CONOCOPHILLIPS 10-Q

Item 1. Financial Statements Consolidated Income Statement ConocoPhillips Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Revenues and Other Income Sales and other operating revenues $ 11,326 4,386 30,708 13,293 Equity in earnings of affiliates 239 35 500 346 Gain (loss) on dispositions 2 ( 3 ) 294 551 Other income (loss) 49 ( 38 ) 884 ( 983 ) Total Revenues and Other Income 11,616 4,380 32,386 13,207 Costs and Expenses Purchased commodities 4,179 1,839 11,660 5,630 Production and operating expenses 1,389 963 4,151 3,183 Selling, general and administrative expenses 128 96 556 249 Exploration expenses 65 125 206 410 Depreciation, depletion and amortization 1,672 1,411 5,425 3,980 Impairments ( 89 ) 2 ( 90 ) 521 Taxes other than income taxes 403 179 1,154 570 Accretion on discounted liabilities 61 62 186 195 Interest and debt expense 219 200 665 604 Foreign currency transaction (gain) loss ( 10 ) ( 5 ) 19 ( 88 ) Other expenses 17 20 78 7 Total Costs and Expenses 8,034 4,892 24,010 15,261 Income (loss) before income taxes 3,582 ( 512 ) 8,376 ( 2,054 ) Income tax provision (benefit) 1,203 ( 62 ) 2,924 ( 171 ) Net income (loss) 2,379 ( 450 ) 5,452 ( 1,883 ) Less: net loss attributable to noncontrolling interests - - - ( 46 ) Net Income (Loss) Attributable to ConocoPhillips $ 2,379 ( 450 ) 5,452 ( 1,929 ) Net Income (Loss) Attributable to ConocoPhillips Per Share of Common Stock (dollars) Basic $ 1.78 ( 0.42 ) 4.10 ( 1.79 ) Diluted 1.78 ( 0.42 ) 4.09 ( 1.79 ) Average Common Shares Outstanding (in thousands) Basic 1,332,286 1,077,377 1,327,216 1,079,525 Diluted 1,336,379 1,077,377 1,330,652 1,079,525 See Notes to Consolidated Financial Statements. Financial Statements Table of Contents 3 ConocoPhillips 2021 Q3 10-Q Consolidated Statement of Comprehensive Income ConocoPhillips Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Net Income (Loss) $ 2,379 ( 450 ) 5,452 ( 1,883 ) Other comprehensive income (loss) Defined benefit plans Reclassification adjustment for amortization of prior service credit included in net income (loss) ( 9 ) ( 8 ) ( 28 ) ( 24 ) Net actuarial gain (loss) arising during the period 8 ( 78 ) 113 ( 73 ) Reclassification adjustment for amortization of net actuarial losses included in net income (loss) 45 45 133 81 Income taxes on defined benefit plans ( 9 ) 10 ( 49 ) 3 Defined benefit plans, net of tax 35 ( 31 ) 169 ( 13 ) Unrealized holding gain (loss) on securities - - ( 1 ) 3 Income taxes on unrealized holding gain on securities - - - ( 1 ) Unrealized holding gain (loss) on securities, net of tax - - ( 1 ) 2 Foreign currency translation adjustments ( 237 ) 188 ( 72 ) ( 302 ) Income taxes on foreign currency translation adjustments ( 1 ) 2 ( 1 ) 4 Foreign currency translation adjustments, net of tax ( 238 ) 190 ( 73 ) ( 298 ) Other Comprehensive Income (Loss), Net of Tax ( 203 ) 159 95 ( 309 ) Comprehensive Income (Loss) 2,176 ( 291 ) 5,547 ( 2,192 ) Less: comprehensive income attributable to noncontrolling interests - - - ( 46 ) Comprehensive Income (Loss) Attributable to ConocoPhillips $ 2,176 ( 291 ) 5,547 ( 2,238 ) See Notes to Consolidated Financial Statements. Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 4 Consolidated Balance Sheet ConocoPhillips Millions of Dollars September 30 December 31 2021 2020 Assets Cash and cash equivalents $ 9,833 2,991 Short-term investments 678 3,609 Accounts and notes receivable (net of allowance of $ 2 and $ 4 , respectively) 5,336 2,634 Accounts and notes receivable—related parties 129 120 Investment in Cenovus Energy 1,416 1,256 Inventories 1,043 1,002 Prepaid expenses and other current assets 1,746 454 Total Current Assets 20,181 12,066 Investments and long-term receivables 8,058 8,017 Loans and advances—related parties - 114 Net properties, plants and equipment (net of accumulated DD&A of $ 65,223 and $ 62,213 , respectively) 56,689 39,893 Other assets 2,376 2,528 Total Assets $ 87,304 62,618 Liabilities Accounts payable $ 4,101 2,669 Accounts payable—related parties 30 29 Short-term debt 920 619 Accrued income and other taxes 2,082 320 Employee benefit obligations 691 608 Other accruals 2,625 1,121 Total Current Liabilities 10,449 5,366 Long-term debt 18,748 14,750 Asset retirement obligations and accrued environmental costs 5,721 5,430 Deferred income taxes 5,630 3,747 Employee benefit obligations 1,162 1,697 Other liabilities and deferred credits 1,479 1,779 Total Liabilities 43,189 32,769 Equity Common stock ( 2,500,000,000 shares authorized at $ 0.01 par value) Issued (2021— 2,089,046,718 shares; 2020— 1,798,844,267 shares) Par value 21 18 Capital in excess of par 60,431 47,133 Treasury stock (at cost: 2021— 770,099,851 shares; 2020— 730,802,089 shares) ( 49,521 ) ( 47,297 ) Accumulated other comprehensive loss ( 5,123 ) ( 5,218 ) Retained earnings 38,307 35,213 Total Equity 44,115 29,849 Total Liabilities and Equity $ 87,304 62,618 See Notes to Consolidated Financial Statements. Financial Statements Table of Contents 5 ConocoPhillips 2021 Q3 10-Q Consolidated Statement of Cash Flows ConocoPhillips Millions of Dollars Nine Months Ended September 30 2021 2020 Cash Flows From Operating Activities Net income (loss) $ 5,452 ( 1,883 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation, depletion and amortization 5,425 3,980 Impairments ( 90 ) 521 Dry hole costs and leasehold impairments 7 114 Accretion on discounted liabilities 186 195 Deferred taxes 895 ( 428 ) Undistributed equity earnings 258 450 Gain on dispositions ( 294 ) ( 551 ) (Gain) loss on investment in Cenovus Energy ( 743 ) 1,302 Other ( 866 ) ( 188 ) Working capital adjustments Decrease (increase) in accounts and notes receivable ( 1,619 ) 1,132 Increase in inventories ( 13 ) ( 74 ) Increase in prepaid expenses and other current assets ( 800 ) ( 49 ) Increase (decrease) in accounts payable 682 ( 583 ) Increase (decrease) in taxes and other accruals 2,648 ( 808 ) Net Cash Provided by Operating Activities 11,128 3,130 Cash Flows From Investing Activities Cash acquired from Concho 382 - Capital expenditures and investments ( 3,767 ) ( 3,657 ) Working capital changes associated with investing activities 79 ( 229 ) Proceeds from asset dispositions 792 1,312 Net sales (purchases) of investments 2,846 ( 1,089 ) Collection of advances/loans—related parties 105 116 Other ( 386 ) ( 31 ) Net Cash Provided by (Used in) Investing Activities 51 ( 3,578 ) Cash Flows From Financing Activities Issuance of debt - 300 Repayment of debt ( 363 ) ( 234 ) Issuance of company common stock 27 ( 2 ) Repurchase of company common stock ( 2,224 ) ( 726 ) Dividends paid ( 1,750 ) ( 1,367 ) Other 6 ( 27 ) Net Cash Used in Financing Activities ( 4,304 ) ( 2,056 ) Effect of Exchange Rate Changes on Cash, Cash Equivalents and Restricted Cash ( 3 ) ( 62 ) Net Change in Cash, Cash Equivalents and Restricted Cash 6,872 ( 2,566 ) Cash, cash equivalents and restricted cash at beginning of period 3,315 5,362 Cash, Cash Equivalents and Restricted Cash at End of Period $ 10,187 2,796 Restricted cash of $ 95 million and $ 259 million are included in the "Prepaid expenses and other current assets" and "Other assets" lines, respectively, of our Consolidated Balance Sheet as of September 30, 2021. Restricted cash of $ 94 million and $ 230 million are included in the "Prepaid expenses and other current assets" and "Other assets" lines, respectively, of our Consolidated Balance Sheet as of December 31, 2020. See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 6 Notes to Consolidated Financial Statements Note 1—Basis of Presentation The interim-period financial information presented in the financial statements included in this report is unaudited and, in the opinion of management, includes all known accruals and adjustments necessary for a fair presentation of the consolidated financial position of ConocoPhillips , its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature unless otherwise disclosed. Certain notes and other information have been condensed or omitted from the interim financial statements included in this report. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and notes included in our 2020 Annual Report on Form 10-K. Note 2—Inventories Millions of Dollars September 30 December 31 2021 2020 Crude oil and natural gas $ 485 461 Materials and supplies 558 541 Total Inventories $ 1,043 1,002 Inventories valued on the LIFO basis $ 305 282 Note 3—Acquisitions and Dispositions Announced Acquisition of Shell Permian Assets In September 2021, we signed a definitive agreement to acquire Shell Enterprises LLC’s assets in the Delaware Basin in an all-cash transaction for $ 9.5 billion before customary adjustments (Shell Permian Acquisition). Assets to be acquired include approximately 225,000 net acres and producing properties located entirely in Texas, as well as over 600 miles of operated crude, gas and water pipelines and infrastructure. The acquisition is anticipated to close in the fourth quarter of 2021, subject to regulatory approval and other customary closing conditions. Under the terms of the agreement, we paid a deposit of $ 475 million which is presented within “Cash Flows from Investing Activities - Other” on our consolidated statement of cash flows. See Item 1A “Risk Factors” for further discussion of risks related to the Shell Permian Acquisition. Acquisition of Concho Resources Inc. (Concho) We completed our acquisition of Concho on January 15, 2021 and as defined under the terms of the transaction agreement, each share of Concho common stock was exchanged for 1.46 shares of ConocoPhillips common stock, for total consideration of $ 13.1 billion. Total Consideration Number of shares of Concho common stock issued and outstanding (in thousands)* 194,243 Number of shares of Concho stock awards outstanding (in thousands)* 1,599 Number of shares exchanged 195,842 Exchange ratio 1.46 Additional shares of ConocoPhillips common stock issued as consideration (in thousands) 285,929 Average price per share of ConocoPhillips common stock** $ 45.9025 Total Consideration (Millions) $ 13,125 *Outstanding as of January 15, 2021. **Based on the ConocoPhillips average stock price on January 15, 2021. Notes to Consolidated Financial Statements Table of Contents 7 ConocoPhillips 2021 Q3 10-Q The transaction was accounted for as a business combination under FASB ASC 805 using the acquisition method, which requires assets acquired and liabilities assumed to be measured at their acquisition date fair values. Fair value measurements were made for acquired assets and liabilities, and adjustments to those measurements may be made in subsequent periods, up to one year from the acquisition date as we identify new information about facts and circumstances that existed as of the acquisition date to consider. Oil and gas properties were valued using a discounted cash flow approach incorporating market participant and internally generated price assumptions; production profiles; and, operating and development cost assumptions. Debt assumed in the acquisition was valued based on observable market prices. The fair values determined for accounts receivables, accounts payable, and most other current assets and current liabilities were equivalent to the carrying value due to their short-term nature. The total consideration of $ 13.1 billion was allocated to the identifiable assets and liabilities based on their fair values as of January 15, 2021. Assets Acquired Millions of Dollars Cash and cash equivalents $ 382 Accounts receivable, net 745 Inventories 45 Prepaid expenses and other current assets 37 Investments and long-term receivables 333 Net properties, plants and equipment 18,968 Other assets 62 Total assets acquired $ 20,572 Liabilities Assumed Accounts payable $ 638 Accrued income and other taxes 49 Employee benefit obligations 4 Other accruals 510 Long-term debt 4,696 Asset retirement obligations and accrued environmental costs 310 Deferred income taxes 1,123 Other liabilities and deferred credits 117 Total liabilities assumed $ 7,447 Net assets acquired $ 13,125 With the completion of the Concho transaction, we acquired proved and unproved properties of approximately $ 11.8 billion and $ 6.9 billion, respectively. We recognized approximately $ 157 million of transaction-related costs, all of which were expensed in the first quarter of 2021. These non-recurring costs related primarily to fees paid to advisors and the settlement of share- based awards for certain Concho employees based on the terms of the Merger Agreement. In the first quarter of 2021, we commenced a company-wide restructuring program, the scope of which included combining the operations of the two companies as well as other global restructuring activities. For the three- and nine-month periods ending September 30, 2021, we recognized non-recurring restructuring costs of approximately $ 52 million and $ 209 million, respectively, mainly for employee severance and related incremental pension benefit costs. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 8 The impact from these transaction and restructuring costs to the lines of our consolidated income statement for the nine-month period ending September 30, 2021, are below: Millions of Dollars Transaction Cost Restructuring Cost Total Cost Production and operating expenses $ 110 110 Selling, general and administration expenses 135 64 199 Exploration expenses 18 4 22 Taxes other than income taxes 4 2 6 Other expenses - 29 29 $ 157 209 366 On February 8, 2021, we completed a debt exchange offer related to the debt assumed from Concho. As a result of the debt exchange, we recognized an additional income tax related restructuring charge of $ 75 million. See Note 19. From the acquisition date through September 30, 2021, “Total Revenues and Other Income” and “Net Income (Loss) Attributable to ConocoPhillips” associated with the acquired Concho business were approximately $ 4,499 million and $ 1,600 million, respectively. The results associated with the Concho business for the same period include a before- and after-tax loss of $ 305 million and $ 233 million, respectively, on the acquired derivative contracts. The before-tax loss is recorded within “Total Revenues and Other Income” on our consolidated income statement. See Note 11. The following summarizes the unaudited supplemental pro forma financial information as if we had completed the acquisition of Concho on January 1, 2020: Millions of Dollars Supplemental Pro Forma (unaudited) Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Total revenues and other income $ 5,019 16,384 Net loss ( 565 ) ( 1,184 ) Net loss attributable to ConocoPhillips ( 565 ) ( 1,230 ) $ per share Earnings per share: Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Basic net loss $ ( 0.41 ) ( 0.90 ) Diluted net loss ( 0.41 ) ( 0.90 ) The unaudited supplemental pro forma financial information is presented for illustration purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been completed on January 1, 2020, nor is it necessarily indicative of future operating results of the combined entity. The unaudited pro forma financial information for the three- and nine-month periods ending September 30, 2020 is a result of combining the consolidated income statement of ConocoPhillips with the results of Concho. The pro forma results do not include transaction-related costs, nor any cost savings anticipated as a result of the transaction. The pro forma results include adjustments to reverse impairment expense of $ 10.5 billion and $ 1.9 billion related to oil and gas properties and goodwill, respectively, recorded by Concho in the nine-month period ending September 30, 2020. Other adjustments made relate primarily to DD&A, which is based on the unit-of-production method, resulting from the purchase price allocated to properties, plants and equipment. We believe the estimates and assumptions are reasonable, and the relative effects of the transaction are properly reflected. Notes to Consolidated Financial Statements Table of Contents 9 ConocoPhillips 2021 Q3 10-Q Assets Sold In 2020, we completed the sale of our Australia -West asset and operations. The sales agreement entitled us to a $ 200 million payment upon a final investment decision (FID) of the Barossa development project. On March 30, 2021, FID was announced and as such, we recognized a $ 200 million gain on disposition in the first quarter of 2021. The purchaser failed to pay the FID bonus when due. We have commenced an arbitration proceeding against the purchaser to enforce our contractual right to the $ 200 million, plus interest accruing from the due date. Results of operations related to this transaction are reflected in our Asia Pacific segment. See Note 10. In the third quarter of 2021, we sold our interests in certain noncore assets in our Lower 48 segment for approximately $ 150 million after customary adjustments, recognizing a before-tax gain on sale of approximately $ 26 million. Production from these noncore Lower 48 properties averaged approximately 15 MBOED in the nine- months ended September 30, 2021. We also completed the sale of our noncore exploration interests in Argentina, recognizing a before-tax loss on disposition of $ 179 million. Results of operations for Argentina were reported in our Other International segment. For the three- and nine-months ended September 30, 2021, we recorded contingent payments of $ 121 million and $ 222 million, respectively, relating to previous dispositions. The contingent payments are recorded as gain on disposition on our consolidated income statement and are reflected within our Canada and Lower 48 segments. No contingent payments were recorded in 2020. Note 4—Investments, Loans and Long-Term Receivables Australia Pacific LNG Pty Ltd (APLNG) APLNG executed project financing agreements for an $ 8.5 billion project finance facility in 2012. All amounts were drawn from the facility. The project financing facility has been restructured over time and at September 30, 2021, this facility was composed of a financing agreement with the Export-Import Bank of the United States, a commercial bank facility and two United States Private Placement note facilities. APLNG made its first principal and interest repayme nt in March 2017 and is scheduled to make bi-annual payments until September 2030. At September 30, 2021, a balance of $ 5.7 billion was outstanding on these facilities. See Note 9. During the fourth quarter of 2020, the estimated fair value of our investment in APLNG declined to an amount below carrying value, primarily due to the weakening of the U.S. dollar relative to the Australian dollar. Based on a review of the facts and circumstances surrounding this decline in fair value, we concluded the impairment was not other than temporary under the guidance of FASB ASC Topic 323, “Investments – Equity Method and Joint Ventures.” Due primarily to improved outlooks for commodity prices and the strengthening of the U.S. dollar relative to the Australian dollar during the first nine months of 2021, the estimated fair value of our investment increased and is above carrying value at September 30, 2021. On October 25, 2021, Origin Energy Limited agreed to the sale of 10 percent of their interest in APLNG for approximately $ 1.6 billion which is expected to close in the fourth quarter of 2021. The transaction is subject to preemption rights in favor of ConocoPhillips and Sinopec among other considerations. We will continue to monitor and evaluate the relationship between the carrying value and fair value of APLNG, including any impact from this announced transaction. At September 30, 2021, the carrying value of our equity method investment in APLNG was $ 6.4 billion. The balance is included in the “Investments and long-term receivables” line on our consolidated balance sheet. Loans As part of our normal ongoing business operations, and consistent with industry practice, we enter into numerous agreements with other parties to pursue business opportunities. Included in such activity are loans made to certain affiliated and non-affiliated companies. At September 30, 2021, significant loans to affiliated companies included $ 114 million in project financing to Qatar Liquefied Gas Company Limited (3), which is recorded within the “Accounts and notes receivable—related parties” line on our consolidated balance sheet . Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 10 Note 5—Investment in Cenovus Energy Our investment in Cenovus Energy (CVE) shares is carried on our consolidated balance sheet at fair value of $ 1.4 billion based on the closing price of $ 10.06 per share on the NYSE on the last trading day of the quarter. At September 30, 2021 and December 31, 2020, we held 141 million and 208 million shares of CVE common stock, respectively. At September 30, 2021, our investment approximated 7 percent of the issued and outstanding CVE common stock. During the third quarter, we sold 47 million shares of our CVE common stock, recognizing proceeds of $ 404 million. Since we began disposing of our CVE shares in May 2021, we have sold 67 million shares for total proceeds of $ 584 million, of which $ 569 million was received by the end of the third quarter. Subject to market conditions, we intend to continue to decrease our investment over time. All gains and losses are recognized within “Other income (loss)” on our consolidated income statement. Proceeds related to the sale of our CVE shares are presented within “Cash Flows from Investing Activities” on our consolidated statement of cash flows. See Note 12 for information related to fair value measurement . Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Total Net gain (loss) on equity securities $ 17 ( 162 ) 743 ( 1,302 ) Less: Net gain (loss) on equity securities sold during the period ( 50 ) - 177 - Unrealized gain (loss) on equity securities still held at the reporting date $ 67 ( 162 ) 566 ( 1,302 ) Note 6—Impairments During the three- and nine-month periods ended September 30, 2021 and 2020, we recognized before -tax impairment charges within the following segments: Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Alaska $ - - 3 - Lower 48 ( 89 ) 1 ( 93 ) 514 Europe, Middle East and North Africa - 1 - 7 $ ( 89 ) 2 ( 90 ) 521 In the three-month period ended September 30, 2021, we recorded a credit to impairment of $ 89 million in our Lower 48 segment due to a decreased ARO estimate for a previously sold asset, in which we retained the ARO liability. In the first quarter of 2020, we recorded impairments of $ 511 million related to certain noncore natural gas assets in the Lower 48 segment which were written down to fair value. Notes to Consolidated Financial Statements Table of Contents 11 ConocoPhillips 2021 Q3 10-Q Note 7—Debt Our debt balance at September 30, 2021, was $ 19.7 billion compared with $ 15.4 billion at December 31, 2020. 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, with an outstanding principal balance of $ 3.9 billion, which was recorded at fair value of $ 4.7 billion on the acquisition date. Debt assumed consisted of the following: ● 3.75 % Notes due 2027 with principal of $ 1,000 million ● 4.3 % Notes due 2028 with principal of $ 1,000 million ● 2.4 % Notes due 2031 with principal of $ 500 million ● 4.875 % Notes due 2047 with principal of $ 800 million ● 4.85 % Notes due 2048 with principal of $ 600 million The adjustment to fair value of the senior notes of approximately $ 0.8 billion on the acquisition date will be amortized as an adjustment to interest expense over the remaining contractual terms of the senior notes. In the first quarter of 2021, we completed a debt exchange offer related to the debt assumed from Concho. Of the approximately $ 3.9 billion in aggregate principal amount of Concho’s senior notes offered in the exchange, 98 percent, or approximately $ 3.8 billion, were tendered and accepted. The new debt issued by ConocoPhillips had the same interest rates and maturity dates as the Concho senior notes. The portion not exchanged, approximately $ 67 million, remained outstanding across five series of senior notes issued by Concho. The debt exchange was treated as a debt modification for accounting purposes resulting in a portion of the unamortized fair value adjustment of the Concho senior notes allocated to the new debt issued by ConocoPhillips on the settlement date of the exchange. The new debt issued in the exchange is fully and unconditionally guaranteed by ConocoPhillips Company. See Note 3 . We have a revolving credit facility totaling $ 6.0 billion with an expiration date of 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 our ability to issue up to $ 6.0 billion of commercial paper. Commercial paper is generally limited to maturities of 90 days and is included in the short-term debt on our consolidated balance sheet. With no commercial paper outstanding and no direct borrowings or letters of credit, we had access to $ 6.0 billion in available borrowing capacity under our revolving credit facility at September 30, 2021. At December 31, 2020, we had $ 300 million of commercial paper outstanding and no direct borrowings or letters of credit issued. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 12 Following our September 20, 2021, announcement regarding the Shell Permian Acquisition, the three rating agencies reviewed their pre-announcement ratings on our debt resulting in the following: ● Fitch affirmed its rating of our long-term debt as “A” with a “stable” outlook. ● S&P affirmed its rating of our long-term debt of “A-” with a “stable” outlook. ● Moody’s affirmed its rating of our senior long-term debt of “A3” and upgraded the outlook to “positive” from “stable.” 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. At September 30, 2021, we had $ 283 million of certain variable rate demand bonds (VRDBs) outstanding with maturities ranging through 2035. The VRDBs are redeemable at the option of the bondholders on any business day. If they are ever redeemed, we have the ability and intent to refinance on a long-term basis, therefore, the VRDBs are included in the “Long-term debt” line on our consolidated balance sheet. Notes to Consolidated Financial Statements Table of Contents 13 ConocoPhillips 2021 Q3 10-Q Note 8—Changes in Equity Millions of Dollars Attributable to ConocoPhillips Common Stock Par Value Capital in Excess of Par Treasury Stock Accum. Other Comprehensive Income (Loss) Retained Earnings Non- Controlling Interests Total For the three months ended September 30, 2021 Balances at June 30, 2021 $ 21 60,337 ( 48,278 ) ( 4,920 ) 37,116 44,276 Net income 2,379 2,379 Other comprehensive income ( 203 ) ( 203 ) Dividends paid ($ 0.43 per common share) ( 579 ) ( 579 ) Dividends payable ($ 0.46 per common share) ( 609 ) ( 609 ) Repurchase of company common stock ( 1,243 ) ( 1,243 ) Distributed under benefit plans 94 94 Balances at September 30, 2021 $ 21 60,431 ( 49,521 ) ( 5,123 ) 38,307 - 44,115 For the nine months ended September 30, 2021 Balances at December 31, 2020 $ 18 47,133 ( 47,297 ) ( 5,218 ) 35,213 29,849 Net income 5,452 5,452 Other comprehensive income 95 95 Dividends paid ($ 1.29 per common share) ( 1,750 ) ( 1,750 ) Dividends payable ($ 0.46 per common share) ( 609 ) ( 609 ) Acquisition of Concho 3 13,122 13,125 Repurchase of company common stock ( 2,224 ) ( 2,224 ) Distributed under benefit plans 176 176 Other 1 1 Balances at September 30, 2021 $ 21 60,431 ( 49,521 ) ( 5,123 ) 38,307 - 44,115 Millions of Dollars Attributable to ConocoPhillips Common Stock Par Value Capital in Excess of Par Treasury Stock Accum. Other Comprehensive Income (Loss) Retained Earnings Non- Controlling Interests Total For the three months ended September 30, 2020 Balances at June 30, 2020 $ 18 47,079 ( 47,130 ) ( 5,825 ) 37,351 31,493 Net income ( 450 ) ( 450 ) Other comprehensive income 159 159 Dividends paid ($ 0.42 per common share) ( 454 ) ( 454 ) Distributed under benefit plans 34 34 Other 1 1 Balances at September 30, 2020 $ 18 47,113 ( 47,130 ) ( 5,666 ) 36,448 - 30,783 For the nine months ended September 30, 2020 Balances at December 31, 2019 $ 18 46,983 ( 46,405 ) ( 5,357 ) 39,742 69 35,050 Net income ( 1,929 ) 46 ( 1,883 ) Other comprehensive loss ( 309 ) ( 309 ) Dividends paid ($ 1.26 per common share) ( 1,367 ) ( 1,367 ) Repurchase of company common stock ( 726 ) ( 726 ) Distributions to noncontrolling interests and other ( 32 ) ( 32 ) Dispositions ( 84 ) ( 84 ) Distributed under benefit plans 130 130 Other 1 2 1 4 Balances at September 30, 2020 $ 18 47,113 ( 47,130 ) ( 5,666 ) 36,448 - 30,783 Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 14 Note 9—Guarantees At September 30, 2021, we were liable for certain contingent obligations under various contractual arrangements as described below. We recognize a liability, at inception, for the fair value of our obligation as a guarantor for newly issued or modified guarantees. Unless the carrying amount of the liability is noted below, we have not recognized a liability because the fair value of the obligation is immaterial. In addition, unless otherwise stated, we are not currently performing with any significance under the guarantee and expect future performance to be either immaterial or have only a remote chance of occurrence. APLNG Guarantees At September 30, 2021, we had outstanding multiple guarantees in connection with our 37.5 percent ownership interest in APLNG. The following is a description of the guarantees with values calculated utilizing September 2021 exchange rates: ● During the third quarter of 2016, we issued a guarantee to facilitate the withdrawal of our pro-rata portion of the funds in a project finance reserve account. We estimate the remaining term of this guarantee is 9 years . Our maximum exposure under this guarantee is approximately $ 170 million and may become payable if an enforcement action is commenced by the project finance lenders against APLNG. At September 30, 2021, the carrying value of this guarantee was $ 14 million. ● In conjunction with our original purchase of an ownership interest in APLNG from Origin Energy Limited in October 2008, we agreed to reimburse Origin Energy Limited for our share of the existing contingent liability arising under guarantees of an existing obligation of APLNG to deliver natural gas under several sales agreements with remaining terms of 1 to 21 years . Our maximum potential liability for future payments, or cost of volume delivery, under these guarantees is estimated to be $ 670 million ($ 1.2 billion in the event of intentional or reckless breach) and would become payable if APLNG fails to meet its obligations under these agreements and the obligations cannot otherwise be mitigated. Future payments are considered unlikely, as the payments, or cost of volume delivery, would only be triggered if APLNG does not have enough natural gas to meet these sales commitments and if the co-venturers do not make necessary equity contributions into APLNG. ● We have guaranteed the performance of APLNG with regard to certain other contracts executed in connection with the project’s continued development. The guarantees have remaining terms of 15 to 24 years or the life of the venture. Our maximum potential amount of future payments related to these guarantees is approximately $ 180 million and would become payable if APLNG does not perform. At September 30, 2021, the carrying value of these guarantees was $ 11 million. Other Guarantees We have other guarantees with maximum future potential payment amounts totaling approximately $ 720 million, which consist primarily of guarantees of the residual value of leased office buildings, guarantees of the residual value of corporate aircrafts, and a guarantee for our portion of a joint venture’s project finance reserve accounts. These guarantees have remaining terms of one to five years and would become payable if certain asset values are lower than guaranteed amounts at the end of the lease or contract term, business conditions decline at guaranteed entities, or as a result of nonperformance of contractual terms by guaranteed parties. At September 30, 2021, the carrying value of these guarantees was $ 11 million. Indemnifications Over the years, we have entered into agreements to sell ownership interests in certain legal entities, joint ventures and assets that gave rise to qualifying indemnifications. These agreements include indemnifications for taxes, lease commitments and environmental liabilities. Those related to environmental issues have terms that are generally indefinite and the maximum amounts of future payments are generally unlimited. The carrying amount recorded for these indemnification obligations at September 30, 2021, was $ 30 million. We amortize the indemnification liability over the relevant time period the indemnity is in effect, if one exists, based on the facts and circumstances surrounding each type of indemnity. In cases where the indemnification term is indefinite, we will reverse the liability when we have information the liability is essentially relieved or amortize the liability over Notes to Consolidated Financial Statements Table of Contents 15 ConocoPhillips 2021 Q3 10-Q an appropriate time period as the fair value of our indemnification exposure declines. Although it is reasonably possible future payments may exceed amounts recorded, due to the nature of the indemnifications, it is not possible to make a reasonable estimate of the maximum potential amount of future payments. See Note 10 for additional information about environmental liabilities . Note 10—Contingencies and Commitments 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. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates particularly sensitive to future changes include contingent liabilities recorded for environmental remediation, tax and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the uncertain magnitude of cleanup costs, the unknown time and extent of such remedial actions that may be required, and the determination of our liability in proportion to that of other responsible parties. Estimated future costs related to tax and legal matters are subject to change as events evolve and as additional information becomes available during the administrative and litigation processes. Environmental We are subject to international, federal, state and local environmental laws and regulations and record accruals for environmental liabilities based on management’s best estimates. These estimates are based on currently available facts, existing technology, and presently enacted laws and regulations, taking into account stakeholder and business considerations. When measuring environmental liabilities, we also consider our prior experience in remediation of contaminated sites, other companies’ cleanup experience, and data released by the U.S. EPA or other organizations. We consider unasserted claims in our determination of environmental liabilities, and we accrue them in the period they are both probable and reasonably estimable. Although liability of those potentially responsible for environmental remediation costs is generally joint and several for federal sites and frequently so for other sites, we are usually only one of many companies cited at a particular site. Due to the joint and several liabilities, we could be responsible for all cleanup costs related to any site at which we have been designated as a potentially responsible party. We have been successful to date in sharing cleanup costs with other financially sound companies. Many of the sites at which we are potentially responsible are still under investigation by the EPA or the agency concerned. Prior to actual cleanup, those potentially responsible normally assess the site conditions, apportion responsibility and determine the appropriate remediation. In some instances, we may have no liability or may attain a settlement of liability. Where it appears that other potentially responsible parties may be financially unable to bear their proportional share, we consider this inability in estimating our potential liability, and we adjust our accruals accordingly. As a result of various acquisitions in the past, we assumed certain environmental obligations. Some of these environmental obligations are mitigated by indemnifications made by others for our benefit, and some of the indemnifications are subject to dollar limits and time limits. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 16 We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state and international sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except those acquired in a purchase business combination, which we record on a discounted basis) for planned investigation and remediation activities for sites where it is probable future costs will be incurred and these costs can be reasonably estimated. We have not reduced these accruals for possible insurance recoveries . At September 30, 2021, our balance sheet included a total environmental accrual of $ 191 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 . In the future, we may be involved in additional environmental assessments, cleanups and proceedings. Litigation and Other Contingencies 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. We have contingent liabilities resulting from throughput agreements with pipeline and processing companies not associated with financing arrangements. Under these agreements, we may be required to provide any such company with additional funds through advances and penalties for fees related to throughput capacity not utilized. In addition, at September 30, 2021, we had performance obligations secured by letters of credit of $ 281 million (issued as direct bank letters of credit) related to various purchase commitments for materials, supplies, commercial activities and services incident to the ordinary conduct of business. In 2007, ConocoPhillips was unable to reach agreement with respect to the empresa mixta structure mandated by the Venezuelan government’s Nationalization Decree. As a result, Venezuela’s national oil company, Petróleos de Venezuela, S.A. (PDVSA), or its affiliates, directly assumed control over ConocoPhillips’ interests in the Petrozuata and Hamaca heavy oil ventures and the offshore Corocoro development project. In response to this expropriation, ConocoPhillips initiated international arbitration on November 2, 2007, with the ICSID. On September 3, 2013, an ICSID arbitration tribunal held that Venezuela unlawfully expropriated ConocoPhillips’ significant oil investments in June 2007. On January 17, 2017, the Tribunal reconfirmed the decision that the expropriation was unlawful. In March 2019, the Tribunal unan imously ordered the government of Venezuela to pay ConocoPhillips approximately $ 8.7 billion in compensation for the government’s unlawful expropriation of the company’s investments in Venezuela in 2007. On August 29, 2019, the ICSID Tribunal issued a decision rectifying the award and reducing it by approximately $ 227 million. The award now stands at $ 8.5 billion plus interest. The government of Venezuela sought annulment of the award, which automatically stayed enforcement of the award. On September 29, 2021, the ICSID annulment committee lifted the stay of enforcement of the award. The annulment proceedings have been suspended as a result of Venezuela’s non-payment of advances to cover the costs of these proceedings. Notes to Consolidated Financial Statements Table of Contents 17 ConocoPhillips 2021 Q3 10-Q In 2014, ConocoPhillips filed a separate and independent arbitration under the rules of the ICC against PDVSA under the contracts that had established the Petrozuata and Hamaca projects. The ICC Tribunal issued an award in April 2018, finding that PDVSA owed ConocoPhillips approximately $ 2 billion under their agreements in connection with the expropriation of the projects and other pre-expropriation fiscal measures. In August 2018, ConocoPhillips entered into a settlement with PDVSA to recover the full amount of this ICC award, plus interest through the payment period, including initial payments totaling approximately $ 500 million within a period of 90 days from the time of signing of the settlement agreement. The balance of the settlement is to be paid quarterly over a period of four and a half years. Per the settlement, PDVSA recognized the ICC award as a judgment in various jurisdictions, and ConocoPhillips agreed to suspend its legal enforcement actions. ConocoPhillips sent notices of default to PDVSA on October 14 and November 12, 2019, and to date PDVSA has failed to cure its breach. As a result, ConocoPhillips has resumed legal enforcement actions. To date, ConocoPhillips has received approximately $ 766 million in connection with the ICC award. ConocoPhillips has ensured that the settlement and any actions taken in enforcement thereof meet all appropriate U.S. regulatory requirements, including those related to any applicable sanctions imposed by the U.S. against Venezuela. In 2016, ConocoPhillips filed a separate and independent arbitration under the rules of the ICC against PDVSA under the contracts that had established the Corocoro Project. On August 2, 2019, the ICC Tribunal awarded ConocoPhillips approximately $ 33 million plus interest under the Corocoro contracts. ConocoPhillips is seeking recognition and enforcement of the award in various jurisdictions. ConocoPhillips has ensured that all the actions related to the award meet all appropriate U.S. regulatory requirements, including those related to any applicable sanctions imposed by the U.S. against Venezuela. The Office of Natural Resources Revenue (ONRR) has conducted audits of ConocoPhillips’ payment of royalties on federal lands and has issued multiple orders to pay additional royalties to the federal government. ConocoPhillips and the ONRR entered into a settlement agreement on March 23, 2021, to resolve the dispute. All orders and associated appeals have been withdrawn with prejudice. Beginning in 2017, cities, counties, governments 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. In October 2020, the Bureau of Safety and Environmental Enforcement (BSEE) ordered the prior owners of Outer Continental Shelf (OCS) Lease P-0166, including ConocoPhillips, to decommission the lease facilities, including two offshore platforms located near Carpinteria, California. ConocoPhillips is challenging this order. This order was sent after the current owner of OCS Lease P-0166 relinquished the lease and abandoned the lease platforms and facilities. BSEE’s order to ConocoPhillips is premised on its connection to Phillips Petroleum Company, a legacy company of ConocoPhillips, which held a historical 25 percent interest in this lease and operated these facilities, but sold its interest approximately 30 years ago. ConocoPhillips continues to evaluate its exposure in this matter. On May 10, 2021, ConocoPhillips filed arbitration under the rules of the Singapore International Arbitration Centre (SIAC) against Santos KOTN Pty Ltd. and Santos Limited for their failure to timely pay the $ 200 million bonus due upon FID of the Barossa development project under the sale and purchase agreement. Santos KOTN Pty Ltd. and Santos Limited have filed a counterclaim, and the arbitration is underway. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 18 Note 11—Derivative and Financial Instruments We use futures, forwards, swaps and options in various markets to meet our customer needs, capture market opportunities and manage foreign exchange currency risk. Commodity Derivative Instruments Our commodity business primarily consists of natural gas, crude oil, bitumen, LNG and NGLs. Commodity derivative instruments are held at fair value on our consolidated balance sheet. Where these balances have the right of setoff, they are presented on a net basis. Related cash flows are recorded as operating activities on our consolidated statement of cash flows. On our consolidated income statement, gains and losses are recognized either on a gross basis if directly related to our physical business or a net basis if held for trading. Gains and losses related to contracts that meet and are designated with the NPNS exception are recognized upon settlement. We generally apply this exception to eligible crude contracts and certain gas contracts. We do not apply hedge accounting for our commodity derivatives. The following table presents the gross fair values of our commodity derivatives, excluding collateral, and the line items where they appear on our consolidated balance sheet: Millions of Dollars September 30 December 31 2021 2020 Assets Prepaid expenses and other current assets $ 1,601 229 Other assets 109 26 Liabilities Other accruals 1,681 202 Other liabilities and deferred credits 94 18 The gains (losses) from commodity derivatives incurred, and the line items where they appear on our consolidated income statement were: Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Sales and other operating revenues $ ( 483 ) 33 ( 862 ) 30 Other income (loss) 7 ( 2 ) 23 3 Purchased commodities 405 ( 27 ) 550 ( 29 ) On January 15, 2021, we assumed financial derivative instruments consisting of oil and natural gas swaps in connection with the acquisition of Concho. At the acquisition date, the financial derivative instruments acquired were recognized at fair value as a net liability of $ 456 million with settlement dates under the contracts through December 31, 2022. During the first quarter of 2021, we recognized a loss of $ 173 million on Concho derivative contracts with settlement dates on or before March 31, 2021, and an additional $ 132 million loss related to all remaining Concho derivative contracts with settlement dates subsequent to March 31, 2021, for a total loss of $ 305 million. This loss associated with the acquired financial instruments is recorded within the “Sales and other operating revenues” line on our consolidated income statement. Notes to Consolidated Financial Statements Table of Contents 19 ConocoPhillips 2021 Q3 10-Q By the end of March 2021, all oil and natural gas derivative financial instruments acquired from Concho were contractually settled. In connection with the settlement, we issued a cash payment of $ 692 million in the first quarter of 2021 and $ 69 million in the second quarter of 2021. Cash settlements related to the Concho derivative contracts are presented within “Cash Flows From Operating Activities” on our consolidated statement of cash flows. The table below summarizes our material net exposures resulting from outstanding commodity derivative contracts: Open Position Long/(Short) September 30 December 31 2021 2020 Commodity Natural gas and power (billions of cubic feet equivalent) Fixed price 10 ( 20 ) Basis ( 19 ) ( 10 ) Financial Instruments We invest in financial instruments with maturities based on our cash forecasts for the various accounts and currency pools we manage. The types of financial instruments in which we currently invest include: ● Time deposits: Interest bearing deposits placed with financial institutions for a predetermined amount of time. ● Demand deposits: Interest bearing deposits placed with financial institutions. Deposited funds can be withdrawn without notice. ● Commercial paper: Unsecured promissory notes issued by a corporation, commercial bank or government agency purchased at a discount to mature at par. ● U.S. government or government agency obligations: Securities issued by the U.S. government or U.S. government agencies. ● Foreign government obligations: Securities issued by foreign governments. ● Corporate bonds: Unsecured debt securities issued by corporations. ● Asset-backed securities: Collateralized debt securities. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 20 The following investments are carried on our consolidated balance sheet at cost, plus accrued interest and the table reflects remaining maturities at September 30, 2021 and December 31, 2020: Millions of Dollars Carrying Amount Cash and Cash Equivalents Short-Term Investments Investments and Long-Term Receivables September 30 December 31 September 30 December 31 September 30 December 31 2021 2020 2021 2020 2021 2020 Cash $ 634 597 Demand Deposits 1,847 1,133 Time Deposits 1 to 90 days 7,226 1,225 469 2,859 91 to 180 days 8 448 Within one year 5 13 One year through five years 2 1 U.S. Government Obligations 1 to 90 days 16 23 - - $ 9,723 2,978 482 3,320 2 1 The following investments in debt securities classified as available for sale are carried at fair value on our consolidated balance sheet at September 30, 2021 and December 31, 2020: Millions of Dollars Carrying Amount Cash and Cash Equivalents Short-Term Investments Investments and Long-Term Receivables September 30 December 31 September 30 December 31 September 30 December 31 2021 2020 2021 2020 2021 2020 Major Security Type Corporate Bonds $ - - 113 130 184 143 Commercial Paper 110 13 69 155 U.S. Government Obligations - - - 4 6 13 U.S. Government Agency Obligations 2 - 8 17 Foreign Government Obligations 10 - 3 2 Asset-backed Securities 2 - 59 41 $ 110 13 196 289 260 216 Cash and Cash Equivalents and Short-Term Investments have remaining maturities within one year. Investments and Long-Term Receivables have remaining maturities greater than one year through eight years. Notes to Consolidated Financial Statements Table of Contents 21 ConocoPhillips 2021 Q3 10-Q The following table summarizes the amortized cost basis and fair value of investments in debt securities classified as available for sale: Millions of Dollars Amortized Cost Basis Fair Value September 30 December 31 September 30 December 31 2021 2020 2021 2020 Major Security Type Corporate bonds $ 296 271 297 273 Commercial paper 179 168 179 168 U.S. government obligations 6 17 6 17 U.S. government agency obligations 10 17 10 17 Foreign government obligations 13 2 13 2 Asset-backed securities 61 41 61 41 $ 565 516 566 518 At September 30, 2021 and December 31, 2020, total unrealized losses for debt securities classified as available for sale with net losses were negligible. Additionally, at September 30, 2021 and December 31, 2020, investment s in these debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded were negligible. For the three- and nine-month periods ended September 30, 2021, proceeds from sales and redemptions of investments in debt securities classified as available for sale were $ 165 million and $ 485 million, respectively. For the three- and nine-month periods ended September 30, 2020, proceeds from sales and redemptions of investments in debt securities classified as available for sale were $ 109 million and $ 298 million, respectively. Gross realized gains and losses included in earnings from those sales and redemptions were negligible. The cost of securities sold and redeemed is determined using the specific identification method. Credit Risk Financial instruments potentially exposed to concentrations of credit risk consist primarily of cash equivalents, short-term investments, long-term investments in debt securities, OTC derivative contracts and trade receivables. Our cash equivalents and short-term investments are placed in high-quality commercial paper, government money market funds, U.S. government and government agency obligations, time deposits with major international banks and financial institutions, high-quality corporate bonds, foreign government obligations and asset-backed securities. Our long-term investments in debt securities are placed in high-quality corporate bonds, asset-backed securities, U.S. government and government agency obligations, foreign government obligations, and time deposits with major international banks and financial institutions. The credit risk from our OTC derivative contracts, such as forwards, swaps and options, derives from the counterparty to the transaction. Individual counterparty exposure is managed within predetermined credit limits and includes the use of cash-call margins when appropriate, thereby reducing the risk of significant nonperformance. We also use futures, swaps and option contracts that have a negligible credit risk because these trades are cleared primarily with an exchange clearinghouse and subject to mandatory margin requirements until settled; however, we are exposed to the credit risk of those exchange brokers for receivables arising from daily margin cash calls, as well as for cash deposited to meet initial margin requirements. Our trade receivables result primarily from our oil and gas operations and reflect a broad national and international customer base, which limits our exposure to concentrations of credit risk. The majority of these receivables have payment terms of 30 days or less, and we continually monitor this exposure and the creditworthiness of the counterparties. We may require collateral to limit the exposure to loss including, letters of credit, prepayments and surety bonds, as well as master netting arrangements to mitigate credit risk with counterparties that both buy from and sell to us, as these agreements permit the amounts owed by us or owed to others to be offset against amounts due to us. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 22 Certain of our derivative instruments contain provisions that require us to post collateral if the derivative exposure exceeds a threshold amount. We have contracts with fixed threshold amounts and other contracts with variable threshold amounts that are contingent on our credit rating. The variable threshold amounts typically decline for lower credit ratings, while both the variable and fixed threshold amounts typically revert to zero if we fall below investment grade. Cash is the primary collateral in all contracts; however, many also permit us to post letters of credit as collateral, such as transactions administered through the New York Mercantile Exchange. The aggregate fair value of all derivative instruments with such credit risk-related contingent features that were in a liability position at September 30, 2021 and December 31, 2020, was $ 455 million and $ 25 million, respectively. For these instruments, no collateral was posted at September 30, 2021 or December 31, 2020. If our credit rating had been downgraded below investment grade at September 30, 2021, we would have been required to post $ 396 million of additional collateral, either with cash or letters of credit. Note 12—Fair Value Measurement We carry a portion of our assets and liabilities at fair value that are measured at the reporting date using an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability) and disclosed according to the quality of valuation inputs under the following hierarchy: ● Level 1: Quoted prices (unadjusted) in an active market for identical assets or liabilities. ● Level 2: Inputs other than quoted prices that are directly or indirectly observable. ● Level 3: Unobservable inputs that are significant to the fair value of assets or liabilities. The classification of an asset or liability is based on the lowest level of input significant to its fair value. Those that are initially classified as Level 3 are subsequently reported as Level 2 when the fair value derived from unobservable inputs is inconsequential to the overall fair value, or if corroborated market data becomes available. Assets and liabilities initially reported as Level 2 are subsequently reported as Level 3 if corroborated market data is no longer available. There were no material transfers into or out of Level 3 during the three- and nine-month periods ended September 30, 2021, nor during the year ended December 31, 2020. Recurring Fair Value Measurement Financial assets and liabilities reported at fair value on a recurring basis primarily include our investment in CVE common shares, our investments in debt securities classified as available for sale, and commodity derivatives. ● Level 1 derivative assets and liabilities primarily represent exchange-traded futures and options that are valued using unadjusted prices available from the underlying exchange. Level 1 also includes our investment in common shares of CVE, which is valued using quotes for shares on the NYSE, and our investments in U.S. government obligations classified as available for sale debt securities, which are valued using exchange prices. ● Level 2 derivative assets and liabilities primarily represent OTC swaps, options and forward purchase and sale contracts that are valued using adjusted exchange prices, prices provided by brokers or pricing service companies that are all corroborated by market data. Level 2 also includes our investments in debt securities classified as available for sale including investments in corporate bonds, commercial paper, asset-backed securities, U.S. government agency obligations and foreign government obligations that are valued using pricing provided by brokers or pricing service companies that are corroborated with market data. ● Level 3 derivative assets and liabilities consist of OTC swaps, options and forward purchase and sale contracts where a significant portion of fair value is calculated from underlying market data that is not readily available. The derived value uses industry standard methodologies that may consider the historical relationships among various commodities, modeled market prices, time value, volatility factors and other relevant economic measures. The use of these inputs results in management’s best estimate of fair value. Level 3 activity was not material for all periods presented. Notes to Consolidated Financial Statements Table of Contents 23 ConocoPhillips 2021 Q3 10-Q The following table summarizes the fair value hierarchy for gross financial assets and liabilities (i.e., unadjusted where the right of setoff exists for commodity derivatives accounted for at fair value on a recurring basis): Millions of Dollars September 30, 2021 December 31, 2020 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Assets Investment in CVE shares $ 1,416 - - 1,416 1,256 - - 1,256 Investments in debt securities 6 560 - 566 17 501 - 518 Commodity derivatives 882 788 40 1,710 142 101 12 255 Total assets $ 2,304 1,348 40 3,692 1,415 602 12 2,029 Liabilities Commodity derivatives $ 893 723 159 1,775 120 91 9 220 Total liabilities $ 893 723 159 1,775 120 91 9 220 The following table summarizes those commodity derivative balances subject to the right of setoff as presented on our consolidated balance sheet. We have elected to offset the recognized fair value amounts for multiple derivative instruments executed with the same counterparty in our financial statements when a legal right of setoff exists. Millions of Dollars Amounts Subject to Right of Setoff Gross Amounts Not Gross Net Amounts Subject to Gross Amounts Amounts Cash Net Recognized Right of Setoff Amounts Offset Presented Collateral Amounts September 30, 2021 Assets $ 1,710 113 1,597 883 714 - 714 Liabilities 1,775 129 1,646 883 763 34 729 December 31, 2020 Assets $ 255 2 253 157 96 10 86 Liabilities 220 1 219 157 62 4 58 At September 30, 2021 and December 31, 2020, we did not present any amounts gross on our consolidated balance sheet where we had the right of setoff. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 24 Reported Fair Values of Financial Instruments We used the following methods and assumptions to estimate the fair value of financial instruments: ● Cash and cash equivalents and short-term investments: The carrying amount reported on the balance sheet approximates fair value. For those investments classified as available for sale debt securities, the carrying amount reported on the balance sheet is fair value. ● Accounts and notes receivable (including long-term and related parties): The carrying amount reported on the balance sheet approximates fair value. The valuation technique and methods used to estimate the fair value of the current portion of fixed -rate related party loans is consistent with Loans and advances— related parties. ● Investment in CVE: See Note 5 for a discussion of the carrying value and fair value of our investment in CVE common shares. ● Investments in debt securities classified as available for sale: The fair value of investments in debt securities categorized as Level 1 in the fair value hierarchy is measured using exchange prices. The fair value of investments in debt securities categorized as Level 2 in the fair value hierarchy is measured using pricing provided by brokers or pricing service companies that are corroborated with market data. See Note 11. ● Loans and advances—related parties: The carrying amount of floating-rate loans approximates fair value. The fair value of fixed-rate loan activity is measured using market observable data and is categorized as Level 2 in the fair value hierarchy. See Note 4. ● Accounts payable (including related parties) and floating-rate debt: The carrying amount of accounts payable and floating-rate debt reported on the balance sheet approximates fair value. ● Fixed-rate debt: The estimated fair value of fixed-rate debt is measured using prices available from a pricing service that is corroborated by market data; therefore, these liabilities are categorized as Level 2 in the fair value hierarchy. ● Commercial paper: The carrying amount of our commercial paper instruments approximates fair value and is reported on the balance sheet as short-term debt. The following table summarizes the net fair value of financial instruments (i.e., adjusted where the right of setoff exists for commodity derivatives): Millions of Dollars Carrying Amount Fair Value September 30 December 31 September 30 December 31 2021 2020 2021 2020 Financial assets Investment in CVE shares $ 1,416 1,256 1,416 1,256 Commodity derivatives 827 88 827 88 Investments in debt securities 566 518 566 518 Loans and advances—related parties 114 220 114 220 Financial liabilities Total debt, excluding finance leases 18,815 14,478 22,797 19,106 Commodity derivatives 858 59 858 59 Notes to Consolidated Financial Statements Table of Contents 25 ConocoPhillips 2021 Q3 10-Q Note 13—Accumulated Other Comprehensive Loss Accumulated other comprehensive loss in the equity section of our consolidated balance sheet included: Millions of Dollars Defined Benefit Plans Net Unrealized Gain (Loss) on Securities Foreign Currency Translation Accumulated Other Comprehensive Loss December 31, 2020 $ ( 425 ) 2 ( 4,795 ) ( 5,218 ) Other comprehensive income (loss) 169 ( 1 ) ( 73 ) 95 September 30, 2021 $ ( 256 ) 1 ( 4,868 ) ( 5,123 ) The following table summarizes reclassifications out of accumulated other comprehensive loss and into net income (loss): Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Defined benefit plans $ 29 30 83 46 The above amounts are included in the computation of net periodic benefit cost and are presented net of tax expense of $ 7 million and $ 7 million for the three-month periods ended September 30, 2021 and September 30, 2020, respectively, and $ 22 million and $ 11 million for the nine-month periods ended September 30, 2021 and September 30, 2020, respectively . See Note 15. Note 14—Cash Flow Information Millions of Dollars Nine Months Ended September 30 Cash Payments 2021 2020 Interest $ 695 591 Income taxes 358 803 Net Sales (Purchases) of Investments Short-term investments purchased $ ( 5,487 ) ( 9,662 ) Short-term investments sold 8,478 8,776 Long-term investments purchased ( 228 ) ( 271 ) Long-term investments sold 83 68 $ 2,846 ( 1,089 ) We paid a deposit of $ 475 million under the terms of the agreement of the Shell Permian Acquisition. This deposit is included within the “Cash Flows from Investing Activities - Other” on our consolidated statement of cash flows. See Note 3 for additional information on cash and non-cash changes to our consolidated balance sheet associated with our Concho acquisition and information on the announced Shell transaction. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 26 Note 15—Employee Benefit Plans Pension and Postretirement Plans Millions of Dollars Pension Benefits Other Benefits 2021 2020 2021 2020 U.S. Int'l. U.S. Int'l. Components of Net Periodic Benefit Cost Three Months Ended September 30 Service cost $ 17 15 21 14 - 1 Interest cost 12 19 17 21 1 2 Expected return on plan assets ( 22 ) ( 30 ) ( 21 ) ( 37 ) - - Amortization of prior service credit - - - ( 1 ) ( 9 ) ( 7 ) Recognized net actuarial loss 9 8 12 5 - 1 Settlements 28 - 27 - - - Net periodic benefit cost $ 44 12 56 2 ( 8 ) ( 3 ) Nine Months Ended September 30 Service cost $ 56 46 63 41 1 2 Interest cost 40 59 51 63 3 5 Expected return on plan assets ( 66 ) ( 90 ) ( 63 ) ( 108 ) - - Amortization of prior service credit - - - ( 1 ) ( 28 ) ( 23 ) Recognized net actuarial loss 36 24 37 16 1 1 Settlements 72 - 28 ( 1 ) - - Curtailments 12 - - - - - Special Termination Benefits 9 - - - - - Net periodic benefit cost $ 159 39 116 10 ( 23 ) ( 15 ) The components of net periodic benefit cost, other than the service cost component, are included in the “Other expenses” line item on our consolidated income statement. We recognized a proportionate share of prior actuarial losses from other comprehensive income as pension settlement expense of $ 28 million and $ 72 million during the three- and nine-month periods ended September 30, 2021, respectively. As part of our company-wide restructuring program, we concluded that actions taken during the first quarter of 2021, would result in a significant reduction of future service of active employees in the U.S. qualified pension plan, a U.S. nonqualified supplemental retirement plan and the U.S. other postretirement benefit plans. As a result, we recognized an increase in the benefit obligation as a curtailment loss of $ 12 million on the U.S. pension benefit plans. In conjunction with the recognition of pension settlement expense, the fair market values of the pension plan assets were updated and the pension benefit obligations of the U.S. qualified pension plan and the U.S. nonqualified supplemental retirement plan were remeasured at September 30, 2021. At the measurement date, the net pension liability decreased by $ 106 million compared to December 31, 2020, primarily a result of an increase in the discount rate, resulting in a corresponding increase to other comprehensive income. Notes to Consolidated Financial Statements Table of Contents 27 ConocoPhillips 2021 Q3 10-Q The relevant assumptions are summarized in the following table: September 30 December 31 2021 2020 Expected return on plan assets 3.40 % 5.80 Relevant discount rates U.S. qualified pension plan 2.80 % 2.40 U.S. nonqualified pension plan 2.30 1.85 During the first nine months of 2021, we contributed $ 409 million to our domestic benefit plans and $ 104 million to our international benefit plans. In 2021, we expect to contribute a total of approximately $ 475 million to our domestic qualified and nonqualified pension and postretirement benefit plans and $ 115 million to our international qualified and nonqualified pension and postretirement benefit plans. Severance Accrual Activity Millions of Dollars Balance at December 31, 2020 $ 24 Accruals 165 Benefit payments ( 102 ) Balance at September 30, 2021 $ 87 Accruals include severance costs associated with our company-wide restructuring program. Of the remaining balance at September 30, 2021, $ 51 million is classified as short-term. See Note 3 for information relating to our Concho acquisition. Note 16—Related Party Transactions Our related parties primarily include equity method investments and certain trusts for the benefit of employees. Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 Significant Transactions with Equity Affiliates 2021 2020 2021 2020 Operating revenues and other income $ 22 21 63 59 Purchases 1 - 5 - Operating expenses and selling, general and administrative expenses 45 16 135 43 Net interest (income) expense* $ - ( 1 ) ( 2 ) ( 5 ) *We paid interest to, or received interest from, various affiliates . See Note 4 for information related to loans to equity affiliates. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 28 Note 17—Sales and Other Operating Revenues Revenue from Contracts with Customers The following table provides further disaggregation of our consolidated sales and other operating revenues: Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Revenue from contracts with customers $ 8,880 3,078 23,794 9,908 Revenue from contracts outside the scope of ASC Topic 606 Physical contracts meeting the definition of a derivative 2,620 1,280 7,348 3,432 Financial derivative contracts ( 174 ) 28 ( 434 ) ( 47 ) Consolidated sales and other operating revenues $ 11,326 4,386 30,708 13,293 Revenues from contracts outside the scope of ASC Topic 606 relate primarily to physical gas contracts at market prices which qualify as derivatives accounted for under ASC Topic 815, “Derivatives and Hedging,” and for which we have not elected NPNS. There is no significant difference in contractual terms or the policy for recognition of revenue from these contracts and those within the scope of ASC Topic 606. The following disaggregation of revenues is provided in conjunction with Note 18—Segment Disclosures and Related Information : Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Revenue from Outside the Scope of ASC Topic 606 by Segment Lower 48 $ 2,123 1,018 5,934 2,692 Canada 266 152 776 452 Europe, Middle East and North Africa 231 110 638 288 Physical contracts meeting the definition of a derivative $ 2,620 1,280 7,348 3,432 Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Revenue from Outside the Scope of ASC Topic 606 by Product Crude oil $ 215 100 517 218 Natural gas 2,192 1,042 6,423 2,895 Other 213 138 408 319 Physical contracts meeting the definition of a derivative $ 2,620 1,280 7,348 3,432 Notes to Consolidated Financial Statements Table of Contents 29 ConocoPhillips 2021 Q3 10-Q Practical Expedients Typically, our commodity sales contracts are less than 12 months in duration; however, in certain specific cases they may extend longer, which may be out to the end of field life. We have long-term commodity sales contracts which use prevailing market prices at the time of delivery, and under these contracts, the market-based variable consideration for each performance obligation (i.e., delivery of commodity) is allocated to each wholly unsatisfied performance obligation within the contract. Accordingly, we have applied the practical expedient allowed in ASC Topic 606 and do not disclose the aggregate amount of the transaction price allocated to performance obligations or when we expect to recognize revenues that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Receivables and Contract Liabilities Receivables from Contracts with Customers At September 30, 2021, the “Accounts and notes receivable” line on our consolidated balance sheet, includes trade receivables of $ 4,262 million compared with $ 1,827 million at December 31, 2020, and includes both contracts with customers within the scope of ASC Topic 606 and those that are outside the scope of ASC Topic 606. We typically receive payment within 30 days or less (depending on the terms of the invoice) once delivery is made. Revenues that are outside the scope of ASC Topic 606 relate primarily to physical gas sales contracts at market prices for which we do not elect NPNS and are therefore accounted for as a derivative under ASC Topic 815. There is little distinction in the nature of the customer or credit quality of trade receivables associated with gas sold under contracts for which NPNS has not been elected compared to trade receivables where NPNS has been elected. Contract Liabilities from Contracts with Customers We have entered into contractual arrangements where we license proprietary technology to customers related to the optimization process for operating LNG plants. The agreements typically provide for negotiated payments to be made at stated milestones. The payments are not directly related to our performance under the contract and are recorded as deferred revenue to be recognized as revenue when the customer can utilize and benefit from their right to use the license. Payments are received in installments over the construction period. Millions of Dollars Contract Liabilities At December 31, 2020 $ 97 Contractual payments received 7 Revenue recognized ( 62 ) At September 30, 2021 $ 42 Amounts Recognized in the Consolidated Balance Sheet at September 30, 2021 Current liabilities $ 42 For the nine-month period of 2021, we recognized revenue of $ 62 million in the “Sales and other operating revenues” line on our consolidated income statement. No revenue was recognized during the three-month period ended September 30, 2021. We expect to recognize the contract liabilities as of September 30, 2021, as revenue during 2022. Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 30 Note 18—Segment Disclosures and Related Information We explore for, produce, transport and market crude oil, bitumen, natural gas, LNG and NGLs on a worldwide basis. We manage our operations through six operating segments, which are primarily defined by geographic region: Alaska; Lower 48; Canada; Europe, Middle East and North Africa; Asia Pacific; and Other International. Corporate and Other represents income and costs not directly associated with an operating segment, such as most interest income and expense; premiums on early retirement of debt; corporate overhead and certain technology activities, including licensing revenues; and unrealized holding gains or losses on equity securities. Corporate assets include all cash and cash equivalents and short-term investments. We evaluate performance and allocate resources based on net income (loss) attributable to ConocoPhillips. Intersegment sales are at prices that approximate market. On January 15, 2021, we completed our acquisition of Concho, an independent oil and gas exploration and production company with operations across New Mexico and West Texas. Results of operations for Concho are included in our Lower 48 segment for the current period. Certain transaction and restructuring costs associated with the Concho acquisition are included in our Corporate and Other segment. See Note 3. Notes to Consolidated Financial Statements Table of Contents 31 ConocoPhillips 2021 Q3 10-Q Analysis of Results by Operating Segment Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Sales and Other Operating Revenues Alaska $ 1,395 864 3,946 2,396 Intersegment eliminations - ( 30 ) - ( 11 ) Alaska 1,395 834 3,946 2,385 Lower 48 7,566 2,323 19,968 6,859 Intersegment eliminations ( 1 ) ( 9 ) ( 5 ) ( 47 ) Lower 48 7,565 2,314 19,963 6,812 Canada 967 348 2,636 1,026 Intersegment eliminations ( 406 ) ( 20 ) ( 1,063 ) ( 200 ) Canada 561 328 1,573 826 Europe, Middle East and North Africa 1,127 432 3,270 1,320 Asia Pacific 673 477 1,880 1,930 Other International 1 1 4 5 Corporate and Other 4 - 72 15 Consolidated sales and other operating revenues $ 11,326 4,386 30,708 13,293 Sales and Other Operating Revenues by Geographic Location (1) United States $ 8,963 3,148 23,978 9,209 Australia - - - 605 Canada 561 328 1,573 826 China 193 161 519 374 Indonesia 231 167 634 503 Libya 313 6 833 50 Malaysia 249 148 727 447 Norway 678 358 1,708 1,046 United Kingdom 136 68 729 224 Other foreign countries 2 2 7 9 Worldwide consolidated $ 11,326 4,386 30,708 13,293 Sales and Other Operating Revenues by Product Crude oil $ 6,433 2,321 16,725 6,981 Natural gas 4,099 1,509 11,422 4,354 Natural gas liquids 414 129 976 364 Other (2) 380 427 1,585 1,594 Consolidated sales and other operating revenues by product $ 11,326 4,386 30,708 13,293 (1) Sales and other operating revenues are attributable to countries based on the location of the selling operation. (2) Includes LNG and bitumen. Millions of Dollars Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 Net Income (Loss) Attributable to ConocoPhillips Alaska $ 405 ( 16 ) 935 ( 76 ) Lower 48 1,631 ( 78 ) 3,274 ( 880 ) Canada 155 ( 75 ) 267 ( 270 ) Europe, Middle East and North Africa 241 92 601 318 Asia Pacific 257 25 749 945 Other International ( 97 ) ( 8 ) ( 106 ) 14 Corporate and Other ( 213 ) ( 390 ) ( 268 ) ( 1,980 ) Consolidated net income (loss) attributable to ConocoPhillips $ 2,379 ( 450 ) 5,452 ( 1,929 ) Notes to Consolidated Financial Statements Table of Contents ConocoPhillips 2021 Q3 10-Q 32 Millions of Dollars September 30 December 31 2021 2020 Total Assets Alaska $ 14,617 14,623 Lower 48 33,200 11,932 Canada 6,797 6,863 Europe, Middle East and North Africa 8,956 8,756 Asia Pacific 10,657 11,231 Other International 1 226 Corporate and Other 13,076 8,987 Consolidated total assets $ 87,304 62,618 Note 19—Income Taxes Our effective tax rate for the three-month periods ended September 30, 2021 and 2020 was 34 percent and 12 percent, respectively. Both periods were primarily impacted by shifts in our before-tax income between higher and lower tax jurisdictions as well as the change in our U.S. valuation allowance driven by the fair value measurement of our CVE common shares. Our effective tax rate for the nine-month periods ended September 30, 2021 and 2020 was 35 percent and 8 percent, respectively, and both periods were impacted by the same items noted above. Our 2021 effective tax rate was adversely impacted by $ 75 million due to incremental interest deductions from the exchange of debt acquired from Concho offsetting U.S. foreign source revenue that would otherwise have been offset by foreign tax credits. The nine-month period ending September 30, 2020, also reflects the tax impact of the gain on disposition recognized for the Australia-West divestiture. For additional information relating to the debt exchange, see Note 7. During the three and nine-month periods of 2021, our valuation allowance decreased by $ 4 million and $ 156 million, respectively, compared to increases of $ 33 million and $ 264 million for the same periods of 2020. The change to our U.S. valuation allowance for all periods relates primarily to the fair value measurement of our CVE common shares and our expectation of the tax impact related to incremental capital gains and losses. The Company has ongoing income tax audits in numerous jurisdictions which are occasionally extended or completed earlier than anticipated. Within the next twelve months we may have audit periods close that could significantly impact our total unrecognized tax benefits. The amount of such change and the associated impact on our financial statements is not estimable at this time. Our deferred tax liability increased by approximately $ 1.1 billion as part of the liabilities assumed through our Concho acquisition. Additionally, our reserve for unrecognized tax benefits increased by $ 150 million related to tax credit carryovers acquired from Concho that we do not expect to recognize. See Note 3. Management’s Discussion and Analysis Table of Contents 33 ConocoPhillips 2021 Q3 10-Q