On April 4, 2012, ConocoPhillips’ [NYSE:COP] board of directors approved the separation of Phillips 66 from ConocoPhillips. This interim update is being issued in anticipation of the "when-issued" trading commencing on or about April 12, 2012.
This interim update provides an overview of first-quarter market and operating conditions, as well as an update on other developments and progress on strategic initiatives for ConocoPhillips in the first quarter of 2012. The market indicators and company estimates may differ considerably from the company’s actual results scheduled to be reported on April 23, 2012.
In addition, Greg Garland, the designated CEO of Phillips 66, will provide an investor update via webcast on April 9, and Ryan Lance, the designated CEO of ConocoPhillips, will provide an investor update on April 16. Investors are encouraged to listen to these webcasts and learn about the plans for the creation of two leading energy companies.
Exploration and Production (E&P)
The table below provides market price indicators for crude oil and natural gas. The company’s actual crude oil and natural gas price realizations are likely to vary from these market indicators due to quality and location differentials, as well as the effect of pricing lags.
First-quarter average production is anticipated to be approximately 1.62 million barrels of oil equivalent (BOE) per day. This is consistent with previous guidance of 1.55 – 1.60 million BOE per day for the full year, which could vary depending on the timing of dispositions. Exploration expenses, excluding special items, are expected to be in line with the first quarter of 2011.
Gross production from the Peng Lai Field in Bohai Bay is currently at 40,000 barrels per day under an approved interim reservoir management plan. As previously announced, under an agreement with China’s Ministry of Agriculture (MOA), the company, as operator of the field, paid approximately $160 million to settle public claims for alleged fishery damage and to fund settlement of private claims from potentially affected fishermen in relevant Bohai Bay communities. The company also paid the MOA approximately $16 million to fund work to improve fishery resources and for related projects in the area. A revised environmental impact assessment and overall development program have been submitted to the appropriate government agencies as part of the process for returning the field to normal operation. The company is currently engaged in administrative discussions with the State Oceanic Administration to resolve outstanding claims.
ConocoPhillips has been involved with three other energy companies, as members of the Mackenzie Gas Project, on the development of the Mackenzie Valley Pipeline and gathering system, which was proposed to transport onshore gas production from the Mackenzie Delta in northern Canada to established markets in North America. The company has a 75 percent interest in the Parsons Lake natural gas field, one of the primary fields in the Mackenzie Delta, which would have anchored the pipeline development. In the first quarter of 2012, the co-venturers elected to suspend funding of the project due to a continued decline in market conditions and the lack of acceptable commercial terms. The company expects to record a noncash impairment for the carrying value of the undeveloped leasehold and capitalized project development costs of approximately $525 million after-tax, during the first quarter of 2012.
Refining and Marketing (R&M)
The table below provides market indicators for regions where the company has significant refining operations. The Weighted U.S. 3:2:1 margin is based on the geographical location and capacity of ConocoPhillips’ U.S. refineries. Realized refining margins are likely to differ due to the company’s specific locations, configurations, crude oil slates or operating conditions. ConocoPhillips’ refining configuration yields somewhat higher distillate and secondary product volumes, and lower gasoline volumes than those implied by the market indicators shown below.
While the table above reflects that refining market crack spreads were generally higher than in the first quarter of 2011, R&M’s results for the first quarter of 2012 are expected to be negatively impacted by significantly weaker crude differentials and secondary product margins due to higher crude prices. As is typical in a period of rapidly rising crude prices, the company also expects marketing margins to be adversely impacted due to the lag in rack prices. The company’s average worldwide crude oil refining capacity utilization rate for the first quarter is anticipated to be in the low-90-percent range. The domestic and international utilization rates are expected to be in the high-80-percent range and high-90-percent range, respectively. First-quarter turnaround costs are anticipated to be approximately $170 million before-tax.
Chemicals and Midstream
Chemicals results are expected to be higher than the first quarter of 2011 primarily due to ethylene margins. Ethylene margins for the quarter were among the highest experienced in the past 20 years. Utilization rates continued to exceed 100 percent, allowing capture of these strong margins. Midstream results are anticipated to be slightly higher than a year ago mainly due to higher natural gas liquids prices.
3-Year Repositioning Plan
ConocoPhillips continues to execute its asset disposition program, targeting $10 billion in proceeds during 2012. During the quarter, the company closed on the sale of its Vietnam business unit and expects to record an after-tax gain of approximately $940 million. Additional dispositions are under contract for mature partner-operated assets in the North Sea and North American conventional natural gas assets. These are expected to close in the second and third quarters of 2012.
The company expects to reach final investment decision on the second train of the Australia Pacific LNG Project in the second quarter of 2012. In connection with the resulting dilution of interest, ConocoPhillips expects to record an after-tax loss of approximately $135 million in the second quarter.
During the first quarter of 2012, Phillips 66 completed the private placement of $5.8 billion of senior notes, the net proceeds of which were deposited into escrow accounts pending the separation. As a result, at March 31, 2012, ConocoPhillips’ total debt is expected to be $5.8 billion higher than at Dec. 31, 2011, with a corresponding $5.8 billion of restricted cash. Post separation, Phillips 66 will retain this debt, and ConocoPhillips will use the majority of a special cash distribution from Phillips 66 to make further debt reductions.
The company anticipates first-quarter 2012 repurchases under the share repurchase program to be $1.9 billion and the number of weighted-average diluted shares outstanding during the quarter to be approximately 1,293 million.
As previously announced, the ConocoPhillips board of directors has approved the planned separation of ConocoPhillips and Phillips 66, effective from May 1, 2012. Phillips 66 and ConocoPhillips look forward to sharing additional information about each company and their future plans at the April 9 and April 16 investor updates, respectively.
ConocoPhillips First-Quarter 2012 Interim Update