Item 1A. Risk Factors
Item 1A. Risk Factors
You should carefully
consider the following risk factors
in addition to the other information
included in this Annual
Report on Form 10-K.
These risk factors are not
the only risks we face.
Our business could also be affected
by
additional risks and uncertainties not currently
known to us or that we currently consider
to be immaterial.
If any
of these risks or other risks that are yet unknown
were to occur,
our business, operating results and
financial
condition, as well as the value of an investment
in our common stock could be adversely
affected.
Risks Related to Our Industry
Our operating results, our ability to execute
on our strategy and the carrying value of our assets
are exposed to
the effects of changing commodity prices.
The oil and gas business is a commodity business.
Our revenues, operating results
and future rate of growth are
highly dependent on the prices we receive for
crude oil, bitumen, natural gas
and NGLs.
Such prices can fluctuate
widely depending upon global events or conditions
that affect supply and demand, most
of which are out of our
control.
In early 2020 global oil demand decreased precipitously
alongside global COVID-19 economic shutdowns.
Although global oil demand and global oil prices improved
through 2021, the global economic recovery
remains
uncertain.
Our industry will continue to be exposed to
the effects of changing commodity prices
given the
volatility in commodity price drivers
and the worldwide political and economic environment
generally,
as well as
continued uncertainty caused by
armed hostilities in various oil-producing regions
around the globe.
Lower crude oil, bitumen, natural gas
and NGL prices may have a material adverse
effect on our revenues,
operating income, cash flows
and liquidity, and
may also affect the amount of dividends we elect
to declare and
pay on our common stock and the amount
of shares we elect to acquire as part of the share repurchase
program
and the timing of such acquisitions.
Lower prices may also limit the amount of reserves we
can produce
economically,
thus adversely affecting our proved
reserves and reserve replacement ratio
and accelerating the
reduction in our existing reserve levels
as we continue production from upstream
fields. Prolonged depressed
crude oil prices may affect certain
decisions related to our operations,
including decisions to reduce capital
investments or curtail operated
production.
Significant reductions in crude oil, bitumen, natural
gas and NGL prices could also require us to
reduce our capital
expenditures, impair the carrying value of our
assets or discontinue the classification of certain
assets as proved
reserves.
In the past three years, we recognized
several impairments, which
are described in
Note 7
.
If commodity
prices decrease relative to their current
levels, and as we continue to optimize
our investments and exercise
capital flexibility,
it is reasonably likely we could
incur future impairments to long-lived assets
used in operations,
investment in nonconsolidated
entities accounted for under the equity
method and unproved properties.
Although it is not reasonably practicable to
quantify the impact of any future impairments
or estimated change to
our unit-of-production
rates at this time, our results
of operations could be adversely affected
as a result.
Our business has been, and will continue to be, adversely affected
by the coronavirus (COVID-19) pandemic.
The COVID-19 pandemic and the measures put in place to
address it have negatively
impacted the global economy,
disrupted global supply chains, reduced global demand for
oil and gas and created significant
volatility and
disruption of financial and commodity markets.
Over the course of the pandemic, public health
officials have
recommended or mandated certain
precautions to mitigate
the spread of COVID-19, including limiting non-
essential gatherings of people, ceasing all non-essential
travel and issuing “social or
physical distancing” guidelines,
“shelter-in-place” orders and
mandatory closures or reductions in capacity
for non-essential businesses.
Although
some of these limitations and mandates have
been relaxed in certain jurisdictions,
others have been reinstated
in
areas that have experienced a resurgence
of COVID-19 cases and there is no guarantee
restrictions will not be
reimposed in the future.
Despite the increased availability
of vaccines in certain jurisdictions, the COVID
-19
pandemic may continue or worsen
during the upcoming months, including as a result of the emergence
of more
infectious variants of the virus,
vaccine hesitancy or increased business and
social activities, which may cause
governmental authorities to reinstate
restrictions.
As a result, the ongoing impact of the COVID-19 pandemic
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remains uncertain and will depend on the severity,
location and duration of the effects
and spread of the disease,
the effectiveness and duration
of actions taken by authorities to contain
the virus or treat its effect, the availability
and effectiveness of vaccines
or other treatments, and how quickly and
to what extent economic conditions
improve.
See our Human Capital Management section within Item 1 and 2—Business and Properties
, for additional
information on how we have
been impacted and the steps we have
taken in response.
Our business is likely to continue to
be further negatively impacted by the COVID
-19 pandemic.
These impacts
could include but are not limited to:
●
Reduced demand for our products
as a result of reductions in travel
and commerce, whether related to
mandated restrictions or otherwise;
●
Disruptions in our supply chain due in part to scrutiny
or embargoing of shipments from infected
areas or
invocation of force majeure
clauses in commercial contracts
due to restrictions imposed as a result
of the
global response to the pandemic;
●
Failure of third-parties on which we rely,
including our suppliers, contract
manufacturers, contractors,
joint venture partners
and external business partners, to
meet their obligations to the company,
or
significant disruptions in their ability to do so,
which may be caused by their own financial or operational
difficulties or restrictions imposed in response
to the disease outbreak;
●
Reduced workforce productivity
caused by, but
not limited to, illness, travel
restrictions, quarantine, or
government mandates;
●
Increased challenges in retention
of personnel caused by vaccine hesitancy
and the resistance of some in
our workforce to comply with
workplace protocols necessary to ensure
the health and safety of our
workforce and minimize disruptions
to the business, such as vaccine and testing requirements,
or the use
of personal protective equipment; and
●
Voluntary or involuntary
curtailments to support oil prices or alleviate storage
shortages for our products.
Any of these factors, or other cascading
effects of the COVID-19 pandemic that
are not currently foreseeable,
could materially increase our costs,
negatively impact our revenues and
damage our financial condition, results of
operations, cash flows and liquidity position.
Despite the rollout of vaccines, the pandemic continues
to progress
and evolve, and the full extent and
duration of any such impacts cannot
be predicted at this time because of the
sweeping impact of the COVID-19 pandemic on daily life
around the world and a lack of certainty
as to if or when
conditions will return to pre-COVID
levels.
Unless we successfully develop resources, the scope
of our business will decline, resulting in an adverse impact to
our business.
As we produce crude oil and natural
gas from our existing portfolio,
the amount of our remaining reserves
declines.
If we are not successful in replacing the crude oil and
natural gas we produce with
good prospects for
future organic opportunities or through
acquisitions, our business will decline.
In addition, our ability to
successfully develop our reserves is dependent
on a number of factors, including our ability to
obtain and renew
rights to develop and produce hydrocarbons;
our success at reservoir optimization; our ability
to bring long-lead
time, capital intensive projects
to completion on budget and on schedule; and our ability
to efficiently and
profitably operate mature
properties.
If we are not successful in developing the resources
in our portfolio, our
financial condition and results of operations
may be adversely affected.
The exploration and production of oil and gas is a highly comp
etitive industry.
The exploration and production
of crude oil, bitumen, natural gas and NGLs
is a highly competitive business.
We
compete with private, public
and state-owned companies in all
facets of the exploration and
production business,
including to locate and obtain new sources
of supply and to produce crude oil, bitumen, natural
gas and NGLs in an
efficient, cost-effective
manner.
We must compete for
the materials, equipment, services, employees
and other
personnel (including geologists, geophysicists,
engineers and other specialists) necessary to conduct
our business.
Some of our competitors are larger
and have greater resources
than we do, or may have
established strategic
long-
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22
term positions or strong governmental
or other relationships in countries
or areas in which we operate, or may
be
willing to incur a higher level of risk than we are willing to
incur to obtain potential sources
of supply.
As a
consequence, we may be at a competitive
disadvantage in certain respects,
such as in accessing the necessary
materials, equipment, services, resources
and personnel.
In addition, we may be at a competitive disadvantage
when competing with state-owned
companies if they are motivated
by political or other factors in making their
business decisions, with less emphasis on financial returns.
If we are not successful in our competition for
new
reserves, our financial condition and results
of operations may be adversely
affected.
Any material change in the factors and assumptions
underlying our estimates of crude oil, bitumen, natural gas
and NGL reserves could impair the quantity and value of those reserves.
Our proved reserve information
included in this annual report represents
management’s best estimates
based on
assumptions, as of a specified date, of the volumes
to be recovered from underground
accumulations of crude oil,
bitumen, natural gas and NGLs.
Such volumes cannot be directly measured and the
estimates and underlying
assumptions used by management are subject to
substantial risk and uncertainty.
Any material changes in the
factors and assumptions underlying
our estimates of these items could result
in a material negative impact to the
volume of reserves reported or could
cause us to incur impairment expenses on property
associated with the
production of those reserves.
Future reserve revisions could also
result from changes in, among other things,
governmental regulation.
Our business may be adversely affected by price controls,
government-imposed limitations on production
or
exports of crude oil, bitumen, natural gas and NGLs, or the unavailability of adequate
gathering, processing,
compression, transportation, and pipeline facilities and
equipment for our production of crude oil, bitumen,
natural gas and NGLs.
As discussed herein, our operations
are subject to extensive governmental
regulations.
From time to time,
regulatory agencies have imposed
price controls and limitations
on production by restricting the rate
of flow of
crude oil, bitumen, natural gas and
NGL wells below actual production capacity.
Similarly, in response
to increased
domestic energy costs, circumstances
determined to be in the economic interest
of the country,
or a declared
national emergency,
the U.S. government could restrict
the export of our products which would
adversely impact
our domestic business.
Because legal requirements are frequently
changed and subject to interpretation,
we
cannot predict whether future restrictions
on our business may be enacted or become applicable
to us.
Our ability to sell and deliver the crude oil, bitumen, natural
gas, NGLs and LNG that we produce also
depends on
the availability,
proximity,
and capacity of gathering, processing, compression,
transportation and pipeline facilities
and equipment, as well as any necessary diluents
to prepare our crude oil, bitumen, natural
gas, NGLs and LNG for
transport.
Furthermore, we rely on there being sufficient
facilities and takeaway
capacity to support our ambitions
to reduce routine flaring.
The facilities, equipment and diluents
we rely on may be temporarily
unavailable to us
due to market conditions, extreme
weather events, regulatory
reasons, mechanical reasons or other factors
or
conditions, many of which are beyond
our control.
In addition, in certain newer plays, the capacity
of necessary
facilities, equipment and diluents may
not be sufficient to accommodate production
from existing and new wells,
and construction and permitting delays,
permitting costs and regulatory or
other constraints could limit or delay
the construction, manufacture or other acquisition
of new facilities and equipment.
If any facilities, equipment or
diluents, or any of the transportation
methods and channels that we rely on become unavailable
for any period of
time, we may incur increased costs
to transport our crude oil, bitumen, natural
gas, NGLs and LNG for sale or we
may be forced to curtail our
production of crude oil, bitumen, natural
gas or NGLs.
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Our investments in joint ventures decrease
our ability to manage risk.
We conduct many of our operations
through joint ventures in which we
may share control with our
joint venture
partners.
There is a risk our joint venture participants
may at any time have economic,
business or legal interests
or goals that are inconsistent
with those of the joint venture or us, or our joint
venture partners may be unable
to
meet their economic or other obligations and
we may be required to fulfill those obligations
alone.
Failure by us,
or an entity in which we have a joint venture
interest, to adequately manage
the risks associated with any
operations, acquisitions or dispositions could
have a material adverse
effect on the financial condition or results
of
operations of our joint ventures
and, in turn, our business and operations.
Our operations present hazards and risks that require significant
and continuous oversight.
The scope and nature of our operations
present a variety of significant hazards
and risks, including operational
hazards and risks such as explosions,
fires, product spills, severe weather,
geological events, labor disputes,
geopolitical tensions, armed hostilities, terrorist
or piracy attacks, sabotage,
civil unrest or cyberattacks.
Our
operations are subject to the additional
hazards of pollution, toxic substances
and other environmental hazards
and risks.
Offshore activities may pose incrementally
greater risks because of complex
subsurface conditions such
as higher reservoir pressures, water
depths and metocean conditions.
All such hazards could result in loss of
human life, significant property
and equipment damage, environmental
pollution, impairment of operations,
substantial losses to us and damage to
our reputation.
Our business and operations may be disrupted
if we do not
respond, or are perceived not to
respond, in an appropriate manner to
any of these hazards and risks
or any other
major crisis or if we are unable to efficiently
restore or replace affected
operational components
and capacity.
Further, our
insurance may not be adequate to
compensate us for all resulting
losses, and the cost to obtain
adequate coverage may
increase for us in the future.
Legal and Regulatory Risks
We expect to continue
to incur substantial capital
expenditures and operating costs
as a result of our compliance
with existing and future environmental
laws and regulations.
Our business is subject to numerous laws and
regulations relating to the protection
of the environment, which are
expected to continue to have
an increasing impact on our operations.
For a description of the most significant of
these environmental laws and
regulations, see the “Contingencies—Environmental”
and “Contingencies—Climate
Change” sections of Management’s
Discussion and Analysis of Financial Condition and Results
of Operations.
These laws and regulations continue
to increase in both number and complexity and
affect our operations
with
respect to, among other things:
●
Permits required in connection with exploration,
drilling, production and other activities, including those
issued by national, subnational, and local authorities;
●
The discharge of pollutants into
the environment;
●
Emissions into the atmosphere, such
as nitrogen oxides, sulfur dioxide, mercury
and GHG emissions,
including methane;
●
Carbon taxes;
●
The handling, use, storage, transportation,
disposal and cleanup of hazardous materials
and hazardous
and nonhazardous wastes
;
●
The dismantlement, abandonment and restoration
of historic properties and facilities at
the end of their
useful lives;
and
●
Exploration and production
activities in certain areas, such as offshore
environments, arctic fields, oil
sands reservoirs and unconventional
plays.
We have incurred and
will continue to incur substantial
capital, operating and maintenance, and
remediation
expenditures as a result of these laws and
regulations.
In addition, to the extent these expenditures
are assumed
by a buyer as a result of a disposition, it may
result in our incurring substantial costs
if the buyer is unable to satisfy
these obligations.
Any failure by us to comply
with existing or future laws, regulations
and other requirements
could result in administrative
or civil penalties, criminal fines, other enforcement
actions or third-party litigation
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against us.
To the extent
these expenditures, as with all costs,
are not ultimately reflected in
the prices of our
products and services, our business, financial condition, results
of operations and cash flows in future
periods
could be materially adversely affected.
Existing and future laws, regulations and internal initiatives
relating to global climate change, such as
limitations on GHG emissions may impact or limit our business plans,
result in significant expenditures, promote
alternative uses of energy or reduce demand for our products.
Continuing political and social attention
to the issue of global climate change has resulted
in both existing and
pending international agreements
and national, regional or local legislation and regulatory
measures to limit GHG
emissions, such as cap and trade regimes, specific
emission standards, carbon taxes,
restrictive permitting,
increased fuel efficiency standards
and incentives or mandates for renewable
energy.
Although we may support
many of these legislative and regulatory
measures, how and when they are enacted could
result in a material
adverse effect to our
business, financial condition, results of operations
and cash flows in future periods.
For example, in November 2021,
the U.S. Environmental Protection
Agency published a Proposed Rule that would
revise the regulations governing
the emission of GHG and volatile organic compounds
from new oil and gas
production facilities, and emission guidelines
for states to use when revising
Clean Air Act implementation plans to
limit GHG emissions from existing oil and gas
facilities.
Although the company supports the direct federal
regulation of methane from new and existing
sources,
the final form and substance of any regulations
are not
currently known and could result in additional
capital expenditures and compliance,
operating and maintenance
costs, any of which may have
an adverse effect on our business
and results of operations.
Additionally,
in 2021, the U.S. joined the international community at
the 26th Conference of the Parties (COP26).
At the conclusion of COP26, the U.S. and nearly
200 other counties agreed to the Glasgow Climate
Pact,
committing to revisiting and strengthening
their current emissions targets
to 2030 in 2022 and finalizing the
outstanding elements of the Paris
Agreement.
In addition, our operations continue
in countries around the world
which are party to the Paris Agreement.
The implementation of current
agreements and regulatory measures,
as
well as any future agreements
or measures addressing climate change and
GHG emissions, may adversely impact
the demand for our products, impose taxes
on our products or operations or require
us to purchase emission
credits or reduce emission of GHGs from our operations.
As a result, we may experience declines in commodity
prices or incur substantial capital expenditures
and compliance, operating, maintenance
and remediation costs,
any of which may have an
adverse effect on our business
and results of operations.
In September 2021, we announced an improvement
to our Paris-aligned climate risk framework,
whereby we
committed to an improvement
to our targets for reduc
ing our scope 1 and 2 emissions intensity on both a
gross
operated and net equity basis and reaffirmed
our commitment to advocate
for the reduction of scope 3 emissions
through our support for a U.S. carbon
price.
Compliance with, and achievement of,
climate change-related
internal initiatives such as the foregoing
may increase costs, require
us to purchase emission credits, or limit or
impact our business plans.
If we are not successful in select internal initiatives,
we may be adversely affected
and
potentially need to reduce
economic end-of-field life
of certain assets and impair associated
net book value.
Increasing attention to
global climate change has also resulted in pressure
from and upon stockholders,
financial
institutions and/or financial markets
to modify their relationships with oil and gas
companies and to limit
investments and/or funding to
such companies.
For example, Harvard University
announced in September 2021
that it will stop investing
its $42 billion endowment in fossil fuels and will let its current
investments expire without
renewal.
As public pressure continues to
mount, our access to capital on terms we
find favorable (if it is available
at all) may be limited and our costs
may increase,
our reputation could be damaged or our business
and results of
operations may be otherwise adversely
affected.
Furthermore, increasing attention
to global climate change has resulted
in an increased likelihood of governmental
investigations and private
litigation, which could increase our costs
or otherwise adversely affect our business.
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
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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.
The ultimate outcome and impact to
us cannot be predicted with certainty,
and we could incur substantial
legal
costs associated with defending
these and similar lawsuits in the future.
We could also receive lawsuits
alleging a
failure or lack of diligence to meet our
publicly stated ESG goals, so
called “greenwashing” cases.
In addition, although we design and operate
our business operations to accommodate
expected climatic
conditions, to the extent there are
significant changes in the earth’s
climate, such as more severe or frequent
weather conditions in the markets
where we operate or the areas
where our assets reside, we could incur
increased expenses, our operations
and supply chain could be adversely impacted, and
demand for our products
could fall.
For more information on legislation
or precursors for possible regulation
relating to global climate change that
affect or could affect
our operations and a description
of the company’s response,
see the “Contingencies—Climate
Change” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations
.
Domestic and worldwide political and economic developments
could damage our operations and materially
reduce our profitability and cash flows.
Actions of the U.S., state, local
and foreign governments, through
sanctions, tax and other legislation, executive
order and commercial restrictions,
could reduce our operating profitability
both in the U.S. and abroad.
In certain
locations, restrictions on our operations;
leasing restrictions; special taxes
or tax assessments; and payment
transparency regulations
that could require us to disclose competitively
sensitive information or might
cause us to
violate non-disclosure laws of other countries
have been imposed or proposed by governments
or certain interest
groups.
For example, in 2020 a ballot initiative
known as the Fair Share Act was proposed
in the state of Alaska,
which, if enacted would have increased
the state’s
share of production revenues and
required producers to
publicly disclose additional financial information.
Although ultimately defeated,
similar initiatives may be
proposed and may be successful in the future.
In addition, we may face regulatory
changes in the U.S. including,
but not limited to, the enactment of tax
law changes that adversely affect
the fossil fuel industry,
new methane
emissions standards, restrictive
flaring requirements, and more stringent
environmental impact studies
and
reviews.
We also cannot rule out the possibility
of similar regulatory shifts and attendant
cost and market access
implications in other international jurisdictions.
One area subject to significant political and
regulatory activity is the use of hydraulic
fracturing, an essential
completion technique that facilitates
production of oil and natural gas
otherwise trapped in lower permeability
rock formations.
A range of local, state,
federal and national laws and
regulations currently govern or,
in some
hydraulic fracturing
operations, prohibit hydraulic
fracturing in some jurisdictions.
Although hydraulic fracturing
has been conducted safely for
many decades, a number of new laws, regulations
and permitting requirements are
under consideration which could result
in increased costs, operating restrictions,
operational delays or could
limit
the ability to develop oil and natural
gas resources.
Certain jurisdictions in which we operate have
adopted or are
considering regulations that could impose
new or more stringent permitting, disclosure
or other regulatory
requirements on hydraulic
fracturing or other oil and natural gas
operations, including subsurface water
disposal.
In addition, certain interest
groups have also proposed ballot initiatives
and constitutional amendments designed
to restrict oil and natural
gas development generally and hydraulic
fracturing in particular.
In the event that ballot
initiatives, local, state,
or national restrictions or prohibitions are
adopted and result in more stringent
limitations
on the production and development of oil and
natural gas in areas where we
conduct operations, we may
incur
significant costs to comply with
such requirements or may experience delays
or curtailment in the permitting or
pursuit of exploration,
development or production activities.
Such compliance costs and delays,
curtailments,
limitations or prohibitions could have
a material adverse effect
on our business, prospects, results of operations,
financial condition and liquidity.
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The U.S. government can also prevent
or restrict us from doing business in foreign
countries.
These restrictions
and those of foreign governments
have in the past limited our ability to
operate in, or gain access to,
opportunities
in various countries.
Actions by host governments, such
as the expropriation of our oil assets by the Venezuelan
government, have affected
operations significantly in the past
and may continue to do so in the future.
Changes in
domestic and international policies and regulations
may affect our ability to collect payments
such as those
pertaining
to the settlement with Petróleos
de Venezuela, S.A. (PDVSA
)
or the ICSID Award against
the
Government of Venezuela;
or to obtain or maintain licenses or permits,
including those necessary for drilling and
development of wells in various locations.
Similarly, the declaration
of a “climate emergency” could
result in
actions to limit exports of our products and other
restrictions.
Local political and economic factors
in international markets
could have a material adverse
effect on us.
Approximately 38 percent
of our hydrocarbon
production was derived from production
outside the U.S. in 2021,
and 29 percent of our proved reserves,
as of December 31, 2021, were located
outside the U.S.
We are subject to
risks associated with operations
in both domestic and international markets,
including changes in foreign
governmental policies relating
to crude oil, natural gas, bitumen, NGLs
or LNG pricing and taxation, other
political,
economic or diplomatic developments (including
the macro effects of international
trade policies and disputes),
potentially disruptive geopolitical conditions,
and international monetary and currency
rate fluctuations.
Restrictions on production of oil and
gas could increase to the extent
governments view such measures as
a viable
approach for pursuing national
and global energy and climate policies.
In addition, some countries where we
operate lack a fully independent judiciary
system.
This, coupled with changes in foreign law or policy,
results in a
lack of legal certainty that exposes
our operations to increased risks,
including increased difficulty in enforcing
our
agreements in those jurisdictions and increased risks
of adverse actions by local government authorities,
such as
expropriations.
Other Risk Factors Facing
our Business or Operations
We may need additional capital in the
future, and it may not be available on acceptable terms
or at all.
We have historically
relied primarily upon cash generated
by our operations to fund our
operations and strategy;
however,
we have also relied from time to
time on access to the debt and equity capital markets
for funding.
There can be no assurance that additional
debt or equity financing will be available in the future on
acceptable
terms or at all.
In addition, although we anticipate we will be
able to repay our existing
indebtedness when it
matures or in accordance with our stated
plans, there can be no assurance we will be able to
do so.
Our ability to
obtain additional financing or refinance our existing
indebtedness when it matures or in
accordance with our
plans, will be subject to a number of factors,
including market conditions, our
operating performance, investor
sentiment and our ability to incur additional debt
in compliance with agreements governing our then-outstanding
debt.
If we are unable to generate sufficient
funds from operations or raise
additional capital for any reason,
our
business could be adversely affected.
In addition, we are regularly evaluated
by the major rating agencies based on a number of factors,
including our
financial strength and conditions affecting
the oil and gas industry generally.
We and other industry companies
have had their ratings reduced
in the past due to negative commodity
price outlooks.
Any downgrade in our credit
rating or announcement that our credit
rating is under review for possible
downgrade could increase the cost
associated with any additional indebtedness
we incur.
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Our business may be adversely affected by deterioration
in the credit quality of, or defaults under
our contracts
with, third-parties with whom we do business.
The operation of our business requires
us to engage in transactions with
numerous counterparties operating
in a
variety of industries, including other companies
operating in the oil and gas industry.
These counterparties may
default on their obligations to
us as a result of operational failures
or a lack of liquidity,
or for other reasons,
including bankruptcy.
Market speculation about the credit
quality of these counterparties, or their ability
to
continue performing on their existing
obligations, may also exacerbate
any operational difficulties
or liquidity
issues they are experiencing, particularly as it relates
to other companies in the oil and gas industry
as a result of
the volatility in commodity prices.
Any default by any of our
counterparties may result in our
inability to perform
our obligations under agreements we have
made with third-parties or may otherwise adversely
affect our business
or results of operations.
In addition, our rights against any of our counterparties
as a result of a default may not be
adequate to compensate us
for the resulting harm caused or may
not be enforceable at all in some circumstances.
We may also be forced
to incur additional costs as we attempt
to enforce any rights
we have against
a defaulting
counterparty,
which could further adversely impact our results
of operations.
Our ability to execute our capital
return program is subject to certain considerations.
In December 2021, we initiated a three
-tier capital return program
that consists of our ordinary dividend, share
repurchases and a quarterly variable
return of cash (VROC).
Ordinary dividends are authorized and determined
by our Board of Directors in its
sole discretion and depend
upon a number of factors, including:
●
Cash available for distribution;
●
Our results of operations and anticipated
future results of operations;
●
Our financial condition, especially in relation to
the anticipated future capital needs of our
properties;
●
The level of distributions paid by comparable
companies;
●
Our operating expenses; and
●
Other factors our Board of Directors
deems relevant.
VROC distributions are also authorized
and determined by our Board of Directors
in its sole discretion and depend
upon a number of factors, including:
●
The anticipated level of distributions
required to meet our capital returns
commitment;
●
Forward prices;
●
Balance sheet cash;
●
Total
yield; and
●
Other factors our Board of Directors
deems relevant.
We expect to continue
to pay a quarterly ordinary dividend
to our stockholders.
In addition, based on the current
environment, we anticipate
also paying a quarterly VROC to
our shareholders staggered from
the ordinary
dividend payment, resulting in up to
eight cash distributions to shareholders
throughout the year;
however,
the
amount of the VROC is variable and will depend upon the
above factors, and our Board
of Directors may determine
not to pay a VROC in a quarter or may
cease declaring a VROC at any time.
In addition,
our Board of Directors may
reduce our ordinary dividend or cease declaring dividends
at any time, including if it determines that
our net cash
provided by operating activities,
after deducting capital expenditures
and investments, are not sufficient
to pay
our desired levels of dividends to our stockholders
or to pay dividends to our stockholders
at all.
Risk Factors
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ConocoPhillips
2021 10-K
28
Additionally, as
of December 31, 2021, $10.9 billion of repurchase authority
remained of the $25 billion share
repurchase program our Board
of Directors had authorized.
Our share repurchase program
does not obligate us to
acquire a specific number of shares during any
period, and our decision to commence, discontinue
or resume
repurchases in any period will depend
on the same factors that our Board
of Directors may consider when
declaring dividends, among others.
In the past we have suspended our share
repurchase program in response
to
market downturns, including as a
result of the oil market downturn
that began in early 2020, and we may do so
again in the future.
Any downward revision
in the amount of our ordinary dividend or VROC or the volume of
shares we purchase
under our share repurchase program
could have an adverse effect
on the market price of our common stock.
There are substantial risks with any
acquisitions or divestitures we have completed
or that we may choose to
undertake.
We regularly review our portfolio
and pursue growth through acquisitions
and seek to divest noncore assets or
businesses.
We may not be able to complete these
transactions on favorable
terms, on a timely basis, or at all.
Even if we do complete such transactions,
our cash flow from operations may
be adversely impacted or otherwise
the transactions may not result in the
benefits anticipated due to various
risks, including, but not limited to (i) the
failure of the acquired assets or businesses
to meet or exceed expected
returns, including risk of impairment; (ii)
the inability to dispose of noncore assets and
businesses on satisfactory terms and conditions;
and (iii) the
discovery of unknown and unforeseen liabilities
or other issues related to any
acquisition for which contractual
protections are inadequate
or we lack insurance or indemnities, including environmental
liabilities, or with regard
to divested assets or businesses, claims by
purchasers to whom we have provided
contractual indemnification.
In addition, we may face difficulties
in integrating the operations,
technologies, products and personnel of any
acquired assets or businesses. For example,
we completed two major acquisitions in
2021, including the
acquisition of Concho in January and the acquisition of the Shell Permian assets
in December.
Combined, these
transactions added approximately
800,000 net acres, thereby significantly
increasing our unconventional
position
and operations in the Permian.
We may still encounter
difficulties integrating the acquired
assets into our
business.
There are a large number of processes,
policies, procedures, operations
and technologies and systems
that must be integrated
in connection with the transactions and the integration
of the acquired assets.
It is
possible that the integration process
could result in the disruption of our ongoing business;
inconsistencies in
standards, controls,
procedures and policies; unexpected integration
issues; higher than expected integration
costs
and an overall post-completion
integration process that
takes longer than originally anticipated.
We have been
and will be required to devote management
attention and resources
to integrating the business
practices and
operations.
Any delays encountered
in the integration process
could have an adverse effect
on our revenues or on
our level of expenses or capital investment
and operating results, which may
adversely affect the value
of our
common stock.
In addition, the actual integration may
result in additional and unforeseen
expenses.
Although we
expect that the strategic benefits,
and additional income, as well as the realization
of other efficiencies related to
the integration of the acquired
assets, may offset incremental
transaction-related costs
over time, if we are not
able to adequately address integration
challenges.
Risk Factors
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29
ConocoPhillips
2021 10-K
Our technologies, systems and networks
may be subject to cyberattacks.
Our business, like others within the oil and
gas industry,
has become increasingly dependent on digital
technologies, some of which are managed by third
-party service providers on whom we rely
to help us collect, host
or process information.
Among other activities, we rely on digital technology to
estimate oil and gas reserves,
process and record financial and operating
data, analyze seismic and drilling information
and communicate with
employees and third-parties.
As a result, we face various cybersecurity
threats such as attempts to
gain
unauthorized access to, or control
of, sensitive information
about our operations and our employees, attempts
to
render our data or systems
(or those of third-parties with whom we do business,
including third-party cloud and IT
service providers) corrupted or unusable,
threats to the security of our facilities and infrastructure
as well as those
of third-parties with whom we do business,
including third-party cloud and IT service providers,
and attempted
cyber terrorism.
In addition, computers control
oil and gas production, processing equipment
and distribution systems
globally and
are necessary to deliver our production
to market.
A disruption, failure, or a cyberattack
of these operating
systems, or of the networks
,
software and infrastructure
on which they rely,
many of which are not owned or
operated by us, could damage critical
production, distribution or storage
assets, delay or prevent delivery
to
markets,
make it difficult or impossible to accurately
account for production and settle
transactions, or negatively
impact public health or safety,
economic security, or
national security.
Although we have experienced occasional
cybersecurity incidents, none have had
a material effect on our
business, operations or reputation.
As cyberattacks have
continued
to evolve, we have become subject
to new
government-imposed security requirements
to implement specific mitigation measures
to protect against
ransomware attacks
and other known threats to information
and operations technology.
In response, we must
continually expend additional resources
to continue to modify or enhance our protective
measures or to
investigate and
remediate any vulnerabilities
detected.
Our implementation of reasonable security
procedures
and controls to monitor and mitigate
security threats and to increase security
for our information, facilities
and
infrastructure may result
in increased costs.
Despite our ongoing investments
in security resources, talent and
business practices, we are unable to assure
that any security measures will be completely
effective.
If our systems and infrastructure
were to be breached, damaged or disrupted,
we could be subject to serious
negative consequences, including disruption
of our operations, damage to our reputation,
a loss of counterparty
trust, reimbursement or other costs,
increased compliance costs, litigation
exposure and legal liability or regulatory
fines, penalties or intervention.
In addition, we have exposure to
cybersecurity incidents and the negative
impacts
of such incidents related to our data
and proprietary information housed
on third-party IT systems, including
the
cloud.
Any of these could materially and adversel
y
affect our business, results of operations
or financial condition,
and any of the foregoing can
be exacerbated by a delay
or failure to detect a cybersecurity
incident or the full
extent of such incident notwithstanding
reasonable security procedures and controls.
The prevalence of remote
working during the pandemic has introduced
additional cybersecurity risk.
Although we have business continuity
plans in place, our operations may be adversely
affected by significant
and widespread disruption to our systems
and infrastructure that support
our business.
While we continue to evolve and modify our business
continuity
plans, there can be no assurance that
they will be completely effective
in avoiding disruption and business
impacts.
Further, our
insurance may not be adequate to
compensate us for all resulting
losses, and the cost to obtain
adequate coverage may
increase for us in the future.
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ConocoPhillips
2021 10-K
30
Item 1B. Unresolved Staff Comments
None.