A critical feature of ConocoPhillips’ financial strategy is to fund the company’s robust growth program. The corporate reinvestment strategy is focused on short- and long-term opportunities to provide sustainable value for shareholders and the company. Fulfilling these objectives will require the company to continue its steady financial course and effectively manage its balance sheet.

       “Since day one, ConocoPhillips has focused on cost discipline, capital discipline and financial discipline,” says John Carrig, executive vice president, Finance, and chief financial officer. “We believe a legacy is what you leave behind, not what you get. We’re not trying to inherit something; we’re trying to pass on something of lasting value to future generations of ConocoPhillips shareholders.”

       Regarding capital expenditures and investments, the company spent $11.6 billion in 2005, including acquisitions of additional equity interest in LUKOIL. At year-end 2005, the company’s ownership interest in LUKOIL was 16.1 percent. ConocoPhillips has earmarked an estimated $11.2 billion for spending in 2006, excluding discretionary expenditures for the potential purchase of additional shares to allow the company to reach 20 percent equity interest in LUKOIL. ConocoPhillips plans to take advantage of both organic and business development opportunities that can have a positive impact on increasing the overall Exploration and Production (E&P) portfolio and further integrating E&P with the Refining and Marketing (R&M) business.

       The company’s focus on equity growth in 2005, coupled with $2.5 billion of debt reduction, allowed for a significant decrease in its debt-to-capital ratio to 19 percent by the end of the year, down from 26 percent at year-end 2004. This is within the company’s target range of 15 percent to 20 percent. The Burlington Resources transaction is expected to increase ConocoPhillips’ debt level. The company plans to work to reduce this incremental debt through cash generated by the acquired assets, as well as other businesses.

       ConocoPhillips’ financial strategy continues to allow the company’s shareholders to benefit from its success through dividend rate increases, based on the company’s operating and financial performance. The compound annual dividend growth rate has been approximately 15 percent since 2002. The company announced a further 16 percent dividend increase in the first quarter of 2006.

       Share repurchases, announced in three separate $1 billion programs in 2005, will help offset dilution related to employee benefit programs for current and prior years. The company completed $1.9 billion in repurchases by year-end 2005.

       During 2005, the company earned $13.5 billion and improved net income per share from $5.80 for the year 2004 to $9.55 for the year 2005. These improvements largely were due to the favorable commodity-price environment and the company’s solid operating performance during the year.

       “In order for the company to continue to benefit in a strong commodity-price environment we must operate well, execute our capital programs and carry out our financial strategy,” states Carrig. “Our financial strategy contemplates funding our growth program, yet growth for the sake of growth is not the objective. We are investing in projects and will continue to selectively pursue opportunities that provide sustainable value for the company and its shareholders.”

Capital Spending in 2006

Excluding discretionary expenditures for potential additional investment in LUKOIL, the capital budget for 2006 is $11.2 billion, including capitalized interest and minority interest. Funding will be allocated to reflect the long-term strategy to invest in further development of the E&P business and selective growth in the R&M business.

       The E&P portion of the capital budget is approximately $7.5 billion, while R&M will be allotted about $3.5 billion. The remainder, roughly $0.2 billion, will be allocated to the Emerging Businesses segment and Corporate.

       In addition to capital programs, ConocoPhillips also continues to provide pension and employee benefit funding. In 2005, the company contributed $480 million to qualified U.S. pension and employee benefit plans, and $144 million to international plans. Over the next several years, pension funding is expected to be about $350 million per year for qualified U.S. plans and $120 million per year for international plans.

Fundamentally Sound

ConocoPhillips devotes a good deal of energy to ensure it employs practices and procedures designed to produce financial results of unquestioned integrity. “Investors must have confidence that what they see in our reporting numbers is trustworthy,” says Carrig. “It is extremely important to employ systems that are capable of being used in many different places and locations. Also, the implementation of the Sarbanes-Oxley controls and the overall financial value placed on financial excellence is something that the company has and will continue to foster. Our internal financial community gets high marks for the way in which we’ve been able to successfully manage the multitude of changes. We continue to establish credibility and build on our reputation.”