2007 Annual Report Delivering Energy. Building Value. Worldwide Operations ConocoPhillips operates responsibly in nearly 40 countries throughout the world, providing reliable and sustainable energy supply that powers modern life.
Trinidad
Alaska Venezuela
Equador Canada
Peru
United States (Lower 48)
Argentina Puerto Rico
Exploration and Production (E&P) five refineries outside the United States, with an aggregate crude oil Profile: E&P explores for, produces, transports and markets crude oil, processing capacity of 669,000 net BD. Marketing – At year-end natural gas and natural gas liquids (NGL) worldwide. Key focus areas 2007, the group sold gasoline, distillates and aviation fuel through include developing legacy assets – large producing projects that can approximatel y 10,500 outlets in the United States and Europe. In the provide strong financial returns over long periods of time – and explor- United States, products were marketed primarily under the Phillips ing for new reserves in promising areas. E&P also extracts bitumen from 66 ®, Conoco ® and 76 ® brands and in Europe primarily under the oil sands deposits in Canada and upgrades it into synthetic crude oil. JET ® brand. The group also sold and marketed lubricants, commercial Operations: At year-end 2007, E&P held a combined 68.5 million fuels and liquid petroleum gas. Additionally, the company participated net developed and undeveloped acres in 23 countries and produced in the specialty products business directly and through joint ventures. hydrocarbons in 16, with proved reserves in three additional countries. Refined products sales totaled 3.2 million BD in 2007. Crude oil production in 2007 averaged 854,000 barrels per day (BD), Transportation – At year-end 2007, the company held interests in natural gas production averaged 5.09 billion cubic feet per day approximately 28,000 miles of U.S. pipeline systems, including (BCFD), and NGL production averaged 155,000 BD. those partially owned or operated by affiliates.
Refining and Marketing (R&M) LUKOIL Investment Profile: R&M refines crude oil and other feedstocks into petroleum Profile: ConocoPhillips has 20 percent ownership in LUKOIL, an products and markets and transports them. Based on crude oil international, integrated oil and natural gas company headquartered capacity, ConocoPhillips is the world’s fifth-largest refiner and in Russia. the second-largest U.S. refiner. Operations: At year-end 2007, LUKOIL had exploration, Operations: R&M has operatio ns in the United States, Europe and production, refining and marketing operations in about the Asia Pacific region. Refining – At year-end 2007, R&M owned 30 countries. During 2007, ConocoPhillips’ estimated share or had interests in 12 U.S. refineries, with an aggregate crude oil of LUKOIL’s production was 444,000 barrels of oil equivalent processing capacity of 2,037,000 BD. It also owned or had interests in per day and refining crude oil throughput was 214,000 BD.
2 ConocoPhillips Exploration Only Midstream Retail Marketing Exploration and Production Emerging Businesses Refining Chemicals
South Korea United Kingdom China Sweden Norway Netherlands Russia Denmark Vietnam Ireland Germany Kazakhstan Malaysia Indonesia Belgium Austria Switzerland Timor -Leste Singapore
Qatar Algeria Libya
Saudi Arabia Australia
Nigeria
Midstream production facilities were in Belgium, China, Saudi Arabia, Profile: ConocoPhillips’ Midstream segment consists of a 50 Singapore, South Korea and Qatar. percent i nterest in DCP Midstream, LLC and certain ConocoPhillips assets located predominantly in North America. Midstream gathers Emerging Businesses natural gas, processes it to extract NGL, and sells the remaining residue Profile: Emerging Businesses develops new businesses and gas to electrical utilities, industrial users and marketing companies. technology complementary to traditional operations. These include Operations: At year-end 2007, DCP Midstream had approximately power generation, which develops integrated projects to support 58,000 miles of pipelines and owned or operated 53 extraction plants E&P and R&M strategies and business objectives; carbons-to-liquids, and 10 fractionation plants. Its raw natural gas throughput averaged a process that converts carbon into a wide range of transportable 5.9 BCFD, and NGL extraction averaged 363,000 BD. products; technology solutions, which develops upstream and downstream technologies and services; and alternative energy and Chemicals programs, which involve heavy oils, biofuels and alternative energy Profile: ConocoPhillips has 50 percent ownership of Chevron sources designed to provide future growth options. Phillips Chemical Company LLC (CPChem), a joint venture Operations: In 2007, the company formed an alliance to with Chevron Corporation. The company produces olefins and collaborate on developing renewable transportation fuels from polyolefins, including ethylene, polyethylene and other olefin biomass such as crops, wood or switchgrass. It also entered into products; aromatics and styrenics, including styrene, benzene, an agreement to explore developing a commercial-scale coal-to- cyclohexane and paraxylene; and specialty products, including substitute-natural-gas (SNG) facility using proprietary chemicals, catalysts and high-performance polymers and ConocoPhillips E-Gas™ technology. In late 2007, the company compounds. also began processing tallow at its Borger, Texas, refinery to make Operations: At year-end 2007, CPChem had 11 U.S. facilities; renewable diesel fuel. nine polyethylene pipe, conduit and pipe fittings plants; and a petrochemical complex in Puerto Rico. Major international
2007 Annual Report 3 Letter to Shareholders
Delivering Energy, Building Value
To Our Shareholders:
uring 2007 ConocoPhillips operated reliably and profitably, overcoming numerous challenges in the increasingly competitive international oil and natural gas industry. Our strategic direction remained consistent. We continued to enhance our portfolio through capital investments. We built additional value for shareholders Dby increasing our annual stock dividend rate and making significant share repurchases. We also prudently managed our balance sheet. Safety and environmental stewardship remain core values at ConocoPhillips. Our performance improved during 2007, and we continue working toward our “Journey to Zero” goals of zero injuries, incidents and occupational illnesses. Enhancing this performance was our ongoing emphasis on operating excellence and associated efforts to improve process safety and operational reliability. Net income during 2007 was $11.9 billion, or $7.22 per share, James J. Mulva compared with $15.6 billion, or $9.66 per share, in 2006. The 2007 Chairman and results included an after-tax impairment of $4.5 billion resulting Chief Executive Officer from the expropriation of our Venezuelan oil projects. Excluding this impairment, 2007 earnings were $16.4 billion or $9.97 per share. We 89.5 million shares for $7 billion during 2007. For 2008, $10 billion in have filed a request for international arbitration concerning the additional repurchases are authorized, and during the first quarter we Venezuelan expropriation, while continuing to negotiate in an effort declared an additional 15 percent increase in the quarterly dividend. to reach an amicable settlement on compensation. Our capital Total debt was reduced by $5.4 billion during 2007 to $21.7 bil- program totaled $12.9 billion. lion, compared with $27.1 billion at year-end 2006. This reduction ConocoPhillips shareholders realized a 25.4 percent return on lowered the debt-to-capital ratio to 19 percent. We foresee no current their investment during 2007 through share price appreciation and need for further significant debt reduction. dividends, the fifth consecutive year of returns exceeding 25 percent. Over the long term, ConocoPhillips strives to achieve financial We increased the quarterly dividend by 14 percent and undertook a performance differential to that of our peers as measured on a per- significant share repurchase program. Our repurchases totaled barrel basis. During 2007, our Refining and Marketing (R&M)
4 ConocoPhillips Market Capitalization Total Shareholder Return (Billions of Dollars) (Annual Average Percent)
150 35
120 28
ConocoPhillips’ market capi - The company’s total share - talization was $139 billion at 90 holder return for 2007 was 21 the end of 2007, representing 25.4 percent, second among a 17 percent increase from 60 its peers. ConocoPhillips’ 14 2006. The company had 1,571 annualized return to share - million shares outstanding holders over the three-year 30 7 on Dec. 31, 2007, with a year- period was 29.4 percent and end closing price of $88.30. over a five-year period was 0 32.6 percent. 0
Year-End Year-End Year-End 1-Year 3-Year 5-Year 2005 2006 2007 S&P 500 ConocoPhillips
business generated income and cash per barrel well above its peer- • Refocused our exploration program to increase exposure to group average. Our Exploration and Production (E&P) sector world-class prospects. This process began with thorough outperformed its peer group on cash per barrel but slightly under- geological studies of areas offering major resource potential, performed on income per barrel due to the purchase accounting followed by key lease acquisitions. We expect to increase impact of recent acquisitions. The company’s overall return on capital wildcat drilling in the future. During 2007, we achieved employed was just under the peer-group average. discoveries in the North Sea, Malaysia and Nigeria. We also continued successful low-risk exploration in the United States Operational Milestones and western Canada, primarily in highly prospective resource Among the year’s operational highlights, ConocoPhillips: plays, and added 476,000 acres of new leases. • Produced 2.3 million barrels of oil equivalent (BOE) per day, • Progressed nearly 40 major development projects toward including volumes from our E&P sector and our LUKOIL startup. In Kazakhstan, development proceeded on the investment. We achieved reserve replacement of 159 percent, Kashagan field, and we and our co-venturers reached an excluding the impact of the Venezuelan expropriation. Total agreement with the government on the project’s costs and reserves were 10.6 billion BOE at year end. LUKOIL yielded schedule and on increasing the government’s ownership 0.4 million BOE per day of our net production and $1.8 billion interest. in income. • Continued growing the Commercial organization, improving our • Started up the Surmont heavy-oil project in Canada, the Kerisi ability to secure refining feedstocks at favorable cost and sell our natural gas project in Indonesia, and the Statfjord Late Life and products at attractive margins. We concurrently increased our pipe- Kelvin oil projects in the North Sea. line, terminal, marine transportation and transmission capacities . • Achieved a worldwide refining crude oil capacity utilization rate • Rationalized our portfolio, realizing $3.6 billion in proceeds of 94 percent, an increase from 2006. Our U.S. utilization rate of primarily from the sale of non-core exploratory and producing 96 percent exceeded the industry average for the sixth consecutive properties and refining and marketing assets. We plan further year. R&M also increased its capacity to process lower-quality, selective divestments to facilitate ongoing portfolio renewal. cost-advantaged feedstock and to produce clean fuels . • Increased annual spending on technology to $400 million, with • Successfully initiated the upstream and downstream business $250 million devoted to existing businesses and $150 million ventures with EnCana and began upgrading the Borger and Wood to new research and emerging businesses. We expanded our River refineries to increase their heavy-oil processing capacity. alternative energy capabilities by introducing renewable diesel
During 2007 ConocoPhillips operated reliably and profitably, overcoming numerous challenges in the increasingly competitive international oil and natural gas industry.
2007 Annual Report 5 OLetter to Shareholders
fuel made from byproduct animal fat, formed an alliance to driven by growing world population and increased energy demand in research production of advanced biofuels from non-food developing countries. We believe ConocoPhillips is favorably positioned sources, undertook a study on producing synthetic natural gas to operate in this environment and to cope with the market’s vulner- from coal, and funded several university research programs. ability to occasional downturns. Although the energy industry faces challenging operational obstacles, we believe that we are prepared to Key Operating and Strategic Initiatives meet them. ConocoPhillips utilizes a well-defined strategy to build shareholder value. Perhaps foremost among these challenges is society’s need to We pursue capital growth by capturing the opportunities inherent achieve energy supply security and its desire to address the climate in our high-quality asset base, as well as newly developed oppor- impact of greenhouse gas emissions. tunities that meet our operating and financial parameters. We do this ConocoPhillips believes that energy supply security would with a balance that serves both energy consumers and shareholders, improve significantly if national governments opened access to driven by operating and financial performance that continues to restricted areas known to offer energy development potential and enhance our financial strength and flexibility. Cash flow in excess encouraged the more efficient use of energy. of immediate capital investment needs is predominantly dedicated However, we also believe that climate-change concerns must be to the direct benefit of shareholders through share repurchases and addressed, and that neither issue can be solved separately. Otherwise, dividends. These complementary actions build the underlying value public concerns over potential energy shortages would defeat efforts of our base businesses, with this value enhanced on a per-share to reduce greenhouse gas emissions, while concerns over climate basis by share repurchases and dividends. change would defeat energy development initiatives. These global The process begins with our attractive assets. We are a leading issues must be addressed together through well-integrated North American oil and natural gas producer, with a major legacy government policies. position in the North Sea and growth prospects in the Middle East, Recent energy legislation in the United States focused exclusively Asia Pacific, Russia and the Caspian Sea. Our R&M business stands on promoting renewable and alternative energy. The legislation second in U.S. crude oil refining capacity and offers opportunities to ignored the vast oil and natural gas potential located on public lands increase refining complexity and capacity to manufacture that are off limits to drilling and the vital role these energy sources environmentally desirable clean fuels. Our other downstream must play in the future. businesses further leverage the energy value chain. ConocoPhillips therefore calls for enactment of a comprehensive To exploit the opportunities available, we plan a $15.3 billion U.S. energy policy that facilitates production of all energy sources, capital program for 2008, with $12 billion allocated to E&P, $2.8 bil- enhances energy efficiency, and initiates action on climate change. lion to R&M, and $500 million to Emerging Businesses and We believe the public would welcome such a policy. Corporate. Key E&P goals also include averaging at least 100 We further call on the energy industry to engage in the debate on percent annual reserve replacement and 2 percent annual production climate-change solutions. During 2007, ConocoPhillips became the growth. In response to current industry cost inflation, our priority only major U.S.-based oil company to join the U.S. Climate Action will be creating value. Partnership, which supports development of a mandatory national framework to reduce greenhouse gas emissions. In anticipation of The Challenging Industry Environment possible future regulations, we are preparing carbon baselines and The global energy market appears poised for long-term strength, incorporating potential carbon costs into our capital projects. We also
Cash flow in excess of immediate capital investment needs is predominantly dedicated to the direct benefit of shareholders through share repurchases and dividends.
6 ConocoPhillips The global energy market appears poised for long-term strength, driven by growing world population and increased energy demand in developing countries. We believe ConocoPhillips is favorably positioned to operate in this environment.
joined the Duke University Climate Change Partnership, which is 2007, members of management had visited 35 U.S. cities to meet striving to develop workable public policies. with the public, political leaders, educators and the media. We also ConocoPhillips is responding to other vital issues, such as the created accompanying television and print advertising. Our plans are growing tendency of energy-exporting countries to restrict access to continue this dialogue in 2008. to their resources. Some allow only their national oil companies to ConocoPhillips is taking action on a number of environmental operate within their borders. Others impose impractical fiscal terms concerns. For example, to enhance the worldwide availability of or, on occasion, even violate contracts and expropriate properties. fresh water, we are establishing a water sustainability center in Qatar. These actions tend to tighten energy supplies, despite the fact that It will research the safe reuse in farm and industrial applications of the world still possesses substantial undeveloped potential. byproduct water from oil production and refining. ConocoPhillips is well-suited to withstand this resource nationalism because a significant proportion of our assets are The ConocoPhillips of Tomorrow located in the United States, Canada, European nations and other Our results for 2007 represent substantial progress in increasing the Organization of Economic Cooperation and Development (OECD) ability of ConocoPhillips to deliver sustainable supplies of energy. member countries. For now, we must focus primarily on developing oil and natural gas. Additionally, in order to overcome industry-wide shortages of These essential energy sources power today’s economy and are technical personnel, we broadened our college and experienced needed to serve as bridging fuels until the energy sources of recruiting programs. To meet the growing need for innovation, tomorrow are developed in sufficient scale. we significantly increased research and development expenditures. Concurrently, we are working to bring unconventional fossil fuels And to resist cost inflation, we implemented more comprehensive to market in cleaner forms while developing biofuels and other planning and procurement strategies for our development projects. renewable energy sources. We are determined to continue this progress, while in the near Corporate Citizenship term meeting our goals of delivering energy reliably and profitably, While ConocoPhillips believes that our responsibility to society generating growth, and building shareholder value. begins with providing reliable and sustainable energy, we also are committed to improving the well-being of the communities in which we operate. One of the many ways we practiced corporate citizenship during 2007 was the contribution of approximately $60 million in donations to worthy educational, youth, health, social service, civic, art, James J. Mulva environmental and safety initiatives, as well as charities. Our Chairman and Chief Executive Officer employees also contributed thousands of hours of their personal time March 1, 2008 to these causes. To enhance dialogue with the public, we continued our Conversation on Energy program, advocating wider diversification of energy supply sources, more efficient energy use, greater tech- nological innovation and environmental responsibility. By year-end
2007 Annual Report 7 Financial Highlights
Millions of Dollars Except as Indicated 2007 2006 % Change Financial Total revenues and other income $194,495 188,523 3% Net income $ 11,891 15,550 (24) Net income per share of common stock — diluted $ 7.22 9.66 (25) Net cash provided by operating activities $ 24,550 21,516 14 Capital expenditures and investments $ 11,791 15,596 (24) Total assets $177,757 164,781 8 Total debt $ 21,687 27,134 (20) Minority interests $ 1,173 1,202 (2) Common stockholders’ equity $ 88,983 82,646 8 Percent of total debt to capital* 19% 24 (21) Common stockholders’ equity per share (book value) $ 56.63 50.21 13 Cash dividends per common share $ 1.64 1.44 14 Closing stock price per common share $ 88.30 71.95 23 Common shares outstanding at year end (in thousands) 1,571,430 1,646,082 (5) Average common shares outstanding (in thousands) Basic 1,623,994 1,585,982 2 Diluted 1,645,919 1,609,530 2 Employees at year end (in thousands) 32.6 38.4 (15) *Capital includes total debt, minority interests and common stockholders’ equity.
2007 2006 % Change Operating* U.S. crude oil production (MBD) 363 367 (1)% Worldwide crude oil production (MBD) 854 972 (12) U.S. natural gas production (MMCFD) 2,292 2,173 5 Worldwide natural gas production (MMCFD) 5,087 4,970 2 Worldwide natural gas liquids production (MBD) 155 136 14 Worldwide Syncrude production (MBD) 23 21 10 LUKOIL Investment net production (MBOED)** 444 401 11 Worldwide production (MBOED)*** 2,324 2,358 (1) Natural gas liquids extracted — Midstream (MBD) 211 209 1 Refinery crude oil throughput (MBD) 2,560 2,616 (2) Refinery utilization rate 94% 92 2 U.S. automotive gasoline sales (MBD) 1,244 1,336 (7) U.S. distillates sales (MBD) 872 850 3 Worldwide petroleum products sales (MBD) 3,245 3,476 (7) LUKOIL Investment refinery crude oil throughput (MBD)** 214 179 20 *Includes ConocoPhillip s’ share of equity affiliates, except LUKOIL, unless otherwise indicated. **Represents ConocoPhillip s’ net share of its estimate of LUKOIL’s production and processing. ***Includes Syncrude and ConocoPhillip s’ estimated share of LUKOIL’s production.
Certain disclosures in this Annual Report may be considered “forward-looking” statements. These are made pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The "Cautionary Statement" in Management's Discussion and Analysis on page 53 should be read in conjunction with such statements. Cautionary Note to U.S. Investors — The United States Securities and Exchange Commission (SEC) permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. The company uses certain terms in this Annual Report, such as “resources,” “recoverable resources,” “resource base,” and “recoverable bitumen,” that the SEC’s guidelines strictly prohibit us from including in filings with the SEC. U.S. investors are urged to consider closely the disclosures in the company’s 2007 Form 10-K, File No. 001-32395, available from the company at 600 N. Dairy Ashford, Houston, TX 77079, and the company’s Web site at www.conocophillips.com/investor/sec.htm . The 2007 Form 10-K also can be obtained from the SEC by calling 1-800-SEC-0330. “ConocoPhillips,” “the company,” “we,” “us” and “our” are used interchangeably in this report to refer to the businesses of ConocoPhillips and its consolidated subsidiaries.
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