ConocoPhillips (COP) Q2 2026: One Region, 53% of the Tax
ConocoPhillips earned $3,931 million in the second quarter, almost exactly double the $1,971 million of a year earlier, and price was the dominant driver rather than barrels. The more durable question is how much of that windfall the company actually keeps, and the answer is buried in the segment note. Europe, Middle East and North Africa produced 25.1% of first-half pretax profit and paid 52.8% of the group's tax — and over the first half that region earned $198 million more before tax while paying $243 million more in tax, so its net income fell. For an oil producer near the top of a supply-shock cycle, where the incremental barrel is taxed matters as much as what it sells for.
All figures below come from the company's Form 10-Q for the quarter ended June 30, 2026, unless otherwise noted.
1. Balance Sheet — $1.5 Billion Parked in a Line Nobody Reads
The balance sheet grew 1.9% to $124,261 million, but the movement worth tracing is a transfer between lines rather than growth.
1-1. The asset that moved, and the tax bill that has not
Look at the fifth and sixth rows below. Prepaid expenses tripled while net property fell — these are the same event.
| Item | Dec 31, 2025 ($M) | Jun 30, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 6,497 | 6,574 | +1.2% |
| Short-term investments | 484 | 1,118 | +131.0% |
| Accounts and notes receivable, net | 5,813 | 6,957 | +19.7% |
| Inventories | 1,873 | 1,879 | +0.3% |
| Prepaid expenses and other current assets | 865 | 2,667 | +208.3% |
| Net properties, plants and equipment | 93,239 | 91,248 | -2.1% |
| Investments and long-term receivables | 10,185 | 10,345 | +1.6% |
| Total assets | 121,939 | 124,261 | +1.9% |
The 208% jump in prepaid expenses is a reclassification, not a working-capital problem. ConocoPhillips agreed in the second quarter to sell noncore Lower 48 interests for roughly $1.7 billion. The disposal group carried a net book value of about $1.5 billion, mostly property, and moved into the prepaid line under held-for-sale rules. That single move explains most of the 2.1% decline in net property, even though first-half capital spending of $5,972 million ran ahead of depreciation, depletion and amortization of $5,889 million. The transactions closed in the third quarter and completed a $5 billion disposition target announced in 2025.
Accumulated DD&A reached $95,966 million, up $5,570 million, and now exceeds the $91,248 million of net book value still carried. Under US GAAP a producing reserve base sits at historical cost less depletion and cannot be written up, so at $104 Brent the stated asset value is almost certainly conservative. Receivables rose 19.7% against second-quarter revenue growth of 36.8%, lagging rather than outpacing the acceleration in sales, which tracks a rising price deck and prompt collection. Inventories barely moved, with $594 million on a LIFO basis against $609 million — small enough that LIFO does not distort the comparison, though it still blocks a clean inventory comparison with IFRS-reporting peers.
One liability deserves a flag here because it returns in section 3. Accrued income and other taxes climbed to $2,540 million from $1,835 million, a $705 million increase. That is tax the company has charged against profit but has not yet handed over.
1-2. Debt barely moved; the interest bill moved a lot
Total debt was $23,290 million against $23,444 million at year-end, a 0.7% reduction, and debt to total capital eased to 26.3% from 26.7%. The income-statement effect was larger than the balance-sheet change suggests. First-half interest and debt expense fell 13.0% to $380 million from $437 million, while interest income rose to $189 million from $143 million. Net interest therefore swung by about $103 million in the company's favour.
The 10-Q gives no full maturity ladder, and the disclosed activity is modest: $67 million of 6.875% notes retired at maturity, $283 million of variable rate demand bonds running through 2035, and a $600 million remarketing completed July 1, 2026 at a 3.0% coupon with a mandatory tender in July 2029. The mandatory tender falls approximately three years from the balance-sheet date; the 3.0% coupon leaves room to refinance at a manageable rate when it arrives. Asset retirement and environmental obligations of $8,404 million, up from $8,214 million, remain the long-duration claim that accretes regardless of price; total accretion on discounted liabilities was $196 million in the half.
1-3. Almost every dollar earned went back out the door
Equity rose just 1.3% to $65,349 million despite $6,114 million of earnings, because the cash was returned rather than retained. Retained earnings reconcile cleanly: $68,864 million plus $6,114 million less $2,057 million of dividends gives $72,921 million. Accumulated other comprehensive loss widened to $6,176 million from $5,911 million.
Treasury stock tells the rest. It grew $3,034 million as treasury shares rose by 26.3 million, implying roughly $115 per share — a derived figure, since the cash flow statement shows $3,006 million paid and excise tax of $27 million is charged separately. Cumulative treasury stock of $79,251 million now exceeds total paid-in capital of $77,855 million (capital in excess of par of $77,832 million plus $23 million of par value). Paid-in capital was nearly static, so all growth in book equity came from retained profit, which is the higher-quality route.
2. Income Statement — Profit Doubled, and the Tax Rate Held Steady in the Quarter
ConocoPhillips reports no operating income line and tags none in its XBRL filings, so the analysis runs on pretax and net measures.
2-1. A price windfall, not a volume one
The line to watch below is the tax provision — it more than doubled, holding the effective rate almost perfectly flat.
| Item | Q2 2025 ($M) | Q2 2026 ($M) | Change | H1 2025 ($M) | H1 2026 ($M) | Change |
|---|---|---|---|---|---|---|
| Sales and other operating revenues | 14,004 | 19,161 | +36.8% | 30,521 | 34,922 | +14.4% |
| Production and operating expenses | 2,572 | 2,431 | -5.5% | 5,078 | 4,707 | -7.3% |
| DD&A | 2,838 | 2,983 | +5.1% | 5,584 | 5,889 | +5.5% |
| Equity in earnings of affiliates | 315 | 239 | -24.1% | 707 | 486 | -31.3% |
| Income tax provision | 1,046 | 2,151 | +105.6% | 2,663 | 3,331 | +25.1% |
| Net income | 1,971 | 3,931 | +99.4% | 4,820 | 6,114 | +26.8% |
| Net margin (%) | 14.1% | 20.5% | — | 15.8% | 17.5% | — |
| Diluted EPS ($) | 1.57 | 3.24 | +106.4% | 3.79 | 5.00 | +31.9% |
Operating leverage ran at 2.70x in the quarter: each 1% of revenue growth delivered 2.70% of net income growth. The driver is price almost entirely. Realized prices rose 36% to $62.33 per barrel of oil equivalent from $45.77, while production fell 6.0% to 2,248 MBOED; the price-volume product implies roughly 28% revenue growth, with the remaining roughly 9 percentage points of the 36.8% reported gain attributable to purchased-commodity resales and mix. Adjusted for closed deals the volume decline was 4%, so about a third of the 6.0-point volume decline reflects deliberate portfolio pruning.
The price move was lopsided. Realized crude rose 55% to $99.40 per barrel, but realized gas fell 38% to $2.58 per MCF — steeper than the 16% drop in Henry Hub. Crude revenue rose to $14,271 million from $9,528 million while gas revenue fell to $1,149 million from $1,930 million. Management attributes the gas weakness to rising domestic production and high inventories.
EPS outgrew net income, up 106.4% against 99.4%, because weighted-average shares fell 3.6% to 1,213 million. Roughly seven percentage points of the EPS gain came from buybacks. There was no accounting help: first-half disposal gains were $19 million against $396 million a year earlier, impairments were immaterial at $21 million, and the second-quarter effective tax rate held at 35.4% against 34.7% (the six-month rate was 35.3% against 35.6%).
2-2. The region that earned $198 million more and paid $243 million more tax
The company explains its tax rate in one sentence — a "shift in our mix of income among taxing jurisdictions" — without quantifying it. The segment note quantifies it.
| Segment (H1 2026) | Pretax ($M) | % of group pretax | Tax ($M) | % of group tax | Effective rate |
|---|---|---|---|---|---|
| Lower 48 | 5,104 | 54.0% | 1,117 | 33.5% | 21.9% |
| EMENA | 2,369 | 25.1% | 1,758 | 52.8% | 74.2% |
| Alaska | 1,067 | 11.3% | 251 | 7.5% | 23.5% |
| Asia Pacific | 854 | 9.0% | 170 | 5.1% | 19.9% |
| Canada | 536 | 5.7% | 131 | 3.9% | 24.4% |
| Corporate | (485) | -5.1% | (96) | -2.9% | — |
| Consolidated | 9,445 | 100% | 3,331 | 100% | 35.3% |
Pretax profit here is segment net income plus segment tax, both disclosed in Note 18. The picture is stark. The Lower 48 generates more than half the group's pretax profit and pays a third of its tax. EMENA generates a quarter of the profit and pays more than half the tax.
EMENA's true rate on its own operations is higher still. Equity earnings from affiliates arrive already taxed, so they inflate the denominator without adding tax. Strip out EMENA's $140 million of equity earnings and the rate on the remaining $2,229 million is 78.9% — close to Norway's combined 78% marginal petroleum tax, which layers a 71.8% special tax on top of the 22% corporate rate (the special tax base deducts the ordinary corporate tax, holding the combined marginal rate at 78%).
That is why EMENA went backwards in the best price environment in years. First-half revenue there rose 16.9% to $3,903 million and pretax profit rose 9.1% to $2,369 million, but tax rose 16.0% to $1,758 million. Net income fell 6.9% to $611 million from $656 million. The marginal tax rate on the increment was 123% — the extra tax exceeded the extra profit. The region's effective rate rose to 74.2% from 69.8%.
This matters beyond one quarter because the group rate has been drifting up for two years. The effective rate was 32.4% in 2024 and 36.9% in 2025, when tax rose 5.4% even as pretax profit fell 7.4% (full-year figures from the 2025 Form 10-K). The mix is moving toward higher-take jurisdictions, and the company has just agreed to move further in that direction in Iraq.
2-3. Costs fell at home while Qatar equity earnings shrank
The cost programme is working. Second-quarter production and operating expenses fell 5.5% in absolute dollars while volumes fell 4% on a basis adjusted for closed deals; over the first half the expense line fell 7.3%, though the company does not disclose an adjusted half-year volume decline. In the Lower 48 the decline was sharper, down 13.4% to $1,276 million in the quarter. The severance accrual confirms execution rather than intention: the balance fell to $127 million from $378 million, with $279 million paid out against only $31 million of new accruals — a roll-forward that implies $130 million, leaving a $3 million gap the filing does not explain.
Working against that, equity earnings fell 31.3% in the half to $486 million from $707 million, and EMENA's share collapsed 51.4% to $140 million from $288 million. The filing gives the reason: production from the Qatar LNG investments "remained constrained through the second quarter of 2026" because of Middle East tensions. The same disruption that pushed Brent to $104.52 from $67.82 suppressed the company's own Qatari volumes. DD&A, meanwhile, rose 5.5% and does not flex with price.
3. Cash Flow — FCF Nearly Doubled, but $705 Million Was Tax Not Yet Handed Over
Free cash flow nearly doubled, but a large slice of the improvement is a timing difference rather than earnings power.
| Item | H1 2025 ($M) | H1 2026 ($M) | Change |
|---|---|---|---|
| Net cash provided by operating activities | 9,600 | 11,729 | +22.2% |
| Capital expenditures and investments | (6,664) | (5,972) | -10.4% |
| Free cash flow (OCF − CapEx) | 2,936 | 5,757 | +96.1% |
| Net cash used in investing activities | (4,807) | (6,319) | — |
| Net cash used in financing activities | (5,620) | (5,356) | — |
| Share repurchases | (2,722) | (3,006) | +10.4% |
| Dividends paid | (1,982) | (2,057) | +3.8% |
The $705 million sitting in accrued income and other taxes — flagged in section 1 — boosted operating cash flow by that amount compared with what would have been reported had the liability been settled. Working capital movements in taxes and other accruals swung from a $1,221 million outflow in H1 2025 to a $705 million inflow in H1 2026 — a $1,926 million combined swing that is a timing difference rather than a structural gain in earnings power.
