CONOCOPHILLIPS 10-Q

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’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 57. 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 the world’s largest independent E&P company with operations and activities in 15 countries. Our diverse, low cost of supply portfolio includes resource-rich unconventional plays in North America; conventional assets in North America, Europe, and Asia; LNG developments; oil sands in Canada; and an inventory of global conventional and unconventional exploration prospects. Headquartered in Houston, Texas, at June 30, 2021, we employed approximately 10,100 people worldwide and had total assets of $85 billion. Completed Acquisition of Concho Resources Inc. On January 15, 2021, we completed our acquisition of Concho Resources Inc. (Concho), an independent oil and gas exploration and production company with operations across New Mexico and West Texas. The addition of complementary acreage in the Delaware and Midland Basins creates a sizeable Permian presence to augment our leading unconventional positions in the Eagle Ford, Bakken and Montney. Since the closing of the transaction, we have made significant progress in integrating the two companies and have exceeded our own expectations in realizing synergies and savings that should have long lasting positive effects on our business. We previously announced an expected $750 million of annual cost and capital savings by 2022. However, due to additional benefits anticipated from further cost, capital, and margin improvements, we now expect approximately $1 billion in annual synergies and savings by 2022. See Note 3 for additional information related to our Concho acquisition. Overview While commodity prices continued to improve in the second quarter of 2021, we believe that prices will remain cyclical and volatile. Our view is that a successful business strategy in the E&P industry must be resilient in lower price environments, while also retaining upside during periods of higher prices. As such, we are unhedged, remain disciplined in our investment decisions and are monitoring market fundamentals, including OPEC plus updates regarding supply guidance, inventory levels, and capital restraint across the industry. Demand is still recovering but has yet to reach pre-pandemic levels. The speed and extent of this recovery will be influenced by whether and at what pace the COVID-19 restrictions that have reduced economic activity and depressed the demand for our products globally are eased. 33 As the macro energy environment continues to evolve, we have embraced what we believe sector leadership requires and we call it our triple mandate. We believe ConocoPhillips can play a valued role in whatever pathway the energy transition takes by investing in the lowest cost of supply barrels to help meet global energy demand, delivering competitive returns of and on capital, and achieving our net-zero ambition on our gross operated (scope 1 and 2) emissions. Our triple mandate is supported by financial principles and allocation priorities that should allow us to deliver superior returns through the price cycles. Our financial principles consist of maintaining balance sheet strength, providing peer-leading distributions, making disciplined investments, and delivering ESG excellence, all of which are in service of delivering financial returns. Our acquisition of Concho further reinforced our value proposition. In the second quarter, total company production was 1,588 MBOED, including 435 MBOED from the Permian Basin, resulting in cash provided by operating activities of $4.3 billion. In the six- month period ended June 30, 2021, we have generated $6.3 billion in cash provided by operating activities, returning $1.2 billion to shareholders through dividends and $1 billion through share repurchases. We ended the quarter with cash, cash equivalents and short-term investments totaling $8.9 billion. In February 2021, we resumed our share repurchase program at an annualized level of $1.5 billion which was increased in the second quarter to an annualized level of $2.5 billion for 2021. Additionally, in May 2021 we announced a paced monetization program related to the 208 million shares of Cenovus Energy (CVE) common shares owned at that time. We plan to fully dispose of our CVE shares by year-end 2022, however, the sales pace for the remaining shares will be guided by market conditions, and we retain discretion to adjust accordingly. The proceeds from this disposition will be deployed towards incremental share repurchases. During the second quarter of 2021 we sold 20 million shares or approximately 10 percent of the shares held at December 31, 2020 for $180 million. Based on current market conditions, in 2021 we anticipate $1 billion in proceeds to be directed towards our existing share repurchase authorization, bringing our total 2021 share repurchases to an estimated $3.5 billion. See Note 5 for additional information on our investment in CVE. These share repurchases along with our annual dividend of $2.3 billion amount to a total of approximately $6 billion in planned distributions for 2021. In May 2021, we demonstrated our commitment to preserving our ‘A’ -rated balance sheet by announcing our intent to reduce the company’s gross debt by $5 billion over five years through natural and accelerated maturities. In June 2021, we affirmed our commitment to ESG leadership and excellence, and to the specific targets that we set in October 2020 when we became the first U.S.-based oil and gas company to adopt a Paris-aligned climate-risk strategy. Our commitment includes: ● Net-zero ambition for operational (scope 1 and 2) emissions by 2050 with active advocacy for a price on carbon to address end-use (scope 3) emissions; ● Targeting a reduction in operational greenhouse gas emissions intensity by 35 to 45 percent from 2016 levels by 2030; ● Zero routine flaring by 2030, with an ambition to get there by 2025; ● 10 percent reduction target for methane emissions intensity by 2025, in addition to the 65 percent reductions we have made since 2015; ● Adding continuous methane monitoring devices to our operations with a focus on the larger Lower 48 facilities; ● Formation of a dedicated low carbon technology organization responsible for identifying and prioritizing global emissions reduction initiatives and opportunities associated with the energy transition including carbon capture, utilization and storage (CCUS) and hydrogen; and ● ESG performance in executive and employee compensation programs. 34 - 1 2 3 4 20 40 60 80 Q2'19 Q3'19 Q4'19 Q1'20 Q2'20 Q3'20 Q4'20 Q1'21 Q2'21 WTI/Brent $/Bbl WTI Crude Oil, Brent Crude Oil and Henry Hub Natural Gas Prices Quarterly Averages WTI - $/Bbl Brent - $/Bbl HH - $/MMBTU HH $/MMBTU Operationally, we remain focused on safely executing the business. Production was 1,588 MBOED in the second quarter of 2021, an increase of 607 MBOED or 62 percent, compared with the second quarter of 2020, primarily due to the acquisition of approximately 330 MBOED in the Permian Basin from our Concho acquisition and the absence of last year’s economic curtailments driven by weakness in oil prices predominantly in operated North American assets. We re-invested $1.3 billion back into the business in the form of capital expenditures during the second quarter, with over half of our investments focused on flexible, short-cycle unconventional plays in the Lower 48 segment where our production is liquids-weighted and is accessible to both domestic and export markets. For the full year, driven by efficiencies we have already captured from the Concho transaction, we have reduced our 2021 capital guidance to $5.3 billion and cost guidance to $6.1 billion for 2021. 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 energy markets and commodity prices are global economic health, supply or demand disruptions or fears thereof caused by civil unrest, global pandemics, 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, operational and ESG priorities that underpin our value proposition. Our earnings and operating cash flows generally correlate with price levels for crude oil and natural gas, which are subject to factors external to the company and over which we have no control. The following graph depicts the trend in average benchmark prices for WTI crude oil, Brent crude oil and Henry Hub natural gas: Brent crude oil prices averaged $68.83 per barrel in the second quarter of 2021, an increase of 136 percent compared with $29.20 per barrel in the second quarter of 2020. WTI at Cushing crude oil prices averaged $66.07 per barrel in the second quarter of 2021, an increase of 137 percent compared with $27.85 per barrel in the second quarter of 2020. Oil prices increased alongside the ongoing global economic recovery following 2020’s COVID closures as well as OPEC plus supply restraint. 35 Henry Hub natural gas prices averaged $2.83 per MMBTU in the second quarter of 2021, an increase of 65 percent compared with $1.71 per MMBTU in the second quarter of 2020. Henry Hub prices have increased due to healthy domestic demand accompanied by record levels of feedgas demand for LNG exports to Europe and Asia. Our realized bitumen price averaged $37.60 per barrel in the second quarter of 2021, an increase of approximately $61 per barrel compared with negative $23.11 per barrel in the second quarter of 2020. The increase in the second quarter of 2021 was driven by higher blend price for Surmont sales, largely attributed to a strengthening of WTI price and reduced unutilized transportation costs which negatively impacted our realized bitumen price in 2020. We continue to optimize bitumen price realizations through the utilization of downstream transportation solutions and implementation of alternate blend capability which results in lower diluent costs. Our total average realized price was $50.03 per BOE in the second quarter of 2021, increased in comparison with $23.09 per BOE in the second quarter of 2020. Key Operating and Financial Summary Significant items during the second quarter of 2021 and recent announcements included the following: ● Delivered strong operational performance across the company’s asset base, including successful planned maintenance turnarounds, resulting in second quarter production of 1,547 MBOED, excluding Libya. ● Net cash provided by operating activities was $4.3 billion, exceeding capital expenditures and investments of $1.3 billion. ● Distributed $1.2 billion to shareholders, comprised of $0.6 billion in dividends and $0.6 billion in share repurchases. ● Ended the quarter with cash and cash equivalents totaling $6.6 billion and short-term investments of $2.3 billion, equaling $8.9 billion in ending cash, cash equivalents and short-term investments. ● Entered into divestiture agreements during July for certain Lower 48 noncore assets totaling approximately $0.2 billion, subject to customary closing adjustments, as part of the company’s plan to generate $2 to $3 billion in disposition proceeds over the next 18 months. Outlook Capital, Cost and Production In June 2021, due to realizing synergistic savings from our Concho acquisition earlier than anticipated, we announced reductions of full year 2021 operating plan capital and cost guidance by a combined $300 million. Capital guidance was reduced to $5.3 billion and cost guidance to $6.1 billion for the full year 2021. Third-quarter 2021 production is expected to be 1.48 to 1.52 MMBOED, reflecting seasonal turnarounds planned in Alaska and the Asia Pacific region. This production guidance excludes Libya and assumes that previously announced divestitures close during the third quarter of 2021. All other guidance items are unchanged. Depreciation, Depletion and Amortization DD&A expense was $1.9 billion in the second quarter of 2021. Proved reserves estimates were updated in the current quarter utilizing historical twelve-month first-of-month average prices, which decreased second quarter DD&A expense by approximately $160 million before-tax. Depending on price fluctuations, we would expect reserve estimates to either increase or decrease. 36 RESULTS OF OPERATIONS Effective with the third quarter of 2020, we have restructured our segments to align with changes to our internal organization. The Middle East business was realigned from the Asia Pacific and Middle East segment to the Europe and North Africa segment. The segments have been renamed the Asia Pacific segment and the Europe, Middle East and North Africa segment. We have revised segment information disclosures and segment performance metrics presented within our results of operations for the prior comparative periods. Unless otherwise indicated, discussion of results for the three- and six-month periods ended June 30, 2021, is based on a comparison with the corresponding periods of 2020. Consolidated Results A summary of the company's net income (loss) attributable to ConocoPhillips by business segment follows: Millions of Dollars Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Alaska $ 371 (141) 530 (60) Lower 48 1,175 (365) 1,643 (802) Canada 102 (86) 112 (195) Europe, Middle East and North Africa 207 25 360 226 Asia Pacific 175 648 492 920 Other International (5) (6) (9) 22 Corporate and Other 66 185 (55) (1,590) Net income (loss) attributable to ConocoPhillips $ 2,091 260 3,073 (1,479) Net income (loss) attributable to ConocoPhillips in the second quarter of 2021 increased $1,831 million. Earnings were positively impacted by: ● Higher realized commodity prices. ● Higher sales volumes, primarily due to our Concho acquisition and absence of production curtailments in our operated North American assets. For additional information related to our Concho acquisition, see Note 3. Second quarter 2021 net income increases were partly offset by: ● Higher DD&A expenses primarily due to our Concho acquisition and the absence of production curtailments in our operated North American assets, partially offset by lower rates driven from price- related reserve revisions due to higher commodity prices in 2021. ● Higher production and operating expenses and taxes other than income taxes, primarily due to our Concho acquisition and the absence of production curtailments in our operated North American assets. ● Absence of a $597 million after-tax gain on dispositions related to our Australia-West divestiture in May 2020. Net income (loss) attributable to ConocoPhillips in the six-month period ended June 30, 2021, increased $4,552 million. In addition to the items detailed above, earnings were positively impacted by: ● A gain of $726 million after-tax on our CVE common shares, compared with an after-tax loss of $1,140 million in the first half of 2020. For discussion of our CVE common shares, see Note 5. ● Lower impairments by $519 million, primarily due to the absence of impairments to noncore gas assets in our Lower 48 segment. 37 In addition to the items detailed above, the increases in earnings in the six-month period ended June 30, 2021, were partly offset by: ● Restructuring and transaction expenses of approximately $261 million after-tax related to our Concho acquisition and mark-to-market impacts on certain key employee compensation programs. ● Realized losses on hedges of $233 million after-tax related to derivative positions assumed through our Concho acquisition. These derivative positions were settled entirely within the first quarter of 2021. See Note 10 for additional information. See the “Segment Results” section for additional information. Income Statement Analysis Unless otherwise indicated, all results in Income Statement Analysis are before-tax. Sales and other operating revenues for the three- and six-month periods of 2021 increased $6,807 million and $10,475 million, respectively, mainly due to higher realized commodity prices and higher sales volumes in the Lower 48, primarily related to our Concho acquisition and the absence of production curtailments in our operated North American assets. Equity in earnings of affiliates for the three-month period of 2021 increased $62 million primarily due to higher earnings driven by higher LNG and crude prices, partially offset by a higher effective tax rate related to equity method investments in our Europe, Middle East, and North Africa segment. For the six-month period of 2021, Equity in earnings of affiliates decreased $50 million primarily due to lower earnings driven by lower LNG lagging contract prices in 2021 when compared with the same periods in 2020. Gain on dispositions for the three- and six-month periods of 2021 decreased $537 million and $262 million, respectively, primarily due to the absence of a $587 million gain associated with our Australia-West divestiture. The six-month decrease was partially offset by recognition of a $200 million FID bonus associated with our Australia-West divestiture in the first quarter of 2021. Other income (loss) for the three-month period of 2021 decreased $137 million and for the six-month period increased $1,780 million. During these periods in 2021, we recognized gains of $418 million and $726 million, respectively, on our CVE common shares, compared with a gain of $551 million and loss of $1,140 million, respectively, for the same periods in 2020. Purchased commodities for the three- and six-month periods of 2021 increased $1,868 million and $3,690 million, respectively, primarily due to higher gas and crude prices. In the six-month period of 2021, higher prices were partly offset by lower crude oil volumes purchased. Production and operating expenses for the three- and six-month periods of 2021 increased $332 million and $542 million, respectively, primarily due to costs associated with additional volumes in our operated North American assets related to our Concho acquisition and the absence of production curtailments. Selling, general and administrative expenses increased $275 million in the six-month period of 2021, primarily due to higher costs associated with compensation and benefits, including mark-to-market impacts of certain key employee compensation programs, and transaction and restructuring expenses associated with our Concho acquisition. Exploration expenses for the six-month period of 2021 decreased $144 million, primarily due to the absence of an unproved property impairment and dry hole expenses related to the Kamunsu East Field in Malaysia and the absence of charges associated with the early termination of our 2020 winter exploration program in Alaska. 38 DD&A for the three- and six-month periods of 2021 increased $709 million and $1,184 million, respectively, mainly due to higher production volumes in the Lower 48 associated with our Concho acquisition and higher volumes in each of our North American assets due to the absence of production curtailments, Montney ramp up and Kelt acquisition in Canada. These increases were partly offset by lower rates from price-related reserve revisions in Lower 48 and Canada. Impairments decreased $520 million in the six-month period of 2021, primarily due to the absence of a $511 million impairment of certain non-core gas assets in our Lower 48 segment. Taxes other than income taxes for the three- and six-month periods of 2021 increased $240 million and $360 million, respectively, primarily due to higher sales volumes in Lower 48 from our Concho acquisition, the absence of production curtailments in all of our North American assets and higher commodity prices. Foreign currency transaction (gain) loss in the six-month period of 2021 was a loss of $29 million compared with a gain of $83 million in the six-month period of 2020. This increase of $112 million was primarily due to the absence of gains recognized from foreign currency derivatives and other foreign currency remeasurements. See Note 18—Income Taxes for information regarding our income tax provision (benefit) and effective tax rate. 39 Summary Operating Statistics Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Average Net Production Crude oil (MBD) Consolidated operations 836 460 820 551 Equity affiliates 13 14 13 13 Total crude oil 849 474 833 564 Natural gas liquids (MBD) Consolidated operations 120 85 113 101 Equity affiliates 8 8 8 7 Total natural gas liquids 128 93 121 108 Bitumen (MBD) 68 34 69 50 Natural gas (MMCFD) Consolidated operations 2,209 1,221 2,142 1,429 Equity affiliates 1,051 1,056 1,066 1,046 Total natural gas 3,260 2,277 3,208 2,475 Total Production (MBOED) 1,588 981 1,558 1,135 Dollars Per Unit Average Sales Prices Crude oil (per bbl) Consolidated operations* $ 65.54 25.10 61.60 38.81 Equity affiliates 64.10 25.32 62.03 38.52 Total crude oil 65.51 25.10 61.60 38.80 Natural gas liquids (per bbl) Consolidated operations 25.62 8.29 25.06 10.85 Equity affiliates 44.12 23.93 46.53 32.38 Total natural gas liquids 26.87 9.88 26.68 12.63 Bitumen (per bbl) 37.60 (23.11) 34.09 (3.09) Natural gas (per MCF) Consolidated operations* 4.25 2.64 4.56 3.19 Equity affiliates 3.97 3.90 3.76 4.65 Total natural gas 4.16 3.22 4.29 3.81 Millions of Dollars Exploration Expenses General administrative, geological and geophysical, lease rental, and other $ 56 94 134 215 Leasehold impairment 1 - 1 31 Dry holes - 3 6 39 $ 57 97 141 285 *Average sales prices, including the impact of hedges settling per initial contract terms in the first quarter of 2021 assumed in our Concho acquisition, were $60.59 per barrel for crude oil and $4.50 per mcf for natural gas for the six-month period ended June 30, 2021. As of March 31, 2021, we had settled all oil and gas hedging positions acquired from Concho. See Note 10 for additional information. 40 We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and NGLs on a worldwide basis. At June 30, 2021, our operations were producing in the U.S., Norway, Canada, Australia, Indonesia, China, Malaysia, Qatar and Libya. Total production of 1,588 MBOED increased 607 MBOED or 62 percent in the second quarter of 2021 and 423 MBOED or 37 percent in the six-month period of 2021, primarily due to: ● Higher volumes in the Lower 48 due to our Concho acquisition. ● Higher volumes in our operated North American assets and Malaysia due to the absence of production curtailments. ● New wells online in the Lower 48, Canada, Norway, Malaysia, and Australia. ● Higher production in Libya due the absence of a forced shutdown of the Es Sider export terminal and other eastern export terminals after a period of civil unrest. The increase in the second quarter and in the six-month period of 2021 was partly offset by: ● Normal field decline. ● Disposition activity primarily related to our Australia-West divestiture completed in the second quarter of 2020. In addition to the items detailed above, in the six-month period of 2021, production also decreased due to: ● Higher unplanned downtime in the Lower 48 due to Winter Storm Uri, which impacted production by approximately 50 MBOED in the first quarter of 2021. Production excluding Libya for the second quarter of 2021 was 1,547 MBOED, an increase of 566 MBOED from the same period a year ago. After adjusting for closed acquisitions and dispositions as well as estimated impacts from the 2020 curtailment program, second-quarter 2021 production increased 46 MBOED or 3 percent. This increase was primarily due to new production from the Lower 48 and other development programs across the portfolio, partially offset by normal field decline. Production from Libya averaged 41 MBOED. Production excluding Libya for the six-month period of 2021 was 1,518 MBOED, an increase of 388 MBOED from the same period a year ago. After adjusting for closed acquisitions and dispositions, estimated impacts from the 2020 curtailment program and Winter Storm Uri impacts from 2021, production increased 18 MBOED. This increase was primarily due to new production from the Lower 48 and other development programs across the portfolio, partially offset by normal field decline. Production from Libya averaged 40 MBOED. 41 Segment Results Alaska Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Net income (loss) attributable to ConocoPhillips ($MM) $ 371 (141) 530 (60) Average Net Production Crude oil (MBD) 184 153 187 175 Natural gas liquids (MBD) 15 13 16 16 Natural gas (MMCFD) 11 8 10 8 Total Production (MBOED) 201 167 205 192 Average Sales Prices Crude oil ($ per bbl) $ 67.87 26.81 63.93 42.52 Natural gas ($ per MCF) 4.53 2.56 3.17 2.82 The Alaska segment primarily explores for, produces, transports and markets crude oil, NGLs and natural gas. As of June 30, 2021, Alaska contributed 20 percent of our consolidated liquids production and less than 1 percent of our consolidated natural gas production. Net Income (Loss) Attributable to ConocoPhillips Earnings from Alaska increased $512 million in the second quarter of 2021 and increased $590 million in the six-month period of 2021, respectively. Earnings were positively impacted by: ● Higher realized crude oil prices. ● Higher volumes due to the absence of production curtailments. ● Lower exploration expenses due to the absence of charges associated with the early cancellation of our 2020 winter exploration program. Partly offsetting the increase in earnings was: ● Higher DD&A expenses primarily driven by higher production volumes and higher rates. Production Average production increased 34 MBOED in the second quarter of 2021 and 13 MBOED in the six-month period of 2021, respectively. The increase was primarily due to: ● Absence of curtailments at our operated assets. Partly offsetting the increase in production was: ● Normal field decline. 42 Lower 48 Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Net Income (Loss) Attributable to ConocoPhillips ($MM) $ 1,175 (365) 1,643 (802) Average Net Production Crude oil (MBD) 454 166 435 218 Natural gas liquids (MBD) 97 64 89 77 Natural gas (MMCFD) 1,459 486 1,389 582 Total Production (MBOED) 794 311 755 392 Average Sales Prices Crude oil ($ per bbl)* $ 64.13 19.87 60.17 32.92 Natural gas liquids ($ per bbl) 24.62 6.95 24.34 9.81 Natural gas ($ per MCF)* 3.27 1.18 3.88 1.36 *Average sales prices, including the impact of hedges settling per initial contract terms in the first quarter of 2021 assumed in our Concho acquisition, were $58.25 per barrel for crude oil and $3.78 per mcf for natural gas for the six-month period ended June 30, 2021. As of March 31, 2021, we had settled all oil and gas hedging positions acquired from Concho. See Note 10 for additional information . The Lower 48 segment consists of operations located in the U.S. Lower 48 states, as well as producing properties in the Gulf of Mexico. As of June 30, 2021, the Lower 48 contributed 53 percent of our consolidated liquids production and 65 percent of our consolidated natural gas production. Net Income (Loss) Attributable to ConocoPhillips Earnings from the Lower 48 increased $1,540 million in the second quarter of 2021 and increased $2,445 million in the six-month period of 2021, respectively. Earnings were positively impacted by: ● Higher sales volumes of crude oil and natural gas due to our Concho acquisition and the absence of production curtailments. ● Higher realized crude oil, natural gas, and NGL prices. Partly offsetting the increase in earnings was: ● Higher DD&A expenses primarily due to higher production from our Concho acquisition and absence of production related curtailment partially offset by lower rates from price-related reserve revisions. ● Higher production and operating expenses and taxes other than income taxes, primarily due to higher production from our Concho acquisition and the absence of production curtailments. In addition to the items detailed above, in the six-month period of 2021, earnings also increased due to: ● The absence of $399 million in after-tax impairments related to certain noncore gas assets in the Wind River Basin operations area. In addition to the items detailed above, in the six-month period of 2021, earnings also decreased due to: ● Realized losses on hedges related to derivative positions acquired in our Concho acquisition. See Note 10 for additional information. ● Higher selling, general and administrative expenses, primarily due to transaction and restructuring charges related to our Concho acquisition. For additional information see Note 3. 43 Production Average production increased 483 MBOED and 363 MBOED in the three- and six-month periods of 2021, respectively, primarily due to: ● Higher volumes due to our Concho acquisition. ● New wells online from our development programs in Eagle Ford, Permian and Bakken. ● Absence of curtailments. These production increases were partly offset by: ● Normal field decline. In addition to the items detailed above, in the six-month period of 2021, production also decreased due to: ● Higher unplanned downtime, primarily due to Winter Storm Uri. Planned Dispositions In July 2021, we entered into divestiture agreements to sell our interests in certain noncore assets in our Lower 48 segment. Proceeds from these agreements total approximately $0.2 billion before customary adjustments. The transactions are expected to close in the third quarter of 2021. Canada Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Net Income (Loss) Attributable to ConocoPhillips ($MM) $ 102 (86) 112 (195) Average Net Production Crude oil (MBD) 9 5 10 4 Natural gas liquids (MBD) 4 2 4 1 Bitumen (MBD) 68 34 69 50 Natural gas (MMCFD) 84 40 87 30 Total Production (MBOED) 95 48 98 60 Average Sales Prices Crude oil ($ per bbl) $ 56.87 8.69 51.66 15.39 Natural gas liquids ($ per bbl) 27.14 1.64 26.19 1.89 Bitumen ($ per bbl) 37.60 (23.11) 34.09 (3.09) Natural gas ($ per MCF) 2.26 0.79 2.32 1.05 Average sales prices include unutilized transportation costs. Our Canadian operations mainly consist of the Surmont oil sands development in Alberta and the liquids-rich Montney unconventional play in British Columbia. As of June 30, 2021, Canada contributed 8 percent of our consolidated liquids production and 4 percent of our consolidated natural gas production. Net Income (Loss) Attributable to ConocoPhillips Earnings from Canada increased $188 million and $307 million, respectively, in the three- and six-month periods of 2021. Earnings were positively impacted by: ● Higher realized bitumen and crude oil prices. ● After-tax gains on disposition related to contingent payments of $52 million and $72 million in the three- and six-month periods of 2021, respectively, associated with the sale of certain assets to CVE in 2017. See Note 3 for additional information about the transaction. 44 Partly offsetting the increase in earnings was: ● Higher production and operating expenses primarily due to the absence of production curtailment and increased Montney production. ● Higher DD&A expenses primarily driven by higher production volumes partially offset by lower rates from price-related reserve revisions. ● Absence of a $48 million refund from the Alberta Tax & Revenue Administration. Production Average production increased 47 MBOED in the second quarter of 2021 and increased 38 MBOED in the six- month period of 2021, respectively. The production increase was primarily due to: ● Absence of curtailments at our Surmont operated asset. ● Wells online from Pad 2 and 3 in the Montney. ● Production from our Kelt acquisition in the third quarter of 2020. ● Improved well performance at our Surmont operated asset. Europe, Middle East and North Africa Three Months Ended Six Months Ended June 30 June 30 2021 2020 * 2021 2020 * Net Income Attributable to ConocoPhillips ($MM) $ 207 25 360 226 Consolidated Operations Average Net Production Crude oil (MBD) 120 75 118 84 Natural gas liquids (MBD) 4 5 4 5 Natural gas (MMCFD) 297 264 303 287 Total Production (MBOED) 173 124 172 137 Average Sales Prices Crude oil ($ per bbl) $ 66.34 32.32 62.48 44.70 Natural gas liquids ($ per bbl) 39.49 16.76 38.21 18.75 Natural gas ($ per MCF) 7.17 2.21 6.58 3.03 *Prior periods have been updated to reflect the Middle East Business Unit moving from Asia Pacific to the Europe, Middle East and North Africa segment. See Note 17 for additional information on our segments. The Europe, Middle East and North Africa segment consists of operations principally located in the Norwegian sector of the North Sea and the Norwegian Sea, Qatar, Libya and commercial operations in the U.K. As of June 30, 2021, our Europe, Middle East and North Africa operations contributed 12 percent of our consolidated liquids production and 14 percent of our consolidated natural gas production. Net Income (Loss) Attributable to ConocoPhillips Earnings from Europe, Middle East and North Africa increased by $182 million and $134 million in the three- and six-month periods of 2021, respectively. Earnings were positively impacted by: ● Higher realized natural gas, crude oil and NGL prices. ● Higher LNG sales prices, reflected in equity in earnings of affiliates. 45 Partly offsetting the increase in earnings was: ● Higher taxes. ● Higher DD&A expenses and production and operating expenses. ● Absence of foreign currency gains. Consolidated Production Average consolidated production increased 49 MBOED and 35 MBOED in the three- and six-month periods of 2021, respectively. The production increase was primarily due: ● Higher production in Libya due to the absence of a forced shutdown of the Es Sider export terminal and other eastern export terminals after a period of civil unrest. ● Improved well performance in Norway. ● New production from Norway drilling activities including the completion of our Tor II redevelopment project first achieved in December 2020. Partly offsetting the increase in production was: ● Normal field decline. Asia Pacific Three Months Ended Six Months Ended June 30 June 30 2021 2020 * 2021 2020 * Net Income Attributable to ConocoPhillips ($MM) $ 175 648 492 920 Consolidated Operations Average Net Production Crude oil (MBD) 69 61 70 70 Natural gas liquids (MBD) - 1 - 2 Natural gas (MMCFD) 358 423 353 522 Total Production (MBOED) 129 133 129 159 Average Sales Prices Crude oil ($ per bbl) $ 67.72 27.98 64.01 43.02 Natural gas liquids ($ per bbl) - 27.90 - 33.21 Natural gas ($ per MCF) 6.32 4.74 6.10 5.45 *Prior periods have been updated to reflect the Middle East Business Unit moving from Asia Pacific to the Europe, Middle East and North Africa segment. See Note 17 for additional information on our segments. The Asia Pacific segment has operations in China, Indonesia, Malaysia and Australia. As of June 30, 2021, Asia Pacific contributed 7 percent of our consolidated liquids production and 17 percent of our consolidated natural gas production. 46 Net Income (Loss) Attributable to ConocoPhillips Earnings decreased $473 million in the second quarter of 2021 and decreased $428 million in the six-month period of 2021, respectively. Earnings were negatively impacted by: ● Absence of a $597 million after-tax gain related to our Australia-West divestiture. ● Lower earnings due to our Australia-West divestiture completed in the second quarter of 2020. ● Higher taxes associated with higher production and prices in Malaysia and Indonesia. Partly offsetting the decrease in earnings was: ● Higher crude oil and natural gas prices. ● Lower production and operating expenses related to our Australia-West divestiture. In addition to the items detailed above, in the six-month period of 2021, earnings also decreased due to: ● Lower equity in earnings of affiliates, primarily due to lower LNG lagging contract prices, partly offset by increased LNG sales volumes. In addition to the items detailed above, in the six-month period of 2021, earnings also increased due to: ● A $200 million gain on disposition related to a FID bonus from our Australia-West divestiture. For additional information related to this FID bonus, see Note 3 and Note 9 . ● Lower exploration expenses, due to the absence of an unproved property impairment and dry hole expenses related to the Kamunsu East Field in Malaysia. Consolidated Production Average consolidated production decreased 4 MBOED and 30 MBOED in the three- and six-month periods of 2021, respectively. The production decrease was primarily due to: ● The divestiture of our Australia-West assets that contributed 24 MBOED in the second quarter and 35 MBOED in the six-month period of 2020. ● Normal field decline. Partly offsetting the decrease in production was: ● Absence of curtailments in Malaysia. ● Bohai Bay development activity in China. ● Increased production in Malaysia associated with Malakai Phase 2 first production and ramp-up. Other International Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Net Income (Loss) Attributable to ConocoPhillips ($MM) $ (5) (6) (9) 22 The Other International segment consists of exploration and appraisal activities in Colombia and Argentina as well as contingencies associated with prior operations in other countries. Earnings from our Other International operations increased $1 million and decreased $31 million in the three- and six-month periods of 2021, respectively. The decrease in earnings was primarily due to the absence of a $29 million after-tax benefit to earnings from the dismissal of arbitration related to prior operations in Senegal recognized in the first quarter of 2020. 47 Corporate and Other Millions of Dollars Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 Net Income (Loss) Attributable to ConocoPhillips Net interest expense $ (181) (174) (451) (329) Corporate general and administrative expenses (65) (90) (194) (40) Technology (4) (9) 37 (8) Other income (expense) 316 458 553 (1,213) $ 66 185 (55) (1,590) Net interest expense consists of interest and financing expense, net of interest income and capitalized interest. Net interest expense increased by $7 million and $122 million in the three-and six-month periods of 2021, respectively, primarily due to higher debt balances assumed due to our Concho acquisition. For additional information regarding the debt acquired in our Concho transaction, see Note 6. Corporate G&A expenses include compensation programs and staff costs. These expenses decreased by $25 million in the three-month period of 2021 primarily due to mark to market adjustments associated with certain compensation programs. For the six-month period of 2021, Corporate G&A expenses increased by $154 million primarily due to restructuring expenses associated with our Concho acquisition. For additional information about restructuring expenses, see Note 14. Technology includes our investment in new technologies or businesses, as well as licensing revenues. Activities are focused on both conventional and tight oil reservoirs, shale gas, heavy oil, oil sands, enhanced oil recovery, as well as LNG. Earnings from Technology increased $45 million in the six-month period of 2021 primarily due to higher licensing revenues. Other income (expense) or “Other” includes certain corporate tax-related items, foreign currency transaction gains and losses, environmental costs associated with sites no longer in operation, other costs not directly associated with an operating segment, premiums incurred on the early retirement of debt, holding gains or losses on equity securities, and pension settlement expense. “Other” decreased by $142 million in the second quarter of 2021, primarily due to an after-tax gain of $418 million on our CVE common shares in the second quarter of 2021 compared with an after-tax gain of $551 million in the same period of 2020 as well as the absence of the release of a $92 million deferred tax asset related to our Australia-West divestiture in the second quarter of 2020. In the six-month period of 2021, “Other” increased by $1,766 million, primarily due to an after-tax gain of $726 million on our CVE common shares in the six-month period of 2021, and the absence of a $1,140 million after-tax loss on those shares in the six-month period of 2020. 48 CAPITAL RESOURCES AND LIQUIDITY Financial Indicators Millions of Dollars June 30 December 31 2021 2020 Cash and cash equivalents $ 6,608 2,991 Short-term investments 2,251 3,609 Total debt 20,010 15,369 Total equity 44,276 29,849 Percent of total debt to capital* 31 % 34 Percent of floating-rate debt to total debt 5 % 7 *Capital includes total debt and total equity. To meet our short- and long-term liquidity requirements, we look to a variety of funding sources, including cash generated from operating activities, our commercial paper and credit facility programs, and our ability to sell securities using our shelf registration statement. During the first six months of 2021, the primary uses of our available cash were $2,465 million to support our ongoing capital expenditures and investments program; $1,171 million to pay dividends, approximately $1.0 billion of hedging, transaction and restructuring costs, and $981 million to repurchase common stock. During the first six months of 2021, our cash and cash equivalents increased by $3,617 million to $6,608 million. At June 30, 2021, we had cash and cash equivalents of $6.6 billion, short-term investments of $2.3 billion, and available borrowing capacity under our credit facility of $5.7 billion, totaling over $14 billion of liquidity. We believe current cash balances and cash generated by operations, together with access to external sources of funds as described below in the “Significant Changes in Capital” section, will be sufficient to meet our funding requirements in the near- and long-term, including our capital spending program, dividend payments and required debt payments. Significant Changes in Capital Operating Activities Cash provided by operating activities was $6,331 million for the first six months of 2021, compared with $2,262 million for the corresponding period of 2020. The increase in cash provided by operating activities is primarily due to higher realized commodity prices and higher sales volumes mostly due to our acquisition of Concho. The increase in cash provided by operating activities was partly offset by the settlement of all oil and gas hedging positions acquired from Concho, normal field decline, transaction and restructuring costs, and the divestiture of our Australia-West assets. Our short- and long-term operating cash flows are highly dependent upon prices for crude oil, bitumen, natural gas, LNG and NGLs. Prices and margins in our industry have historically been volatile and are driven by market conditions over which we have no control. Absent other mitigating factors, as these prices and margins fluctuate, we would expect a corresponding change in our operating cash flows. 49 The level of absolute production volumes, as well as product and location mix, impacts our cash flows. Future production is subject to numerous uncertainties, including, among others, the volatile crude oil and natural gas price environment, which may impact investment decisions; the effects of price changes on production sharing and variable-royalty contracts; acquisition and disposition of fields; field production decline rates; new technologies; operating efficiencies; timing of startups and major turnarounds; political instability; impacts of a global pandemic; weather-related disruptions; and the addition of proved reserves through exploratory success and their timely and cost-effective development. While we actively manage these factors, production levels can cause variability in cash flows, although generally this variability has not been as significant as that caused by commodity prices. To maintain or grow our production volumes, we must continue to add to our proved reserve base. See the “Capital Expenditures and Investments” section, for information about our capital expenditures and investments. On January 15, 2021, we assumed financial derivative instruments consisting of oil and natural gas swaps in connection with our acquisition of Concho. At March 31, 2021, all oil and natural gas derivative financial instruments acquired from Concho were contractually settled. In the first six months of 2021, we paid $761 million relating to these settlements. See Note 10 for additional information. Investing Activities For the first six months of 2021, we invested $2.5 billion in capital expenditures. Our 2021 operating plan capital expenditures is currently expected to be $5.3 billion compared with $4.7 billion in 2020. See the “Capital Expenditures and Investments” section, for information about our capital expenditures and investments. We completed our acquisition of Concho on January 15, 2021. The assets acquired in the transaction included $382 million of cash. See Note 3 for additional information. In May 2021, we announced a paced monetization of our investment in CVE common shares with the plan to direct proceeds toward our existing share repurchase authorization program. We expect to fully dispose of our CVE shares by year-end 2022, however, the sales pace will be guided by market conditions, and we retain discretion to adjust accordingly. In the second quarter of 2021, we sold 20 million of these shares, representing approximately 10% of the shares held at December 31, 2020, for $180 million of proceeds. See Note 5 for additional information. We invest in short-term investments as part of our cash investment strategy, the primary objective of which is to protect principal, maintain liquidity and provide yield and total returns; these investments include time deposits, commercial paper, as well as debt securities classified as available for sale. Funds for short-term needs to support our operating plan and provide resiliency to react to short-term price volatility are invested in highly liquid instruments with maturities within the year. Funds we consider available to maintain resiliency in longer term price downturns and to capture opportunities outside a given operating plan may be invested in instruments with maturities greater than one year. Investing activities in the first six months of 2021 included net sales of $1,302 million of investments. We sold $1,403 million of short-term instruments and invested $101 million in long-term instruments. See Note 10 for additional information. 50 Financing Activities We have a revolving credit facility totaling $6.0 billion, expiring in May 2023. Our revolving credit facility may be used for direct bank borrowings, the issuance of letters of credit totaling up to $500 million, or as support for our commercial paper program. The revolving credit facility is broadly syndicated among financial institutions and does not contain any material adverse change provisions or any covenants requiring maintenance of specified financial ratios or credit ratings. The facility agreement contains a cross-default provision relating to the failure to pay principal or interest on other debt obligations of $200 million or more by ConocoPhillips, or any of its consolidated subsidiaries. The amount of the facility is not subject to redetermination prior to its expiration date. Credit facility borrowings may bear interest at a margin above rates offered by certain designated banks in the London interbank market or at a margin above the overnight federal funds rate or prime rates offered by certain designated banks in the U.S. The facility agreement calls for commitment fees on available, but unused, amounts. The facility agreement also contains early termination rights if our current directors or their approved successors cease to be a majority of the Board of Directors. The revolving credit facility supports ConocoPhillips Company’s ability to issue up to $6.0 billion of commercial paper. Commercial paper maturities are generally limited to 90 days. With $300 million of commercial paper outstanding and no direct borrowings or letters of credit, we had $5.7 billion in available borrowing capacity under the revolving credit facility at June 30, 2021. We may consider issuing additional commercial paper in the future to supplement our cash position. On January 15, 2021, we completed the acquisition of Concho in an all-stock transaction. In the acquisition, we assumed Concho’s publicly traded debt, which was recorded at fair value of $4.7 billion on the acquisition date. In June 2021, we reaffirmed our commitment to preserving our ‘A’-rated balance sheet with the intent to reduce gross debt by $5 billion over the next five years, driving a more resilient and efficient capital structure. See Note 3 for additional information on our Concho acquisition and see Note 6 for additional information on the debt. In January 2021, Fitch affirmed its rating of our long-term debt as “A” with a “stable” outlook and affirmed its rating of our short-term debt as “F1+.” On January 25, 2021, S&P revised its industry risk assessment of the E&P industry to “Moderately High” from “Intermediate” based on a view of increasing risks from the energy transition, price volatility, and weaker profitability. On February 11, 2021, S&P downgraded its rating of our long-term debt from “A” to “A-” with a “stable” outlook and downgraded its rating of our short-term debt from “A-1” to “A-2.” In May 2021, Moody’s affirmed its rating of our senior long-term debt of “A3” with a “stable” outlook. Moody’s rates our short-term debt as “Prime-2.” We do not have any ratings triggers on any of our corporate debt that would cause an automatic default, and thereby impact our access to liquidity, upon downgrade of our credit ratings. If our credit ratings are downgraded from their current levels, it could increase the cost of corporate debt available to us and restrict our access to the commercial paper markets. If our credit rating were to deteriorate to a level prohibiting us from accessing the commercial paper market, we would still be able to access funds under our revolving credit facility. Certain of our project-related contracts, commercial contracts and derivative instruments contain provisions requiring us to post collateral. Many of these contracts and instruments permit us to post either cash or letters of credit as collateral. At June 30, 2021 and December 31, 2020, we had direct bank letters of credit of $222 million and $249 million, respectively, which secured performance obligations related to various purchase commitments incident to the ordinary conduct of business. In the event of credit ratings downgrades, we may be required to post additional letters of credit. Shelf Registration We have a universal shelf registration statement on file with the SEC under which we have the ability to issue and sell an indeterminate amount of various types of debt and equity securities. 51 Guarantor Summarized Financial Information We have various cross guarantees among our Obligor group; ConocoPhillips, ConocoPhillips Company and Burlington Resources LLC, with respect to publicly held debt securities. ConocoPhillips Company is 100 percent owned by ConocoPhillips. Burlington Resources LLC is 100 percent owned by ConocoPhillips Company. ConocoPhillips and/or ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of Burlington Resources LLC, with respect to its publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following tables present summarized financial information for the Obligor Group, as defined below: ● The Obligor Group will reflect guarantors and issuers of guaranteed securities consisting of ConocoPhillips, ConocoPhillips Company and Burlington Resources LLC. ● Consolidating adjustments for elimination of investments in and transactions between the collective guarantors and issuers of guaranteed securities are reflected in the balances of the summarized financial information. ● Non-Obligated Subsidiaries are excluded from the presentation. Upon completion of the Concho acquisition on January 15, 2021, we assumed Concho’s publicly traded debt of approximately $3.9 billion in aggregate principal amount, which was recorded at fair value of $4.7 billion on the acquisition date. We completed a debt exchange offer that settled on February 8, 2021, of which 98 percent, or approximately $3.8 billion in aggregate principal amount of Concho’s notes, were tendered and accepted for new debt issued by ConocoPhillips. The new debt issued in the exchange is fully and unconditionally guaranteed by ConocoPhillips Company. Both the guarantor and issuer of the exchange debt is reflected within the Obligor Group presented here. See Note 3 and Note 6 for additional information relating to the Concho transaction. Transactions and balances reflecting activity between the Obligors and Non-Obligated Subsidiaries are presented below: Summarized Income Statement Data Millions of Dollars Six Months Ended June 30, 2021 Revenues and Other Income $ 13,054 Income (loss) before income taxes 3,138 Net income (loss) 3,073 Net Income (Loss) Attributable to ConocoPhillips 3,073 52 Summarized Balance Sheet Data Millions of Dollars June 30 December 31 2021 2020 Current assets $ 10,597 8,535 Amounts due from Non-Obligated Subsidiaries, current 585 440 Noncurrent assets 58,272 37,180 Amounts due from Non-Obligated Subsidiaries, noncurrent 8,326 7,730 Current liabilities 5,322 3,797 Amounts due to Non-Obligated Subsidiaries, current 2,004 1,365 Noncurrent liabilities 25,829 18,627 Amounts due to Non-Obligated Subsidiaries, noncurrent 7,526 3,972 Capital Requirements For information about our capital expenditures and investments, see the “Capital Expenditures and Investments” section. Our debt balance at June 30, 2021, was $20.0 billion, compared with $15.4 billion at December 31, 2020. The net increase is primarily due to $4.7 billion of debt assumed in the Concho acquisition. The current portion of debt, including payments for finance leases, is $1,205 million. Payments will be made using current cash balances and cash generated by operations. For additional information regarding debt, see Note 6. We believe in delivering value to our shareholders through a growing and sustainable dividend supplemented by additional returns of capital, including share repurchases. In 2020, we paid $1.8 billion, equating to $1.69 per share of common stock, in dividends. We anticipate returning $2.3 billion to shareholders in the form of dividends in 2021. In the first six months of 2021, we paid dividends totaling $1.2 billion, the equivalent of $0.86 per share. On July 13, 2021, we announced a quarterly dividend of $0.43 per share, payable September 1, 2021. In late 2016, we initiated our current share repurchase program, which has a total program authorization to repurchase $25 billion of our common stock. As of June 30, 2021, our plan is to repurchase approximately $3.5 billion in 2021 and we anticipate funding approximately $1.0 billion of that amount through proceeds from the sales of our CVE common stock. The pace of CVE share sales will be guided by market conditions, and we retain the discretion to adjust accordingly. In the six months ended June 30, 2021, we repurchased 17.7 million shares at a cost of $981 million, $159 million of which was funded using CVE share proceeds. Since the inception of the program, we have repurchased 206 million shares at a cost of $11.5 billion. Our dividend and share repurchase programs are subject to numerous considerations, including market conditions, management discretion and other factors. See “Item 1A—Risk Factors – Our ability to declare and pay dividends and repurchase shares is subject to certain considerations” in Part I—Item 1A in our 2020 Annual Report on Form 10-K. 53 Capital Expenditures and Investments Millions of Dollars Six Months Ended June 30 2021 2020 Alaska $ 463 732 Lower 48 1,480 1,130 Canada 68 142 Europe, Middle East and North Africa 257 251 Asia Pacific 148 188 Other International 18 63 Corporate and Other 31 19 Capital expenditures and investments $ 2,465 2,525 During the first six months of 2021, capital expenditures and investments supported key exploration and development programs, primarily: ● Development and appraisal activities in the Lower 48, primarily Permian, Eagle Ford, and Bakken. ● Appraisal and development activities in Alaska related to the Western North Slope and development activities in the Greater Kuparuk Area. ● Appraisal activities in liquids-rich plays and optimization of oils sands development in Canada. ● Continued development activities across assets in Norway. ● Continued development activities in China, Malaysia and Indonesia. In February 2021, we announced 2021 operating plan capital expenditures of $5.5 billion. In June 2021, we reduced capital guidance to $5.3 billion, recognizing synergistic savings from our Concho acquisition. Contingencies 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. For information on other contingencies, see Note 9. 54 Legal and Tax Matters 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 certain federal, state and privately owned properties, claims of alleged environmental contamination from historic operations, and other contract disputes. 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 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. Environmental We are subject to the same numerous international, federal, state and local environmental laws and regulations as other companies in our industry. For a discussion of the most significant of these environmental laws and regulations, including those with associated remediation obligations, see the “Environmental” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 64–66 of our 2020 Annual Report on Form 10-K. We occasionally receive requests for information or notices of potential liability from the EPA and state environmental agencies alleging that we are a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or an equivalent state statute. On occasion, we also have been made a party to cost recovery litigation by those agencies or by private parties. These requests, notices and lawsuits assert potential liability for remediation costs at various sites that typically are not owned by us, but allegedly contain waste attributable to our past operations. As of June 30, 2021, there were 15 sites around the U.S. in which we were identified as a potentially responsible party under CERCLA and comparable state laws. At June 30, 2021, our balance sheet included a total environmental accrual of $188 million, compared with $180 million at December 31, 2020, for remediation activities in the U.S. and Canada. We expect to incur a substantial amount of these expenditures within the next 30 years. Notwithstanding any of the foregoing, and as with other companies engaged in similar businesses, environmental costs and liabilities are inherent concerns in our operations and products, and there can be no assurance that material costs and liabilities will not be incurred. However, we currently do not expect any material adverse effect upon our results of operations or financial position as a result of compliance with current environmental laws and regulations. Climate Change Continuing political and social attention to the issue of global climate change has resulted in a broad range of proposed or promulgated state, national and international laws focusing on GHG reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve, and while it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation, such laws, if enacted, could have a material impact on our results of operations and financial condition. For examples of legislation or precursors for possible regulation and factors on which the ultimate impact on our financial performance will depend, see the “Climate Change” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 67–69 of our 2020 Annual Report on Form 10-K. 55 Climate Change Litigation Beginning in 2017, governmental and other entities in several states in the U.S. have filed lawsuits against oil and gas companies, including ConocoPhillips, seeking compensatory damages and equitable relief to abate alleged climate change impacts. Additional lawsuits with similar allegations are expected to be filed. The amounts claimed by plaintiffs are unspecified and the legal and factual issues involved in these cases are unprecedented. ConocoPhillips believes these lawsuits are factually and legally meritless and are an inappropriate vehicle to address the challenges associated with climate change and will vigorously defend against such lawsuits. Several Louisiana parishes and the State of Louisiana have filed 43 lawsuits under Louisiana’s State and Local 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 of the lawsuits and will vigorously defend against them. Because Plaintiffs’ SLCRMA theories are unprecedented, there is uncertainty about these claims (both as to scope and damages) and we continue to evaluate our exposure in these lawsuits. Company Response to Climate-Related Risks The company has responded by putting in place a Sustainable Development Risk Management Standard covering the assessment and registering of significant and high sustainable development risks based on their consequence and likelihood of occurrence. We have developed a company-wide Climate Change Action Plan with the goal of tracking mitigation activities for each climate-related risk included in the corporate Sustainable Development Risk Register. The risks addressed in our Climate Change Action Plan fall into four broad categories: ● GHG-related legislation and regulation. ● GHG emissions management. ● Physical climate-related impacts. ● Climate-related disclosure and reporting. Emissions are categorized into three different scopes. Gross operated scope 1 and scope 2 GHG emissions help us understand our climate transition risk. ● Scope 1 emissions are direct GHG emissions from sources that we own or control. ● Scope 2 emissions are GHG emissions from the generation of purchased electricity or steam that we consume. Scope 3 emissions are indirect emissions from sources that we neither own nor control. 56 We announced in October 2020 the adoption of a Paris-aligned climate risk framework with the objective of implementing a coherent set of choices designed to facilitate the success of our existing exploration and production business through the energy transition. Given the uncertainties remaining about how the energy transition will evolve, the strategy aims to be robust across a range of potential future outcomes. The strategy is comprised of four pillars: ● Targets: Our target framework consists of a hierarchy of targets, from a long-term ambition that sets the direction and aim of the strategy, to a medium-term performance target for GHG emissions intensity, to shorter-term targets for flaring and methane intensity reductions. These performance targets are supported by lower-level internal business unit goals to enable the company to achieve the company-wide targets. We have set a target to reduce our gross operated (scope 1 and 2) emissions intensity by 35 to 45 percent from 2016 levels by 2030, with an ambition to achieve net-zero operated emissions by 2050. We have joined the World Bank Flaring Initiative to work towards zero routine flaring of gas by 2030. ● Technology choices: We expanded our Marginal Abatement Cost Curve process to provide a broader range of opportunities for emission reduction technology. ● Portfolio choices: Our corporate authorization process requires all qualifying projects to include a GHG price in their project approval economics. Different GHG prices are used depending on the region or jurisdiction. Projects in jurisdictions with existing GHG pricing regimes incorporate the existing GHG price and forecast into their economics. Projects where no existing GHG pricing regime exists utilize a scenario forecast from our internally consistent World Energy Model. In this way, both existing and emerging regulatory requirements are considered in our decision-making. The company does not use an estimated market cost of GHG emissions when assessing reserves in jurisdictions without existing GHG regulations. ● External engagement: Our external engagement aims to differentiate ConocoPhillips within the oil and gas sector with our approach to managing climate-related risk. We are a Founding Member of the Climate Leadership Council (CLC), an international policy institute founded in collaboration with business and environmental interests to develop a carbon dividend plan. Participation in the CLC provides another opportunity for ongoing dialogue about carbon pricing and framing the issues in alignment with our public policy principles. We also belong to and fund Americans For Carbon Dividends, the education and advocacy branch of the CLC. 57 CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected revenues, projected costs and plans, objectives of management for future operations, the anticipated benefits of the transaction between us and Concho Resources Inc. (Concho), the anticipated impact of the transaction on the combined company’s business and future financial and operating results, the expected amount and the timing of synergies from the transaction are forward-looking statements. Examples of forward-looking statements contained in this report include our expected production growth and outlook on the business environment generally, our expected capital budget and capital expenditures, and discussions concerning future dividends. You can often identify our forward-looking statements by the words “anticipate,” “believe,” “budget,” “continue,” “could,” “effort,” “estimate,” “expect,” “forecast,” “intend,” “goal,” “guidance,” “may,” “objective,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “target,” “will,” “would” and similar expressions. We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. In addition, we based many of these forward- looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward- looking statements. Any differences could result from a variety of factors and uncertainties, including, but not limited to, the following: ● The impact of public health crises, including pandemics (such as COVID-19) and epidemics and any related company or government policies or actions. ● Global and regional changes in the demand, supply, prices, differentials or other market conditions affecting oil and gas, including changes resulting from a public health crisis or from the imposition or lifting of crude oil production quotas or other actions that might be imposed by OPEC and other producing countries and the resulting company or third-party actions in response to such changes. ● Fluctuations in crude oil, bitumen, natural gas, LNG and NGLs prices, including a prolonged decline in these prices relative to historical or future expected levels. ● The impact of significant declines in prices for crude oil, bitumen, natural gas, LNG and NGLs, which may result in recognition of impairment charges on our long-lived assets, leaseholds and nonconsolidated equity investments. ● Potential failures or delays in achieving expected reserve or production levels from existing and future oil and gas developments, including due to operating hazards, drilling risks and the inherent uncertainties in predicting reserves and reservoir performance. ● Reductions in reserves replacement rates, whether as a result of the significant declines in commodity prices or otherwise. ● Unsuccessful exploratory drilling activities or the inability to obtain access to exploratory acreage. ● Unexpected changes in costs or technical requirements for constructing, modifying or operating E&P facilities. ● Legislative and regulatory initiatives addressing environmental concerns, including initiatives addressing the impact of global climate change or further regulating hydraulic fracturing, methane emissions, flaring or water disposal. ● Lack of, or disruptions in, adequate and reliable transportation for our crude oil, bitumen, natural gas, LNG and NGLs. ● Inability to timely obtain or maintain permits, including those necessary for construction, drilling and/or development, or inability to make capital expenditures required to maintain compliance with any necessary permits or applicable laws or regulations. 58 ● Failure to complete definitive agreements and feasibility studies for, and to complete construction of, announced and future E&P and LNG development in a timely manner (if at all) or on budget. ● Potential disruption or interruption of our operations due to accidents, extraordinary weather events, civil unrest, political events, war, terrorism, cyber attacks, and information technology failures, constraints or disruptions. ● Changes in international monetary conditions and foreign currency exchange rate fluctuations. ● Changes in international trade relationships, including the imposition of trade restrictions or tariffs relating to crude oil, bitumen, natural gas, LNG, NGLs and any materials or products (such as aluminum and steel) used in the operation of our business. ● Substantial investment in and development use of, competing or alternative energy sources, including as a result of existing or future environmental rules and regulations. ● Liability for remedial actions, including removal and reclamation obligations, under existing and future environmental regulations and litigation. ● Significant operational or investment changes imposed by existing or future environmental statutes and regulations, including international agreements and national or regional legislation and regulatory measures to limit or reduce GHG emissions. ● Liability resulting from litigation, including the potential for litigation related to the transaction with Concho, or our failure to comply with applicable laws and regulations. ● General domestic and international economic and political developments, including armed hostilities; expropriation of assets; changes in governmental policies relating to crude oil, bitumen, natural gas, LNG and NGLs pricing; regulation or taxation; and other political, economic or diplomatic developments. ● Volatility in the commodity futures markets. ● Changes in tax and other laws, regulations (including alternative energy mandates), or royalty rules applicable to our business. ● Competition and consolidation in the oil and gas E&P industry. ● Any limitations on our access to capital or increase in our cost of capital, including as a result of illiquidity or uncertainty in domestic or international financial markets or investment sentiment. ● Our inability to execute, or delays in the completion, of any asset dispositions or acquisitions we elect to pursue. ● Potential failure to obtain, or delays in obtaining, any necessary regulatory approvals for pending or future asset dispositions or acquisitions, or that such approvals may require modification to the terms of the transactions or the operation of our remaining business. ● Potential disruption of our operations as a result of pending or future asset dispositions or acquisitions, including the diversion of management time and attention. ● Our inability to deploy the net proceeds from any asset dispositions that are pending or that we elect to undertake in the future in the manner and timeframe we currently anticipate, if at all. ● Our inability to liquidate the common stock issued to us by Cenovus Energy as part of our sale of certain assets in western Canada at prices we deem acceptable, or at all. ● The operation and financing of our joint ventures. ● The ability of our customers and other contractual counterparties to satisfy their obligations to us, including our ability to collect payments when due from the government of Venezuela or PDVSA. ● Our inability to realize anticipated cost savings and capital expenditure reductions. ● The inadequacy of storage capacity for our products, and ensuing curtailments, whether voluntary or involuntary, required to mitigate this physical constraint. ● Our ability to successfully integrate Concho’s business and fully achieve the expected benefits and cost reductions associated with the transaction with Concho in a timely manner or at all. ● The risk that we will be unable to retain and hire key personnel. ● Unanticipated difficulties or expenditures relating to integration with Concho. ● Uncertainty as to the long-term value of our common stock. ● The diversion of management time on integration-related matters. ● The factors generally described in Part I—Item 1A in our 2020 Annual Report on Form 10-K and any additional risks described in our other filings with the SEC. 59 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information about market risks for the six months ended June 30, 2021, does not differ materially from that discussed under Item 7A in our 2020 Annual Report on Form 10-K.