ConocoPhillips 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2023

or

For the transition period from ___________________ to ___________________

Commission file number: 001-32395

ConocoPhillips

(Exact name of registrant as specified in its charter)

925 N. Eldridge Parkway, Houston, TX 77079

(Address of principal executive offices) (Zip Code)

281-293-1000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The registrant had 1,187,407,942 shares of common stock, $.01 par value, outstanding at September 30, 2023.

Table of Contents

Commonly Used Abbreviations

The following industry-specific, accounting and other terms, and abbreviations may be commonly used in this report.

PART I. Financial Information

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

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Management’s Discussion and Analysis is the company’s analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the financial statements and notes. It contains forward-looking statements including, without limitation, statements relating to the company’s plans, strategies, objectives, expectations and intentions that are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “budget,” “continue,” “could,” “effort,” “estimate,” “expect,” “forecast,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “target,” “will,” “would” and similar expressions identify forward-looking statements. The company does not undertake to update, revise or correct any of the forward-looking information unless required to do so under the federal securities laws. Readers are cautioned that such forward-looking statements should be read in conjunction with the company’s disclosures under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSES OF THE ‘SAFE HARBOR’ PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,” beginning on page 47**.

The terms “earnings” and “loss” as used in Management’s Discussion and Analysis refer to net income (loss).

Business Environment and Executive Overview

ConocoPhillips is one of the world’s leading E&P companies based on production and reserves, with operations and activities in 13 countries. Our diverse, low cost of supply portfolio includes resource-rich unconventional plays in North America; conventional assets in North America, Europe, Africa and Asia; global LNG developments; oil sands in Canada; and an inventory of global exploration prospects. Headquartered in Houston, Texas, at September 30, 2023, we employed approximately 9,800 people worldwide and had total assets of $94 billion.

Overview

At ConocoPhillips, we anticipate that commodity prices will continue to be cyclical and volatile, and our view is that a successful business strategy in the E&P industry must be resilient in lower price environments, while also retaining full upside exposure during periods of higher prices. As such, we are unhedged, remain committed to our disciplined investment framework and continually monitor market fundamentals, including the impacts associated with the conflicts in Ukraine and the Middle East, OPEC Plus crude supplies, global demand for our products, oil and gas inventory levels, governmental policies, inflation and supply chain disruptions.

The macro-environment, including the energy transition, also continues to evolve. We believe ConocoPhillips will continue to play an essential role by executing on three objectives: reliably and responsibly meeting energy transition pathway demand, delivering competitive returns on and of capital and focusing on achieving our net-zero operational emissions ambition. We call this our Triple Mandate, and it represents our commitment to create long-term value for our stakeholders.

Our value proposition to deliver superior returns to stockholders through price cycles is guided by foundational principles and capital allocation priorities that support our Triple Mandate. Our foundational principles consist of maintaining balance sheet strength, providing peer-leading distributions, making disciplined investments and demonstrating responsible and reliable ESG performance.

In July, we executed an agreement to purchase the remaining 50 percent interest in Surmont, an asset in our Canada segment. In October, we completed this purchase for approximately $2.7 billion of cash after customary adjustments, funded from proceeds received via debt offerings in August. The transaction also includes a contingent payment arrangement of up to an additional $0.3 billion over a five-year term. Now, as the 100 percent owner and operator of Surmont, we will seek to optimize the asset while remaining on track to achieve our previously announced corporate emissions intensity objectives. See Note 3.

In the third quarter of 2023, we issued new long-term debt to fund our acquisition of the remaining 50 percent working interest in Surmont. In the second quarter of 2023, we initiated and completed a strategic debt refinancing. These transactions extend the weighted average maturity of our portfolio and the second quarter refinancing reduces near-term debt maturities. See Note 6.

In September, we announced further progress on our global LNG strategy by signing a 15-year throughput agreement, securing additional regasification capacity at the Gate LNG terminal in the Netherlands. The 15-year agreement is for approximately 1.5 MTPA beginning in 2031. The additional capacity secures access to important markets for our growing LNG portfolio. Additionally, earlier in 2023, we further expanded our global LNG portfolio through a 30 percent direct equity investment in Port Arthur Liquefaction Holdings, LLC (PALNG) and a 25 percent equity interest in QatarEnergy LNG NFS(3) (NFS3). We also signed a 20-year offtake agreement at the Saguaro LNG export facility on the west coast of Mexico for approximately 2.2 MTPA, subject to Mexico Pacific reaching FID and other certain conditions precedent. See Note 3.

In November, we reconfirmed our 2023 planned return of capital to shareholders of $11 billion through our three-tier return of capital framework, significantly exceeding our commitment to return greater than 30 percent of our anticipated cash provided by operating activities for the full year. Also in November, we declared an increase to our quarterly ordinary dividend from $0.51 per share to $0.58 per share, representing a 14 percent increase. Beginning in the first quarter of 2024, ConocoPhillips plans to pay its quarterly ordinary dividend and VROC concurrently, and will announce such payments in the same quarter they will be paid.

Operationally, we remain focused on safely executing the business. Production was 1,806 MBOED in the third quarter of 2023, an increase of 52 MBOED from the same period a year ago. After adjusting for impacts from closed acquisitions and dispositions, third-quarter 2023 production increased by 49 MBOED or three percent from the same period a year ago. Organic growth from Lower 48 and other development programs more than offset normal field decline and downtime.

Third-quarter production resulted in $5.4 billion of cash provided by operating activities. We also returned $1.3 billion to shareholders through share repurchases and $1.3 billion through our ordinary dividend and a VROC. We ended the quarter with cash, cash equivalents and short-term investments totaling $9.4 billion.

Also in the third quarter of 2023, we re-invested $2.5 billion into the business in the form of capital expenditures and investments, with over half of the expenditures related to flexible, short-cycle unconventional plays in the Lower 48 segment, where our production has access to both domestic and export markets.

Business Environment

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Information about market risks for the nine months ended September 30, 2023 does not differ materially from that discussed under Item 7A in our 2022 Annual Report on Form 10-K except for foreign currency exchange risks.

Foreign Currency Exchange Risk

At September 30, 2023, we had outstanding foreign currency exchange forward contracts to buy $4.3 billion CAD at $0.736 against the U.S. dollar in anticipation of our future acquisition of the additional interest in Surmont. The forward contracts have a gross notional value of $4.3 billion CAD. Based on the assumed volatility in the fair value, the net fair value of these foreign currency contracts at September 30, 2023, was a before-tax gain of $36 million. Based on an adverse hypothetical 10 percent change in the September 30, 2023 exchange rate, this would result in an additional before-tax loss of approximately $320 million. The sensitivity analysis is based on changing one assumption while holding all other assumptions constant, which in practice may be unlikely to occur, as changes in some of the assumptions may be correlated. The contracts settled in the fourth quarter of 2023.

We maintain disclosure controls and procedures designed to ensure information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Act), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. At September 30, 2023, with the participation of our management, our Chairman and Chief Executive Officer (principal executive officer) and our Executive Vice President and Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Act, of ConocoPhillips’ disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chairman and Chief Executive Officer and our Executive Vice President and Chief Financial Officer concluded our disclosure controls and procedures were operating effectively at September 30, 2023.

In the third quarter of 2023, we began a multi-year implementation of an updated global enterprise resource planning system (ERP). As a result, we have made corresponding changes to our business processes and information systems, updating applicable internal controls over financial reporting where necessary. As the phased implementation of the ERP system progresses, we expect to continue to modify or change certain processes and procedures which may result in further changes to our internal controls over financial reporting.

There have been no other changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

ConocoPhillips has elected to use a $1 million threshold for disclosing certain proceedings arising under federal, state or local environmental laws when a governmental authority is a party. ConocoPhillips believes proceedings under this threshold are not material to ConocoPhillips' business and financial condition. Applying this threshold, there are no such proceedings to disclose for the quarter ended September 30, 2023. See Note 9 for information regarding other legal and administrative proceedings.

There have been no material changes from the risk factors disclosed in Item 1A of our 2022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

*There were no repurchases of common stock from company employees in connection with the company's broad-based employee incentive plans.

In late 2016, we initiated our current share repurchase program. As of October 2022, we had announced a total authorization to repurchase up to $45 billion of our common stock. As of September 30, 2023, we had repurchased $27.7 billion of shares. Repurchases are made at management’s discretion, at prevailing prices, subject to market conditions and other factors. Except as limited by applicable legal requirements, repurchases may be increased, decreased or discontinued at any time without prior notice. Shares of stock repurchased under the plan are held as treasury shares. See Part I—Item 1A—Risk Factors – “Our ability to execute our capital return program is subject to certain considerations” in our 2022 Annual Report on Form 10-K.

Insider Trading Arrangements

During the three-month period ended September 30, 2023, no officer or director of the company adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.

** Filed herewith.*

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.