“We have created a self-sustaining, competitive international integrated energy company, and our long-term strategy remains unchanged. Through organic growth and prior business transactions, we have the resources and opportunities to grow,” said Jim Mulva, chairman and chief executive officer. “Our planned 2009 capital program is structured to continue funding significant projects that will grow and develop the company, while deferring or slowing some projects and other programs. Our existing portfolio of high-quality assets enables us to replace reserves and maintain current production levels in a low price environment. We are positioning ourselves in the current business environment to live within our means in order to maintain financial strength. We are doing this by reducing our cost structure, addressing our balance sheet, and continuing to manage the company through prudent capital discipline.
“As a result of the current business environment’s impact on our operating and capital plans, we expect to reduce about 4 percent of our overall employee work force. This reduction does not include any impact from asset sales, as we do not anticipate any material dispositions during 2009 beyond the completion of our U.S. retail asset disposition. We also intend to reduce our contractor headcount.
“With the recent substantial decline in commodity prices and worldwide equity markets, we expect to recognize several significant noncash impairments in the fourth quarter. The largest of these is a $25.4 billion after-tax impairment to goodwill related to our E&P segment. We also plan to reduce the carrying value of our equity investment in LUKOIL by $7.3 billion after-tax, and record other asset impairments totaling $1.3 billion after-tax. These impairments are primarily a function of falling commodity prices and the decline in the market capitalization of ConocoPhillips and of LUKOIL. These noncash charges do not impact the strategic value of ConocoPhillips’ assets, including our LUKOIL Investment; our estimated resource base of more than 50 billion barrels of oil equivalent; or our ability to generate cash flow.
“This decline in commodity prices also will impact our 2008 oil and gas reserve reporting, as some reserves, primarily in North America and our LUKOIL Investment segment, will be removed from our proved reserves based upon year-end prices. We estimate our organic reserve additions and acquired reserves less dispositions will be approximately 80 percent to 85 percent of our 2008 production, and we continue to expect that over the long-term we will replace more than 100 percent of our production. As required by current rules, year-end proved reserve volumes are calculated using prices on a single day – December 31, 2008. These rules result in an overall preliminary 2008 reserve replacement ratio in the range of 25 percent to 30 percent. We estimate the 2008 reserve revisions due to price would have been minimal if we were able to apply the 12-month-average pricing provisions of the oil and gas reserve reporting rules recently promulgated by the U.S. Securities and Exchange Commission, which are expected to be effective for fiscal 2009.
“We completed $15.2 billion of share repurchases in 2007 and 2008 under the programs announced in 2007. As market conditions warrant, we will consider increasing our dividend, paying down debt, and increasing our capital program, as well as repurchasing shares. Our year-end debt-to-capital ratio, including the effects of the fourth-quarter impairments, is projected to be 33 percent; our debt-to-capital ratio target of 20 percent to 25 percent remains unchanged.
“We look forward to discussing our 2009 capital, operating and financial plans in greater detail when we meet with the investment community on March 11 in New York.”
Further details of the company’s 2009 capital program, fourth-quarter 2008 interim update, and 2008 preliminary reserves replacement information follow.
2009 Capital Program
Approximately 82 percent of the company’s 2009 total authorized capital program will be allocated to its Exploration and Production (E&P) segment. The Refining and Marketing (R&M) segment will receive about 16 percent, with the remaining being spent in Emerging Businesses and Corporate. Additional details on the capital program for each of the company’s business segments are provided below.
Exploration and Production
The 2009 capital program for E&P is approximately $10.3 billion, including capitalized interest of $0.5 billion and about $0.8 billion for the company’s contributions to the upstream business venture with EnCana and loans to affiliates. This program, and the regional totals below, include the capital allocated for the company’s global gas activities, as well as approximately $1.4 billion for worldwide exploration activities.
In North America, the E&P capital program is expected to be approximately $5.2 billion.
In Europe, Asia, Africa and the Middle East, the E&P capital program is expected to be about $5.1 billion.
Refining and Marketing
The 2009 capital program for R&M is approximately $2.0 billion, including capitalized interest of $0.1 billion.
The company has allocated about $1.4 billion for its U.S. businesses. Of this, approximately $1.1 billion has been dedicated to U.S. refining, primarily for projects related to sustaining and improving the existing business with a focus on safety, regulatory compliance, reliability and capital maintenance. In addition, projects to expand conversion capability and increase clean product yield continue, including funding for the San Francisco hydrocracker project. Some projects will be pursued at a slower pace as economic conditions warrant. The remaining $0.3 billion is for projects in the company’s domestic transportation, marketing and specialty businesses, including the Keystone crude oil pipeline project.
International R&M is expected to spend approximately $0.6 billion, with a focus on projects related to reliability, safety and the environment, as well as an upgrade project at the Wilhelmshaven, Germany, refinery. As previously announced, the refinery project in Yanbu, Saudi Arabia, has been delayed.
Emerging Businesses and Corporate
The 2009 capital program for Emerging Businesses and Corporate is approximately $0.2 billion. The majority of the Emerging Businesses spending is for completion of the second phase of an expansion project at the company’s Immingham Combined Heat and Power plant in the United Kingdom.
In Corporate, capital expenditures are expected to be primarily for global information systems and services projects and corporate facilities.