onocoPhillips exercises a consistent, proven investment strategy that balances allocations of the company’s cash flow in order to grow the asset base, return capital to shareholders through dividends and share repurchases, and manage debt. Allocations vary in response to changing industry conditions and the emergence of new opportunities.

In recent years ConocoPhillips successfully expanded its portfolio through key acquisitions and investments. Meanwhile, the company’s consistent operating performance and favorable market conditions made possible significant reductions in debt.

“Our opportunity portfolio and financial strength enable ConocoPhillips to focus on increasing our shareholder distributions,” says John Carrig, executive vice president, Finance, and chief financial officer.

 

2007 Financial Results
During 2007 ConocoPhillips earned net income of $11.9 billion, or $7.22 per share, compared with 2006 net income of $15.6 billion, or $9.66 per share. Excluding the impact of a $4.5 billion non-cash impairment charge recorded in connection with the Venezuelan expropriation, 2007 earnings were $16.4 billion. Cash flow from operating activities reached $24.6 billion, a 14 percent increase over 2006. The company’s performance compared favorably with that of its industry peers on many key financial and operational metrics.

 

 

Dividends and Share Repurchases
Shareholders received a 14 percent increase in quarterly dividends paid on ConocoPhillips stock during 2007, the sixth consecutive annual increase since the company’s formation in 2002. A further increase of 15 percent was declared in the first quarter of 2008.

The company’s commitment to returning additional cash flow to shareholders was evident in its share repurchase programs. An initial $1 billion program announced in January was expanded to $4 billion in February. At mid year, ConocoPhillips announced a $15 billion program for the balance of 2007 and 2008, including $2 billion remaining under the February program. Repurchases totaled $7 billion in 2007, with a remaining $10 billion authorized for repurchases in 2008.

“These repurchases supplement and expand the underlying growth in our base businesses on a per-share basis,” Carrig says. “This in turn improves earnings per share and generates value for our shareholders.”

 

Debt Reduction
Total debt was reduced by $5.4 billion during 2007, following a $5.1 billion reduction in 2006 during the nine months following the Burlington Resources acquisition. These reductions and the company’s strong financial results strengthened the balance sheet, allowing the establishment of a 20 percent to 25 percent target range for its debt-to-capital ratio.

“That ratio stood at only 19 percent at year-end 2007, so we currently foresee no need for further significant debt reductions,” Carrig says. Total debt was $21.7 billion at year-end 2007, compared with $32.2 billion at the end of the first quarter of 2006. Stockholders’ equity and minority interests increased to $90.2 billion at year-end 2007, from $83.8 billion the year before.

 

Portfolio Rationalization
During 2007, ConocoPhillips realized $3.6 billion in proceeds from the sale of assets, primarily non-core exploratory and producing properties and select refining and marketing assets.

“Our optimization efforts will continue,” Carrig says. “We believe there are ongoing opportunities to divest the relatively few properties that offer limited growth potential, then redeploy the proceeds and continually upgrade our portfolio.”

Capital Program
The company’s capital program during 2007 totaled $12.9 billion, compared with $16.4 billion in 2006. The decrease was primarily attributable to the completion of purchases of LUKOIL shares in 2006.

The 2008 capital expenditures and investments budget is $14.3 billion, including capitalized interest. Loans to affiliates and contributions to fund the EnCana venture are expected to add $1 billion, bringing the total authorized capital program to $15.3 billion.

“We are exercising disciplined operating and capital expenditure programs in recognition of the industry environment of restricted access to new resources, service-cost inflation and intense competition,” Carrig says.

The $12 billion Exploration and Production 2008 capital program is primarily allocated for the development of producing properties in the United States, Canada, the North Sea, the Asia Pacific region, Russia and the Caspian Sea, with $1.6 billion earmarked for worldwide exploration.

Of Refining and Marketing’s $2.8 billion 2008 capital program, $1.6 billion is allocated to U.S. refining and $400 million to international refining to enhance reliability, energy efficiency, maintenance and regulatory compliance; increase crude oil and conversion capability and clean-product yields; and conduct a major upgrade of the Wilhelmshaven refinery.

Additionally, $800 million is allocated for North American transportation and marketing, including the Keystone crude oil pipeline.

Other planned capital expenditures include $500 million for Emerging Businesses and Corporate. Outside the company’s capital program, ConocoPhillips also plans research and technology expenditures of $250 million to support its primary businesses and $150 million on unconventional oil and natural gas and alternative and renewable energy sources.