDVSA under the contracts that had established the Petrozuata and Hamaca projects. The ICC Tribunal issued
an award in April 2018, finding that PDVSA owed ConocoPhillips ConocoPhillips approximately $
2
agreements in connection with the expropriation of the projects and other pre-expropriation fiscal measures.
In
August 2018, ConocoPhillips entered into a settlement with PDVSA to recover the full amount of this ICC
award, plus interest through the payment period, including initial payments totaling approximately $500
To date, ConocoPhillips has received
$754 million.Per the settlement, PDVSA recognized the ICC awardas a judgment in various
a result, ConocoPhillips has resumed legal enforcement actions. ConocoPhillips has ensured that the
including those related to any applicable sanctions imposed by the U.S. against Venezuela.
In 2016, ConocoPhillips filed a separate and independent arbitration under the rules of the ICC against
PDVSA under the contracts that had established the Corocoro Project.project. On August 2, 2019, the ICC Tribunal
awarded ConocoPhillips approximately $
33
ConocoPhillips is seeking recognition and enforcement of the award in various jurisdictions. ConocoPhillips
has ensured that all the actions related to the award meet all appropriate U.S. regulatory requirements,
including those related to any applicable sanctions imposed by the U.S. against Venezuela.
The Office of Natural Resources Revenue (ONRR) has conducted conducted audits of ConocoPhillips’payment of
royalties on federal lands and has issued multiple orders to pay additional royalties to the federal government.
ConocoPhillips has appealed theseand the ONRR entered intoa settlement agreement on March 23, 2021,to resolve the dispute.
All orders and stronglyassociated appeals have been withdrawn objects to the ONRR claims.The appeals are pending
with the Interior Board of Land Appeals (IBLA),except for one order that is the subject ofa lawsuit
Beginning in 2017, cities, counties, governmentsgovernmental and other entitiesin several states in the U.S. have filed lawsuits against filedoil
alleged climate change impacts. Additional lawsuits with similar allegations are
expected to be filed. The
amounts claimed by plaintiffs are unspecified and the legal the legal and factual issues
involved in these cases are
unprecedented. ConocoPhillips believes these lawsuits are factually factually and legally
meritless and are an
inappropriate vehicle to addressthe challenges associatedwith climatechange and will
vigorously defend
against such lawsuits.
Several Louisiana parishes and the State of Louisiana have filed
43
Coastal Resources Management Act (SLCRMA) against oil and gas companies, including ConocoPhillips,
seeking compensatory damages for contamination and erosion of the Louisiana coastline allegedly caused by
historical oil and gas operations. ConocoPhillips entities are defendants in
22
vigorously defend against them. Because Plaintiffs’ SLCRMA theories are unprecedented, there is uncertainty
about these claims (both as to scope and damages) and any potential financial impact on the company.
In 2016, ConocoPhillips, through its subsidiary, The Louisiana Land and ExplorationCompany LLC,
Outer Continental Shelf (OCS) Lease P-0166, including ConocoPhillips, to decommission the lease facilities,
including two offshore platforms located near Carpinteria, California. This order was sent after the current
owner of OCS Lease P-0166 relinquished the lease lease and abandoned the lease platformsand facilities. PhillipsBSEE’s
order to ConocoPhillips is premised on its connectionto Phillips Petroleum Company, a legacy company of
ConocoPhillips, which held a historical
25
sold its interest approximately
30 years
ago.ConocoPhillips has not had any connectionto the operation or
production on this lease since that time.ConocoPhillips is challenging this order.
17
Note 13—10—Derivative and Financial Instruments
We use futures, forwards, swaps and options in various markets to meet our customer needs, needs, capture market
opportunities, and manage foreign exchange currency risk.
Commodity Derivative Instruments
Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and NGLs.
Commodity derivative instruments are held at fair value on our consolidated balance sheet. Where these
balances have the right of setoff, they are presented on a a net basis. Related cash flows are recorded as
operating activities on our consolidated statement of cash flows. On our consolidated income statement, gains
for trading. Gains and losses related to contracts that meet and are designated
with the NPNS exception are
recognized upon settlement. We generally apply this exception to eligible crude contracts and certain gas
contracts. We do not electapply hedge accounting for our commodity derivatives.
The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the
line items where they appear on our consolidated balance sheet:
Millions of Dollars
December 31
Assets
Prepaid expenses and other current assets
$
Other assets
Liabilities
Other accruals
Other liabilities and deferred credits
The gains (losses) from commodity derivatives incurred, and the line items where they appear on on our
consolidated income statement were:
Millions of Dollars
2020
Sales and other operating revenues
$
Other income (loss)
Purchased commodities
On January 15, 2021, we assumed financial derivativeinstruments consisting of oil and natural gasswaps
following the acquisition of Concho.At the acquisition date, the financial derivativeinstruments acquired
were recognized at fair value as a net liabilityof $
456
million with settlement dates under the contracts
through December 31, 2022.During the first quarter, we recognized a before-tax loss of $
173
million on
Concho derivative contracts with settlement dateson or before March 31, 2021, and an additional$
132
million
loss related to acquired Concho derivative contractswith settlement dates subsequent to March 31,2021, for a
total before-tax loss of $
305
million.This loss associated with the acquired financial instrumentsis recorded
within the “Sales and other operating revenues”line on our consolidated income statement.
18
At March 31, 2021, all oil and natural gas derivativefinancial instruments acquired from Conchowere
contractually settled.In connection with the settlement, we paid $
692
million in the first quarter of 2021 and
will pay the remaining $
69
million in the second quarter of 2021.Cash settlements related to the Concho
derivative contractsare presented within “Cash Flows FromOperating Activities” on our consolidated cash
flow statement.
The table below summarizes our material net exposures resulting resulting from outstanding commodity derivative derivative
contracts:
Open Position
Long/(Short)
December 31
Commodity
Natural gas and power (billions of(billion cubic feet equivalent)
Financial Instruments
We invest in financial instruments with maturities based on our cash forecasts for the various accounts and
currency pools we manage. The types of financial instruments in which we currently invest include:
●
Time deposits: Interest bearing deposits placed with financial institutions for a predetermined amount
of time.
●
Demand deposits: Interest bearing deposits placed with financial institutions. Deposited funds can be
withdrawn without notice.
●
Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or
government agency purchased at a discount to mature at par.
●
U.S. government or government agency obligations: Securities issued by the U.S. government or or U.S.
government agencies.
●
Foreign government obligations: Securities issued by foreign governments.
●
Corporate bonds: Unsecured debt securities issued by corporations.
●
Asset-backed securities: Collateralized debt securities.
The following investments are carried on our consolidated balance sheet at cost, plus accrued interest:interest and the
table reflects remaining maturities at March31, 2021 and December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash
Equivalents
Short-Term Investments
Investments and Long-
March 31
December 31
December 31
2021
2020
2020
2021
2020
Cash
$
Demand Deposits
Time Deposits
1 to 90 days
0
0
$
2
1
19
The following investments in debt securities classified as available for sale are carried atfair value on ourconsolidated
consolidated balance sheet at fair value:March 31, 2021and December 31, 2020:
Millions of Dollars
Carrying Amount
Cash and Cash Equivalents
Short-Term
Investments
Investments and Long-Term
Receivables
December 31
December 31
December 31
2020
2021
2020
2021
2020
Major Security Type
Corporate Bonds
$
0
0
Commercial Paper
U.S. Government Obligations
0
0
13
U.S. Government Agency
Obligations
17
Foreign Government Obligations
0
0
2
Asset-backed Securities
0
0
$
Cash and Cash Equivalents and Short-Term Investments have remaining maturitieswithin one year.
Investments and Long-Term Receivables have remaining maturitiesgreater than one year through eight years.
The following table summarizes the amortized cost basis and fair value of investments in debt securities
classified as available for sale:
Millions of Dollars
Amortized
Cost Basis
Fair Value
December 31
2021
2020
2021
2020
Major Security Type
Corporate bonds
$
Commercial paper
U.S. government obligations
U.S. government agency obligations
17
Foreign government obligations
2
Asset-backed securities
$
As of September 30, 2020March 31, 2021 and December 31, 2019,2020, total unrealized losses for debt securities classified as available
recorded were negligible.
For the three-and nine-monththree-month periods ended September 30,March 31, 2021 and March 31, 2020, proceeds fromsales and redemptions of
of investments in debt securities classifiedas availablefor sale were $
respectively.
Gross realized gains and losses included in earnings earnings from those sales and redemptions were
negligible. The
cost of securities sold and redeemed is determined using the specific identification method.
20
Credit Risk
Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents,
short-term investments, long-term investments in debt securities, OTC derivative contracts and trade
receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper,
government money market funds, government debt securities, time deposits with major international banks and
financial institutions, and high-quality corporate bonds.bonds,and foreign government obligations. Our long-term
investments in debt securitiesare
placed in high-qualitycorporate bonds, U.S. government and government
agency obligations, asset-backed securities, and government agency obligations, foreigntime deposits with major internationalbanks and financial
The credit risk from our OTC derivative contracts, such as forwards, swaps and options, derives from the
counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit
limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant
nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because
these trades are cleared primarily with an exchange clearinghouse clearinghouse and subject to mandatory margin
requirements until
settled; however, we are exposed to the creditrisk of those exchangebrokers for receivables
arising from daily
margin cash calls, as well as for cashdeposited to meetinitial margin requirements.
Our trade receivables result primarily from our petroleumoil and gas operations and reflect a broad national and
international customer base, which limits our exposure to concentrations of credit risk. The majority of these
receivables have payment terms of
30 days
or less, or less, and we continually monitor this exposure and and the
creditworthiness of the counterparties.Our collateral requirements will depend on thecreditworthiness of our
counterparties. At our option, we may require collateral to limit the exposure to loss
including, letters of
credit, prepayments and suretybonds, as well asmaster netting arrangementsto mitigate
credit risk withcounterparties that both buy fromand sell tous, as these agreements permitthe amounts owed
to others to be offset against amountsdue to us.
Certain of our derivative instruments contain provisions that require us to post collateral if the derivative
exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts
with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts
typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert
to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also
permit us to post letters of credit as collateral, such as transactions administered through the New York
Mercantile Exchange.
The aggregate fair value of all derivative instruments with such credit risk-related contingent features that were
in a liability position on September 30, 2020at March 31, 2021 and December December 31, 2019,2020, was $
respectively. For these instruments,
0
required to post $
Note 14—11—Fair ValueMeasurement
We carry a portion of our assets and liabilities at fair value that are measured at the reporting date using an exit price
the quality of valuation inputs underthe followinghierarchy:
●
Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities.
●
Level 2: Inputs other than quoted prices that are directly or indirectly observable.
●
Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities.
21
The classification hierarchy of an asset or liability is based on the lowest level of input significant to its fair
value. Those
that are initially classified as Level 3 are subsequently are subsequently reported as Level 2 when the fair value derived fair valuefrom
corroborated market data is no longer available. There were no material transfers into or out of Level 3 during
Recurring Fair Value Measurement
Financial assets and liabilities reported at fair value on a recurring basis primarily include our investment in
Cenovus Energy common shares, our investments in debt securities classified as available for sale, and
commodity derivatives.
●
Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are
valued using unadjusted prices available from the underlying exchange. Level 1 also includes our
investment in common shares of Cenovus Energy, which is valued using quotes for shares on the NYSE,
and our investments in U.S. government obligations classifiedas available for sale debt securities,which
are valued using exchange prices.
●
Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and
sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service
companies that are all corroborated by marketdata. Level 2 also includes our investments indebt
securities classified as available for sale including investments in corporate bonds, commercial paper,
asset-backed securities, U.S. government agency obligations and foreign government obligations that are
valued using pricing provided by brokers or pricing service companies that are corroborated with with market
data.
●
Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale
contracts where a significant portion of fair value is calculated from underlying market data that is not
readily available. The derived value uses industry standard methodologies methodologies that may consider the historical
relationships among various commodities, modeled market prices, time value, volatility factorsand other
relevant economic measures. The use of these inputs results in management’s best estimate of fair value.
Level 3 activity was not material for all periods periods presented.
The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e.liabilities (i.e.,
unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring
basis):
Millions of Dollars
December 31, 20192020
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets
Investment in Cenovus Energy
$
0
0
0
0
Investments in debt securities
-
552
17
501
0
Commodity derivatives
Total assets
$
Liabilities
Commodity derivatives
$
89
Total liabilities
$
89
22
The following table summarizes those commodity derivative balances subject to the right of setoff as
presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for
multiple derivative instruments executed with the same counterparty in our financial statements when a legal
right of setoff exists.
Millions of Dollars
Amounts Subject to Right of Setoff
Gross
Amounts Not
Gross
Net
Amounts
Subject to
Gross
Amounts
Amounts
Cash
Net
Recognized
Right of Setoff
Amounts
Offset
Presented
Collateral
Amounts
Assets
$
278
5
273
197
76
1
75
Liabilities
254
2
252
197
55
1
54
December 31, 2020
Assets
$
2
253
157
96
10
86
Liabilities
220
1
4
At September 30, 2020March 31, 2021 and December 31, 2019,2020, we we did not present any amounts gross on ourconsolidated
balance sheet where we had the right of setoff.
Reported Fair Values of Financial Instruments
We used the following methods and assumptions to estimate the fair value of financial instruments:
●
Cash and cash equivalents and short-term investments: The carrying amount reported on the balance
sheet approximates fair value. For those investments classified as available for sale debt securities,
the carrying amount reported on the balance sheet is fair value.
●
Accounts and notes receivable (including long-term and related parties): The carrying amount
reported on the balance sheet approximates fair value. The valuation technique and methods used to
estimate the fair value of the current portion of fixed-rate related party loans is consistent with with Loans
and advances—related parties.
●
Investment in Cenovus Energy: See Note 6—5—Investment in in Cenovus Energy for a discussion of the
carrying value and fair value of our investment in Cenovus Energy common shares.
●
Investments in debt securities classified as available for sale: The fair value of investments in debt
securities categorized as Level 1 in the fair value hierarchy is measured using exchangeprices. The
fair value of investments in debt securities categorized as Level 2 in the fair value hierarchy is
measured using pricing provided by brokers or pricing pricing service companies that are corroborated with
market data. See Note 13—10—Derivatives and Financial Instruments, for additional information.
●
Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair
value. The fair value of fixed-rate loan activity is measured using market observable data and is
categorized as Level 2 in the fair value hierarchy. See Note 5—4—Investments, Loans and Long-Term
Receivables, for additional information.
●
Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts
payable and floating-rate debt reported on the balance sheet approximates fair value.
●
Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a
pricing service that is corroborated by market data; data; therefore, these liabilities are categorizedas Level
2 in the fair value hierarchy.
●
Commercial paper: The carrying amount of our commercial paper instruments approximates fair value
and is reported on the balance sheet as short-term debt.See Note 9—Debt, for additional information.
The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of
setoff exists for commodity derivatives):
Millions of Dollars
Carrying Amount
Fair Value
December 31
December 31
2020
2020
Financial assets
Investment in Cenovus Energy
$
Commodity derivatives
Investments in debt securities
Financial liabilities
Total debt, excluding finance leases
Commodity derivatives
Note 15—12—Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss in the equity section of our consolidated balance sheet included:
Millions of Dollars
Defined Benefit
Net
Unrealized
Gain (Loss) on
Securities
Foreign
Currency
Translation
Accumulated
Other
Comprehensive
Loss
December 31, 20192020
$
Other comprehensive income (loss)
$
The following table summarizes reclassifications out of accumulated other comprehensive loss and into net
income (loss):
Millions of Dollars
Three Months Ended
2020
Defined benefit plans
$
The above amounts are included in the computation of net periodic benefitcost and are presented net of tax expense of $
$
million for the three-month periods ended September 30,March 31, 2021 and 2020, and September 30, 2019, respectively, and $
information.
24
Note 13—Cash Flow Information
Millions of Dollars
Three Months Ended
March 31
2021
2020
Cash Payments
Interest
$
233
200
Income taxes
53
465
Net Sales (Purchases) of Investments
Short-term investments purchased
$
(3,432)
(3,423)
Short-term investments sold
2,966
2,606
Investments and Long-term receivables purchased
(60)
(143)
Investments and Long-term receivables sold
27
25
$
(499)
(935)
We assumed various financial derivative instruments in the Concho acquisition.In the first quarter of 2021,
we settled all financial derivative contractsassumed in the Concho acquisition, includingaccelerating
settlement of contracts with settlementdates after March 31, 2021.Cash settlements related to financial
derivatives of $
692
million are presented within “Cash Flows FromOperating Activities” on our consolidated
cash flow statement.See Note 10—Derivative and Financial Instruments,for additional information.
For the first quarter of 2021, included within“Cash Flows From Investing Activities”is $
382
million of cash
received through the addition of cash balances acquiredfrom Concho.We had additional non-cash increases
in assets and liabilities associated with the acquisitionof Concho as consideration for the transactionwas
entirely in ConocoPhillips common stock.See Note 3—Acquisitions and Dispositionsfor additional
information on the acquisition.
25
Note 16—Cash Flow Information
Pension and Postretirement Plans
The components of net periodic benefit cost ofall defined benefit plans for the first quarterare presented in
the following table:
Millions of Dollars
Pension Benefits
Other Benefits
2020
2020
U.S.
U.S.
Components of Net Periodic Benefit Cost
Three Months Ended September 30March 31
Service cost
$
21
15
21
14
1
Interest cost
13
20
17
2
Expected return on plan assets
(24)
(30)
(21)
(37)
0
0
Amortization of prior service credit
0
0
0
0
(9)
(8)
Recognized net actuarial loss
15
8
12
6
0
0
Settlements
2
0
1
(1)
0
0
12
0
0
0
0
Special termination benefits
9
0
0
0
0
0
Net periodic benefit cost
$
The components of net periodic benefit cost, other than the service cost component, are included in in the “Other
expenses” line item on our consolidated income statement.
March 31, 2021, would result in a significantreduction of future service of active employeesin the U.S.
qualified pension plan, a U.S. nonqualifiedsupplemental retirement plan and the U.S.other postretirement
benefit plans.As a result, we recognized an increase in the benefitobligation as a curtailment loss of
$
conjunction with the recognition of curtailmentlosses, the fair market values of pension plan assetswere
updated, and the pension benefit obligationsof the U.S. qualified pension, a U.S. nonqualifiedsupplemental
retirement plan and the U.S. other postretirementbenefit plans were remeasured.At March 31, 2021, the net
pension liability decreased by $
increase to other comprehensive income.
The relevant discount rates are summarized inthe following table:
March 31
December 31
Discount rate
2021
2020
U.S. qualified pension plan
%
3.00
2.40
U.S. nonqualified pension plan
2.40
1.85
U.S. postretirement benefit plans and $
2.20
26
The following table summarizes our severance accrualactivity for the three-month period ended SeptemberMarch 30, 2020, lump-sum benefit payments exceeded31,
2021:
Millions of Dollars
$
24
Accruals
101
Benefit payments
(33)
Balance at March 31, 2021
$
92
Accruals in the first quarter of 2021 represent As a result, we recognized a
the pension plan assets were updated and the pensiontotal remaining balance at March 31, 2021, benefit obligation of the plan wasremeasured as of
Acquisitions and Dispositions, for additionalinformation on the discount
Note 18—15—Related Party Transactions
Our related parties primarily include equity method investments and certain trusts for the benefit of
employees.For disclosures on trusts for the benefitof employees, see Note 17—Employee BenefitPlans.
Significant transactions with our equity affiliateswere:
Millions of Dollars
Three Months Ended
2020
Operating revenues and other income
$
Operating expenses and selling, general and administrative162619434715(3)(5)(10)(2)
expenses
Net interest income*(income) expense*
(1)
*We paid interest to, or received interest from, from, various affiliates. See Note 5—4—Investments, Loans and Long-Term Receivables, for additional
information on loans to affiliated companies.
Note 19—16—Sales and Other Operating Revenues
Revenue from Contracts with Customers
The following table provides further disaggregation of our consolidated sales and other operating revenues:
Millions of Dollars
2020
Revenue from contracts with customers
$
Revenue from contracts outside the scope of ASCTopic 606
Physical contracts meeting the definition of a derivative
Financial derivative contracts
Consolidated sales and other operating revenues
$
27
Revenues from contracts outside the scope of ASC Topic 606 relate primarily to physical gas contracts at
market prices which qualify as derivatives accounted for under ASC Topic 815, “Derivatives and Hedging,”
and for which we have not elected NPNS. There is no significant difference in contractual terms or the policy
for recognition of revenue from these contracts and those within the scope of ASC Topic 606. The following
disaggregation of revenues is provided in conjunction with Note 20—17—Segment Disclosures and Related
Information:
Millions of Dollars
2020
Revenue from Outside the Scope of ASC Topic 606
by Segment
Lower 48
$
Canada
Europe, Middle East and North Africa
Physical contracts meeting the definition of a derivative
$
Millions of Dollars
2020
Revenue from Outside the Scope of ASC Topic 606
by Product
Crude oil
$
Natural gas
Other
Physical contracts meeting the definition of a derivative
$
Practical Expedients
Typically, ourcommoditysalescontractsarelessthan 12monthsinduration;however,incertainspecific
cases they may extendlonger, which maybe out to theend of fieldlife.
We have long-term commodity sales
contracts which use prevailing market prices at the time of delivery, and under these contracts, the market-
based variable consideration for each performance obligation (i.e., delivery of commodity) is allocated to each
wholly unsatisfied performance obligation within the contract.
we have applied the practical
expedient allowed in ASC Topic 606 and do not disclose the aggregate amount of the transaction price
allocated to performance obligations or when we expect to recognize revenues that are unsatisfied (or partially
unsatisfied) as of the end of the reporting period.
Receivables and Contract Liabilities
Receivables from Contracts with Customers
At September 30, 2020,March 31, 2021, the “Accounts and notes receivable” line on our consolidated balance sheet includesincludedtrade
contracts with customers within the scope of ASC Topic 606 and those that are outside the scope of ASC
Topic 606.
We typically receive payment within 30 days or less (depending on the terms of the invoice) once
delivery is made.
contracts at market prices for which we do not elect NPNS and are therefore accounted for as a derivative
under ASC Topic 815. There is little distinction in the nature of the customer or credit quality of trade
receivables associated with gas sold under contracts for which NPNS has not been elected compared towith trade
receivables where NPNS has been elected.
28
Contract Liabilities from Contracts with Customers
We have entered into contractual arrangements where we license proprietary technologyto customers related
to the optimization process for operating LNGplants.The agreements typically provide for negotiated
payments to be made at stated milestones.
The payments are not directly related to our performance under the
contract and are recorded as deferred revenue to be recognized as revenue when the customer can utilize and
benefit from their right to use the license.
Payments are received in installments over the construction period.
Millions of Dollars
Contract Liabilities
At December 31, 20192020
$
Contractual payments received
Revenue recognized
(62)
At September 30, 2020March 31, 2021
$
Amounts Recognized in the Consolidated Balance Balance Sheet at September 30, 2020March 31, 2021
Current liabilities
$
We expect to recognize the contract liabilities as of September 30, 2020,at March 31, 2021, as revenue during 2021 andin the first quarter of 2022.
Note 20—17—Segment Disclosures and Related Information
We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and NGLs on a a worldwide
basis. We manage our operations through
6
region: Alaska; Lower 48; Canada; Europe, Middle East and North Africa; Asia PacificPacific; and Other
International.
Corporate and Other represents income and costs not directly associated with an operating segment, such as
most interest expense,income and expense; premiums on earlyretirement of debt; corporate overhead and certain
Corporate assets include all cash and cash equivalents and short-term investments.
We evaluate performance and allocate resources based on net income (loss) attributable to ConocoPhillips.
Intersegment sales are at prices that approximate market.
Effective with the third quarter of 2020, we have restructured our our segments to align with changes to our internal
to the
Europe and North Africa segment. The segments have been renamed the Asia Pacific segment and the Europe,
On January 15, 2021, we completed our acquisitionof Concho, an independent oil and priorgas exploration comparativeand
are included in our Lower 48 segment for the currentperiod.Certain transaction and restructuring costs
associated with the Concho acquisition are includedin our Corporate and Other segment.See Note 3—
Acquisitions and Dispositions for additionalinformation related to our Concho acquisition.
29
Analysis of Results by Operating Segment
Millions of Dollars
Three Months Ended
2020
Sales and Other Operating Revenues
Alaska
$
3,103
Intersegment eliminations
Lower 48
513
Intersegment eliminations
Canada
Europe, Middle East and North Africa
Asia Pacific
Other International
1
Corporate and Other
Consolidated sales and other operating revenues
$
Sales and Other Operating Revenues by Geographic Geographic Location
(1)
United States
$
Australia
0
Canada
China
Indonesia
Libya
Malaysia
Norway
United Kingdom
Other foreign countries
2
Worldwide consolidated
$
Sales and Other Operating Revenues byProduct
Crude oil
$
Natural gas
Natural gas liquids
Other
(2)
Consolidated sales and other operating revenues by by product
$
(1) Sales and other operating revenues are attributable to countries based on the location ofthe selling operation.
(2) Includes LNG and bitumen.
30
Millions of Dollars
Three Months Ended
2020
Net Income (Loss) Attributable to ConocoPhillips
Alaska
$
Lower 48
Canada
Europe, Middle East and North Africa
Asia Pacific
Other International
Corporate and Other
Consolidated net income (loss) attributable to ConocoPhillips
$
Millions of Dollars
December 31
Total Assets
Alaska
$
Lower 48
Canada
Europe, Middle East and North Africa
Asia Pacific
Other International
Corporate and Other
Consolidated total assets
$
Note 21—18—Income Taxes
Our effective tax rate for the first quarter of 2021was
9.5
percent for the
first quarter of 2020.The increase in the three-month periods ended Septembereffective tax rate for the first 30, 2020 and 2019.Bothquarter of 2021 is primarily due to a
decrease in our U.S. valuation allowancedriven by the fair value measurement of our Cenovus
Our effective tax ratesrate for the nine-month periods endedfirst quarter of 2021 is September 30, 2020 and 2019 were
interest deductions from the exchange of debtacquired from Concho offsetting U.S. foreign source revenue
that would otherwise have been offset by foreign tax benefitcredits.See Note 6—Debt,for additional information on
the debt exchange.
During the first quarter of 2021, our valuationallowance decreased by $
the tax
impact related to incremental capitalgains and losses.
Concho acquisition.Additionally, our reserve for unrecognized tax benefits increased by the boardof
to reimbursetax credit carryovers acquired from Concho for its expenses in an amountthat equalwe do not expect to $
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’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,believe,” “budget,” “continue,”“could, “could,” “intend,” “may,” “plan,” “potential,” “predict,”
“outlook,intend,” “effort,“may,” “target”“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 57.55.
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 anthe world’s largest independent E&P company with operations with operations and activities in 15 countries.
Our diverse,
low cost of supply portfolio includes resource-rich resource-rich unconventional plays in North America; conventionalAmerica;
conventional assets in North America, Europeand Asia; LNGdevelopments; oil sands assets in Canada;and an
inventory of
global conventional and unconventional exploration exploration prospects. At September 30, 2020,Headquartered in Houston, Texas,
at March 31, 2021, we employed approximatelyapproximately 9,80010,300 people worldwide and had total total assets of $63$84 billion. AnnouncedCompleted Acquisition of Concho Resources Inc.and Paris-AlignedClimate Risk Strategy (Concho)and gas exploration and production companywith operations across New Mexico and West Texas.The2020.Under the terms of the transaction,common stock were exchanged for each outstanding share of Concho common stock, of Concho willresulting bein the issuanceconverted into the right to receive 1.46of approximately 286 million shares of ConocoPhillips common stock. We will also assume theassumed $3.9 billion inlower generalTransaction and administrative costs and a reductionrestructuring activities associated with combining the operations of ConocoPhillips andThe transaction is anticipatedcosts related to closethe workforce reductions; employeeretention costs; employee relocations; fees paidtoConocoPhillipsNote 10—Derivative and Concho shareholders, regulatoryFinancial Instruments, clearance, andin the satisfaction or waiver ofNotes to Consolidated Financial othercustomary closing conditions.Statements. See Item 1A. “Risk Factors” for further discussion of risks
On October 19, 2020,January 15, 2021, we announced entry intocompleted our acquisition a definitive agreement to acquireof Concho Resources Inc. (Concho), an independent Resources Inc.oil
addition of complementary acreage in antheDelaware and Midland Basins creates a sizeablePermian presence to
augment our leading unconventional positionsin the Eagle Ford, Bakken and Montney.
Consideration for the all-stock transaction wasvalued at $9.7$13.1 billion, in which 1.46 shares billion based upon closing share priceson October 16,of ConocoPhillips
aggregate principal amount of outstanding debt forbalances of Concho, which were approximately $3.9was recorded at fair value of $4.7 billion at September 30, 2020.asare expected to capture $500previously announced$750 million of annualcost and capitalsavings by 2022, which2022. would be sourced from
of the closing date. The combined companiesWe have made significant progress since the closing of the transaction on achievingour
Concho resulted in our future global new ventures explorationnon-recurring expenses for program.employee severance payments; incremental pension benefit
financial, legal, and accounting advisors; andfiling fees.We recognized $291 million before-tax related to
these costs in the first quarter of 2021 and expect to incur less of these expensesthroughout the remainder of
the year.Additionally, we recognized $305 million of before-tax losses on commodityderivatives related to
hedging positions assumed in the Concho acquisition.At March 31, 2021, all oil and natural gas derivative
financial instruments acquired from Concho werecontractually settled.In connection with the settlement, we
paid $692 million in the first quarter of 2021 subjectandwill pay the remaining $69 million in thesecond quarter of
2021.For additional information related to the approvalsettlement of bothfinancial derivatives acquired from Concho, see
32
For additional information related to our Conchoacquisition,see Note 3—Acquisitions and Dispositionsin the
Overview
After an unprecedented 2020, the energy landscape improvedin the first quarter of 2021 with oil prices
rallying to peak over $60 per barrel for both Brentand WTI, a level not seen since the outbreak of theCOVID-
19 pandemic.Oil prices have benefited from the continuationof coordinated production cuts by the OPEC
plus countries and capital discipline by independentoil and gas producers.
Despite the recent upswing in oil prices, webelieve that commodity prices will remaincyclical and volatile,
and a successful business strategy in the explorationand production industry must be resilientin lower price
environments, while retaining upside during periodsof higher prices.Accordingly, we remain disciplined and
are monitoring market fundamentals, including adherenceof the OPEC plus countries to production cut
agreementsand capital restraint across the broader E&P industry.Demand is recovering but has yet to reach
pre-pandemic levels.The speed and extent of this recovery willbe influenced by the easing of COVID-19
restrictions that have reduced economic activityand depressed the demand for our products.
We alsobelieve a successful strategy in the E&P industry is to create value through the pricecycles by delivering
on the foundational principles that underpin ourvalue proposition; free cash flow generation,a strong balance
sheet, commitment to differential returns of and on capital,and ESG leadership.Our first quarter as a
combined company demonstrated the power ofConcho’s acquired assets to help deliver on our value
proposition.Total company production was 1,527 MBOED, including 405MBOED from the Permian Basin,
resulting in net cash provided by operating activitiesof $2.1 billion.We returned 46 percent of this cash to
shareholders with dividends of $0.6 billion and sharerepurchases of $0.4 billion, and ended thequarter with
cash, cash equivalents and short-term investmentstotaling $6.9 billion.Net cash provided by operating
activities in the first quarter was negatively impactedby approximately $1 billion due toimpacts from settling
outstanding hedging contracts, in addition to transactionand restructuring costs.
In February 2021, we resumed our share repurchaseprogram, with $1.5 billion of share repurchases
anticipated in 2021.As of March 31, 2021, approximately $14.1billion of repurchase authority remained of
the $25 billion share repurchase program our Boardof Directors had previously authorized.
In May 2021, we announced further progress onour value proposition principles.We plan to undertake a
paced monetization program related to the adoption 10 percentof Cenovus Energy common shares we own.We
obtained these shares as partial consideration in the2017 disposition of our Foster Creek ChristinaLake oil
sands and western Canada Deep Basin naturalgas assets.The proceeds from these sales will be directed
towards our existing share repurchase authorizationand will be incremental to our previously announced$1.5
billion of share repurchases in 2021.We plan to fully dispose of our Cenovus shares by year-end 2022,
however,the sales pace will be guided by market conditionsand we retain discretion to adjust accordingly.
Additionally, in May 2021,we reaffirmed our commitment to preserving our top-tierbalance sheet with an
intent to reduce the company’s gross debt by $5 billion over five years, drivinga more resilient and efficient
capital structure.
We remain focused on our commitment to ESG leadership and excellence.This commitment is demonstrated
by our continued progress on specific targets that we set inOctober 2020 when we announced our adoptionof
a Paris-aligned climate risk framework, as part ofincluding:
●
●
Targeting a reduction in operational greenhouse gas emissions intensity by 35 to 45 percentfrom 2016
levels by 2030;
●
Our ambition to exceed the World Bank Zero Routine Flaring 2030 initiative by fiveyears;
Adding continuous methane monitoring devices toour operations, with an ambition to achieve net zero byinitial focus on our 2050 for operated emissions.Lower
48 facilities;
33
Advocating for a U.S. carbon price and reaffirmedto address end-use (scope 3) emissions through our membershipin
Including ESG performance in executive and
Operationally, we remain focused on safely executing the business. In the thirdfirst quarter of 2021, production of
1,527 MBOED was impacted by 50 MBOED of unplanneddowntime in the Lower 48 due to Winter Storm
Uri.Production increased approximately 238 MBOEDor 18 percent in the first quarter of 2021, compared
with the first quarter of 2020, primarily due to theacquisition of over 300 MBOED in thePermian Basin from
Concho, partly offset by the absence of 46 MBOED fromthe disposition of our Australia-West assets in the
second quarter of 2020.Adjusted for all acquisitions and dispositionsin the comparative periods and
excluding Libya, production of
We invested $1.1re-invested $1.2 billion back into
the business in the form of capital expenditures including $0.4 billionduring the first quarter,
with over half of acquisition capital, and paid
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 by civil
unrest, global pandemics,pandemic or 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, the prices of which
are subject to factorsexternal to the company and overwhich we haveno control. The
following graph depicts
the trend in average benchmarkprices for WTIcrude oil, Brent crude oiland Henry
Hub naturalgas:
Brent crude oil prices averaged $43.00$60.90 per barrel in the thirdfirst quarter of 2020,a decrease2021, an increase of 3121 percent
compared with $61.94$50.31 per barrel in the thirdfirst quarter of 2019.2020. WTI at Cushing crude oil prices averaged $57.84 per
of 2019.2020. Oil prices are lowerincreased due to high inventory levelsthe recovery from simultaneous demand and contractions supply shocks experiencedin economic activity
Henry Hub natural gas prices averaged $1.98$2.71 per MMBTU in the thirdfirst quarter of 2020,2021, a decreasean increase of 1139
percent compared with $2.23$1.95 per MMBTU in the thirdfirst quarter of 2019.2020. Current period Henry Hub prices are
Winter Storm Uri and seasonallynormalization of inventories following weak demand.COVID-19 demand losses.
Our realized bitumen price averaged $15.87$30.78 per barrel in the thirdfirst quarter of 2020,2021, a decrease of 51significant percentincrease
compared with $32.54$5.90 per barrel in the thirdfirst quarter of 2019.2020. The decreaseincrease in the thirdfirst quarter of 20202021 was
by higher WTI priceprices and a narrower
bitumen price realizations through the utilizationof downstream transportation solutions and implementation
of alternate blend capability which challenged both pipeline and railresults in lower economics.In
Our total average realized price was $30.94$45.36 per BOE in the thirdfirst quarter of 2020,2021, compared with $47.07with $38.81 per
BOE in the thirdfirst quarter of 2019.
2020, due to the recovery from simultaneous demand and supply shocks impacting
all of our produced commodities in 2020.
Key Operating and Financial Summary
Significant items during the thirdfirst quarter of 2020 and recent announcementsof 2021 included the following:
●
●
investments of $1.2 billion.
●
Net cash provided by operating activities includedapproximately $1.0 billion of non-recurringitems
associated with our Concho acquisition.
●
Produced 1,488 MBOED,excluding Libya, during the quarterly dividend.first quarterdespite incurring approximately 50
MBOED of unplanned production downtimethroughout Lower 48 caused by Winter Storm Uri.
●
Ended the quarter with cash and cash equivalents andtotaling restricted cash totaling $2.8$2.8 billion and short-term
investments of $4.0
$4.1 billion,equaling $6.9 billion in ending cash, cash equivalentsand short-term investments.
●
Resumed the share repurchase program at anannualized level of $1.5 billion.
●
●
●
Reaffirmed commitment to preserving a top-tier balance sheetwith intent to reduce the company’s
gross debt by $5 billion over the next five years,driving a more resilient and efficient capital structure.
●
Announced agreementplans to acquire Conchosell our Cenovus shares in anthe all-stock transaction for 1.46 sharesopen market in a disciplined manner by year-end
2022 beginning in the second quarter of ConocoPhillips2021, utilizingthe proceeds to fund incremental
Outlook
Capital and Production
guidance excludes Libya.
In October 2020,February 2021, we announced an agreement to acquire2021 operating Concho, thereby significantly expanding our
sustain current production and $0.4 billionfor investment in major projects, primarily in theAlaska, in addition to