UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                          to                                         

ConocoPhillips

Delaware		01-0562944
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

600 North Dairy Ashford, Houston, TX 77079
(Address of principal executive offices) (Zip Code)

281-293-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ           Accelerated filer o           Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 1,627,185,696 shares of common stock, $.01 par value, outstanding at June 30, 2007.

 

 

CONOCOPHILLIPS

		Page
Part I – Financial Information
Item 1. Financial Statements
Consolidated Income Statement			1
Consolidated Balance Sheet			2
Consolidated Statement of Cash Flows			3
Notes to Consolidated Financial Statements			4
Supplementary Information—Condensed Consolidating Financial Information			25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			56
Item 4. Controls and Procedures			56
Part II – Other Information
Item 1. Legal Proceedings			57
Item 1A. Risk Factors			58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			58
Item 4. Submission of Matters to a Vote of Security Holders			59
Item 6. Exhibits			60
Signature			61

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Consolidated Income Statement		ConocoPhillips

		Millions of Dollars
		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Revenues and Other Income
Sales and other operating revenues*		$	47,370				47,149				88,690				94,055
Equity in earnings of affiliates			1,506				1,164				2,435				2,124
Other income			521				163				1,139				224
Total Revenues and Other Income			49,397				48,476				92,264				96,403
Costs and Expenses
Purchased crude oil, natural gas and products			30,820				29,448				57,535				62,903
Production and operating expenses			2,557				2,694				5,049				4,909
Selling, general and administrative expenses			604				610				1,131				1,176
Exploration expenses			259				134				521				246
Depreciation, depletion and amortization			2,016				1,965				4,040				3,145
Impairment—expropriated assets			4,588				—				4,588				—
Impairments			98				50				97				50
Taxes other than income taxes*			4,697				4,421				9,071				8,808
Accretion on discounted liabilities			81				73				160				133
Interest and debt expense			319				360				626				475
Foreign currency transaction (gains) losses			(179	)			18				(178	)			40
Minority interests			19				21				40				39
Total Costs and Expenses			45,879				39,794				82,680				81,924
Income before income taxes			3,518				8,682				9,584				14,479
Provision for income taxes			3,217				3,496				5,737				6,002
Net Income		$	301				5,186				3,847				8,477
Net Income Per Share of Common Stock (dollars)
Basic		$	.18				3.13				2.34				5.58
Diluted			.18				3.09				2.31				5.49
Dividends Paid Per Share of Common Stock (dollars)		$	.41				.36				.82				.72
Average Common Shares Outstanding (in thousands)
Basic			1,635,848				1,654,758				1,641,569				1,519,593
Diluted			1,657,999				1,678,445				1,663,618				1,542,752
*Includes excise taxes on petroleum products sales:		$	4,069				3,922				7,910				7,912

See Notes to Consolidated Financial Statements.

Consolidated Balance Sheet		ConocoPhillips

		Millions of Dollars
		June 30				December 31
		2007				2006
Assets
Cash and cash equivalents		$	1,411				817
Accounts and notes receivable (net of allowance of $42 million in 2007 and $45 million in 2006)			12,144				13,456
Accounts and notes receivable—related parties			2,146				650
Inventories			5,245				5,153
Prepaid expenses and other current assets			3,435				4,990
Total Current Assets			24,381				25,066
Investments and long-term receivables			28,875				19,595
Loans and advances—related parties			1,440				1,118
Net properties, plants and equipment			85,296				86,201
Goodwill			29,597				31,488
Intangibles			907				951
Other assets			372				362
Total Assets		$	170,868				164,781
Liabilities
Accounts payable		$	14,357				14,163
Accounts payable—related parties			1,776				471
Notes payable and long-term debt due within one year			1,109				4,043
Accrued income and other taxes			4,072				4,407
Employee benefit obligations			669				895
Other accruals			1,934				2,452
Total Current Liabilities			23,917				26,431
Long-term debt			21,703				23,091
Asset retirement obligations and accrued environmental costs			6,088				5,619
Joint venture acquisition obligation—related party			6,595				—
Deferred income taxes			20,582				20,074
Employee benefit obligations			3,565				3,667
Other liabilities and deferred credits			2,310				2,051
Total Liabilities			84,760				80,933
Minority Interests			1,180				1,202
Common Stockholders’ Equity
Common stock (2,500,000,000 shares authorized at $.01 par value) Issued (2007—1,714,314,763 shares; 2006—1,705,502,609 shares)
Par value			17				17
Capital in excess of par			42,382				41,926
Grantor trusts (at cost: 2007—43,363,722 shares; 2006—44,358,585 shares)			(746	)			(766	)
Treasury stock (at cost: 2007—43,765,345 shares; 2006—15,061,613 shares)			(2,969	)			(964	)
Accumulated other comprehensive income			2,599				1,289
Unearned employee compensation			(138	)			(148	)
Retained earnings			43,783				41,292
Total Common Stockholders’ Equity			84,928				82,646
Total		$	170,868				164,781

See Notes to Consolidated Financial Statements.

Consolidated Statement of Cash Flows		ConocoPhillips

		Millions of Dollars
		Six Months Ended
		June 30
		2007				2006
Cash Flows From Operating Activities
Net income		$	3,847				8,477
Adjustments to reconcile net income to net cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and amortization			4,040				3,145
Impairment—expropriated assets			4,588				—
Impairments			97				50
Dry hole costs and leasehold impairments			281				85
Accretion on discounted liabilities			160				133
Deferred taxes			180				(222	)
Undistributed equity earnings			(1,235	)			(754	)
Gain on asset dispositions			(927	)			(56	)
Other			88				(14	)
Working capital adjustments
Decrease in accounts and notes receivable			210				790
Increase in inventories			(271	)			(2,167	)
Decrease (increase) in prepaid expenses and other current assets			285				(436	)
Increase in accounts payable			1,097				564
Decrease (increase) in taxes and other accruals			(801	)			49
Net Cash Provided by Operating Activities			11,639				9,644
Cash Flows From Investing Activities
Acquisition of Burlington Resources Inc.*			—				(14,284	)
Capital expenditures and investments, including dry hole costs*			(5,347	)			(7,916	)
Proceeds from asset dispositions			2,215				73
Long-term advances/loans to affiliates			(326	)			(376	)
Collection of advances/loans to affiliates			66				110
Other			19				—
Net Cash Used in Investing Activities			(3,373	)			(22,393	)
Cash Flows From Financing Activities
Issuance of debt			765				15,874
Repayment of debt			(5,121	)			(3,306	)
Issuance of company common stock			181				104
Repurchase of company common stock			(2,000	)			(425	)
Dividends paid on company common stock			(1,342	)			(1,091	)
Other			(153	)			(47	)
Net Cash Provided by (Used in) Financing Activities			(7,670	)			11,109
Effect of Exchange Rate Changes on Cash and Cash Equivalents			(2	)			80
Net Change in Cash and Cash Equivalents			594				(1,560	)
Cash and cash equivalents at beginning of period			817				2,214
Cash and Cash Equivalents at End of Period		$	1,411				654

*	Net of cash acquired.
See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements		ConocoPhillips

Note 1—Interim Financial Information

The interim-period financial information presented in the financial statements included in this report is unaudited and includes all known accruals and adjustments, in the opinion of management, necessary for a fair presentation of the consolidated financial position of ConocoPhillips and its results of operations and cash flows for such periods. All such adjustments are of a normal and recurring nature. The acquisition of Burlington Resources Inc. was reflected in our balance sheet beginning at March 31, 2006, and was reflected in our results of operations beginning April 1, 2006.

To enhance your understanding of these interim financial statements, see the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

Note 2—Changes in Accounting Principles

Effective April 1, 2006, we implemented Emerging Issues Task Force Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty.” Issue No. 04-13 requires purchases and sales of inventory with the same counterparty and entered into “in contemplation” of one another to be combined and reported net (i.e., on the same income statement line). Exceptions to this are exchanges of finished goods for raw materials or work-in-progress within the same line of business, which are only reported net if the transaction lacks economic substance. The implementation of Issue No. 04-13 did not have a material impact on net income.

The table below shows the actual six months ended June 30, 2007, sales and other operating revenues, and purchased crude oil, natural gas and products under Issue No. 04-13, and the respective pro forma amounts had this new guidance been effective for the period included in this report prior to April 1, 2006.

		Millions of Dollars
		Six Months Ended
		June 30
		Actual				Pro Forma
		2007				2006
Sales and other operating revenues		$	88,690				87,398
Purchased crude oil, natural gas and products			57,535				56,246

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). This Interpretation provides guidance on recognition, classification and disclosure concerning uncertain tax liabilities. The evaluation of a tax position requires recognition of a tax benefit if it is more likely than not it will be sustained upon examination. We adopted this Interpretation effective January 1, 2007. The adoption did not have a material impact on our consolidated financial statements.

At January 1, 2007, we had unrecognized tax benefits of $912 million. Included in this balance was $468 million which, if recognized, would affect our effective tax rate.

We recognize accrued interest related to unrecognized tax benefits in interest expense, and penalties in operating expense. Accrued liabilities for interest and penalties as of January 1, 2007, totaled $99 million, net of accrued income taxes.

See Note 21—Income Taxes, for additional information about income taxes.

Note 3—Acquisition of Burlington Resources Inc.

On March 31, 2006, ConocoPhillips completed the $33.9 billion acquisition of Burlington Resources Inc., an independent exploration and production company that held a substantial position in North American natural gas proved reserves, production and exploratory acreage.

The final allocation of the purchase price to specific assets and liabilities was completed in the first quarter of 2007. It was based on the final outside appraisal of the fair value of Burlington Resources long-lived assets and the conclusion of the fair value determination of all other Burlington Resources assets and liabilities.

The following table summarizes the final purchase price allocation of the fair value of the assets acquired and liabilities assumed as of March 31, 2006:

		Millions
		of Dollars
Cash and cash equivalents		$	3,238
Accounts and notes receivable			1,432
Inventories			229
Prepaid expenses and other current assets			108
Investments and long-term receivables			268
Properties, plants and equipment			28,176
Goodwill			16,787
Intangibles			107
Other assets			46
Total Assets		$	50,391
Accounts payable		$	1,487
Notes payable and long-term debt due within one year			1,009
Accrued income and other taxes			697
Employee benefit obligations—current			248
Other accruals			254
Long-term debt			3,330
Asset retirement obligations			730
Accrued environmental costs			174
Deferred income taxes			7,849
Employee benefit obligations			347
Other liabilities and deferred credits			397
Common stockholders’ equity			33,869
Total Liabilities and Equity		$	50,391

All of the goodwill was assigned to the Worldwide Exploration and Production reporting unit. Of the $16,787 million of goodwill, $7,953 million relates to net deferred tax liabilities arising from differences between the allocated financial bases and deductible tax bases of the acquired assets. None of the goodwill is deductible for tax purposes.

The following table presents pro forma information for the six months ended June 30, 2006, as if the acquisition had occurred at the beginning of 2006.

		Millions
		of Dollars
Pro Forma
Sales and other operating revenues		$	95,960
Net income			8,920
Net income per share of common stock (dollars)
Basic			5.39
Diluted			5.31

The pro forma information is not intended to reflect the actual results that would have occurred if the companies had been combined during the period presented, nor is it intended to be indicative of the results of operations that may be achieved by ConocoPhillips in the future.

Note 4—Restructuring

In connection with the acquisition of Burlington Resources, we implemented a restructuring program as part of the effort to capture the synergies of combining the two companies. Under this program, we recorded accruals totaling $230 million in 2006 for employee severance payments, site closings, incremental pension benefit costs associated with workforce reductions, and employee relocations. Approximately 600 positions were identified for elimination during 2006, most of which were in the United States. During 2007, an additional 25 positions were identified for elimination.

Of the total accrual, $224 million was reflected in the Burlington Resources purchase price allocation as an assumed liability, and $6 million related to ConocoPhillips was reflected in selling, general and administrative expenses in 2006. The following table summarizes activity related to the non-pension portion of the accrual in the first six months of 2007:

		Millions
		of Dollars
Balance at December 31, 2006		$	120
Benefit payments			(40	)
Adjustments			15
Balance at June 30, 2007*		$	95

*	Includes current liabilities of $49 million. All workforce reductions are expected to be completed by March 2008. Some costs for site closings, continuation of employee benefits, and employee relocations are expected to extend beyond one year from June 30, 2007.

Note 5—Variable Interest Entities (VIEs)

In June 2005, ConocoPhillips and OAO LUKOIL (LUKOIL) created the OOO Naryanmarneftegaz (NMNG) joint venture to develop resources in the Timan-Pechora province of Russia. The NMNG joint venture is a VIE, but we are not the primary beneficiary. We use the equity method of accounting for this investment. At June 30, 2007, the book value of our investment in the venture was $1,233 million.

See Note 11—Debt, for information about the liquidation of Phillips 66 Capital II.

Note 6—Inventories

Inventories consisted of the following:

		Millions of Dollars
		June 30				December 31
		2007				2006
Crude oil and petroleum products		$	4,470				4,351
Materials, supplies and other			775				802
		$	5,245				5,153

Inventories valued on the last-in, first-out (LIFO) basis totaled $4,276 million and $4,043 million at June 30, 2007 and December 31, 2006, respectively. The remainder of our inventories is valued under various methods, including first-in, first-out and weighted average. The excess of current replacement cost over LIFO cost of inventories amounted to $5,090 million and $4,178 million at June 30, 2007 and December 31, 2006, respectively.

Note 7—Assets Held for Sale

In 2006, we commenced asset rationalization efforts that led to the classification of certain assets as “held for sale” under Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, at December 31, 2006, we reclassified $3,051 million of non-current assets and $604 million of non-current liabilities into current assets and current liabilities, respectively.

During the first six months of 2007, a portion of these held-for-sale assets were sold, additional assets met the held-for-sale criteria, and other assets no longer met the held-for-sale criteria. As a result, at June 30, 2007, we classified $1,652 million of non-current assets as “Prepaid expenses and other current assets” on our consolidated balance sheet and we classified $216 million of non-current liabilities as current liabilities, consisting of $166 million in “Accrued income and other taxes” and $50 million in “Other accruals.” We expect the disposal of these assets to be substantially completed by mid-2008.

The major classes of non-current assets and non-current liabilities held for sale at June 30, 2007, reclassified to current were:

		Millions
		of Dollars
Assets
Investments and long-term receivables		$	146
Net properties, plants and equipment			1,407
Goodwill			50
Intangibles			2
Other assets			47
Total assets reclassified		$	1,652
Exploration and Production (E&P)		$	331
Refining and Marketing (R&M)			1,321
		$	1,652
Liabilities
Asset retirement obligations and accrued environmental costs		$	28
Deferred income taxes			166
Other liabilities and deferred credits			22
Total liabilities reclassified		$	216
E&P		$	37
R&M			179
		$	216

Note 8—Investments, Loans and Long-Term Receivables

Investments in Venezuela

See the “Expropriated Assets” section of Note 10—Impairments, for information on the complete impairment of our investments in the Hamaca and Petrozuata projects.

EnCana Business Ventures

In October 2006, we announced a business venture with EnCana Corporation (EnCana) to create an integrated North American heavy-oil business. The transaction closed on January 3, 2007. The venture consists of two 50/50 business ventures, a Canadian upstream general partnership, FCCL Oil Sands Partnership (FCCL), and a U.S. downstream limited liability company, WRB Refining LLC (WRB). We use the equity method of accounting for both entities, with the operating results of our investment in FCCL reflecting its use of the full-cost method of accounting for oil and gas exploration and development activities.

FCCL’s operating assets consist of the Foster Creek and Christina Lake steam-assisted gravity drainage bitumen projects, both located in the eastern flank of the Athabasca oil sands in northeast Alberta. A subsidiary of EnCana is the operator and managing partner of FCCL. We are obligated to contribute $7.5 billion, plus accrued interest, to FCCL over a 10-year period beginning in 2007. For additional information on this obligation, see Note 17—Joint Venture Acquisition Obligation.

WRB’s operating assets consist of the Wood River and Borger refineries, located in Roxana, Illinois, and Borger, Texas, respectively. As a result of our contribution of these two assets to WRB, a basis difference of $5.1 billion exists due to the fair value of the contributed assets recorded by WRB exceeding their

historic book value. The difference will be amortized and recognized as a benefit evenly over a period of 25 years starting from the closing date. The basis difference at June 30, 2007, is approximately $5.0 billion. We are the operator and managing partner of WRB. EnCana is obligated to contribute $7.5 billion, plus accrued interest, to WRB over a 10-year period beginning in 2007. For the Wood River refinery, operating results are shared 50/50 starting upon formation. For the Borger refinery, we are entitled to 85 percent of the operating results in 2007, 65 percent in 2008, and 50 percent in all years thereafter.

LUKOIL

Our ownership interest in LUKOIL was 20 percent at June 30, 2007, based on 851 million issued shares. For financial reporting under U.S. generally accepted accounting principles, treasury shares held by LUKOIL are not considered outstanding for determining our equity-method ownership interest in LUKOIL. Our ownership interest, based on estimated shares outstanding, was 20.5 percent at June 30, 2007.

At June 30, 2007, the book value of our ordinary share investment in LUKOIL was $10,099 million. Our share of the net assets of LUKOIL was estimated to be $7,523 million. This basis difference of $2,576 million is primarily being amortized on a unit-of-production basis. On June 30, 2007, the closing price of LUKOIL shares on the London Stock Exchange was $76.20 per share, making the total market value of our LUKOIL investment $12,963 million.

Loans to Related Parties

As part of our normal ongoing business operations and consistent with industry practice, we invest and enter into numerous agreements with other parties to pursue business opportunities, which share costs and apportion risks among the parties as governed by the agreements. Included in such activity are loans made to certain affiliated companies. Significant loans to affiliated companies at June 30, 2007, included the following:

	•		$607 million in loan financing, including accrued interest, to Freeport LNG for the construction of an LNG facility. We expect to provide loan financing of approximately $630 million for the construction of the facility.
	•		$255 million in loan financing, including accrued interest, to Varandey Terminal Company associated with the costs of a terminal expansion. We expect our total obligation for the terminal expansion to be approximately $525 million at current exchange rates, including interest to be accrued during construction.
	•		$540 million of project financing, including accrued interest, to Qatargas 3, an integrated project to produce and liquefy natural gas from Qatar’s North field. Our maximum exposure to this financing structure is $1.2 billion.

Note 9—Properties, Plants and Equipment

The company’s investment in properties, plants and equipment (PP&E), with accumulated depreciation, depletion and amortization (Accum. DD&A), was:

		Millions of Dollars
		June 30, 2007												December 31, 2006
		Gross				Accum.				Net				Gross				Accum.				Net
		PP&E				DD&A				PP&E				PP&E				DD&A				PP&E
E&P		$	95,244				26,276				68,968				88,592				21,102				67,490
Midstream			330				163				167				330				157				173
R&M			18,747				4,221				14,526				22,115				5,199				16,916
LUKOIL Investment			—				—				—				—				—				—
Chemicals			—				—				—				—				—				—
Emerging Businesses			1,091				119				972				1,006				98				908
Corporate and Other			1,301				638				663				1,229				515				714
		$	116,713				31,417				85,296				113,272				27,071				86,201

Suspended Wells

The following table reflects the net changes in suspended exploratory well costs during the first six months of 2007:

		Millions of Dollars
		Six Months Ended
		June 30, 2007
Beginning balance at January 1		$	537
Additions pending the determination of proved reserves			60
Reclassifications to proved properties			(15	)
Sales of suspended well investment			(22	)
Charged to dry hole expense			(10	)
Ending balance at June 30		$	550

The following table provides an aging of suspended well balances at June 30, 2007, and December 31, 2006:

		Millions of Dollars
		June 30				December 31
		2007				2006
Exploratory well costs capitalized for a period of one year or less		$	184				225
Exploratory well costs capitalized for a period greater than one year			366				312
Ending balance		$	550				537
Number of projects that have exploratory well costs that have been capitalized for a period greater than one year			31				22

The following table provides a further aging of those exploratory well costs that have been capitalized for more than one year after drilling is completed, as of June 30, 2007:

		Millions of Dollars
						Suspended Since
Project		Total				2006				2005				2004				2003				2002				2001
Alpine satellite—Alaska (2)		$	21				—				—				—				—				21				—
Kashagan—Kazakhstan (1)			18				—				—				—				9				—				9
Aktote—Kazakhstan (2)			19				—				—				7				12				—				—
Kairan—Kazakhstan (1)			13				—				—				13				—				—				—
Gumusut—Malaysia (2)			30				—				6				11				13				—				—
Malikai—Malaysia (2)			34				5				19				10				—				—				—
Plataforma Deltana—Venezuela (2)			21				—				6				15				—				—				—
Uge—Nigeria (1)			16				—				16				—				—				—				—
Su Tu Trang—Vietnam (2)			23				7				8				—				8				—				—
Caldita—Australia (1)			33				—				33				—				—				—				—
Enochdhu/Finlaggen—U.K. (1)			11				11				—				—				—				—				—
Humphrey—U.K. (2)			12				12				—				—				—				—				—
Clair—U.K. (1)			17				17				—				—				—				—				—
K4—U.K. (1)			12				12				—				—				—				—				—
West Sak—Alaska (2)			10				6				3				1				—				—				—
Sixteen projects of less than $10 million each (1)(2)			76				18				36				2				11				9				—
Total of 31 projects		$	366				88				127				59				53				30				9

(1)	Additional appraisal wells planned.
(2)	Appraisal drilling complete; costs being incurred to assess development.

Note 10—Impairments

Expropriated Assets

On January 31, 2007, Venezuela’s National Assembly passed a law allowing the president of Venezuela to pass laws on certain matters by decree. On February 26, 2007, the president of Venezuela issued a decree (the Nationalization Decree) mandating the termination of the then-existing structures related to our heavy-oil ventures and oil production risk contracts and the transfer of all rights relating to our heavy-oil ventures and oil production risk contracts to joint ventures (“empresas mixtas”) that will be controlled by the Venezuelan national oil company or its subsidiaries.

On June 26, 2007, we announced we had been unable to reach agreement with respect to our migration to an empresa mixta structure mandated by the Nationalization Decree. Therefore, pursuant to the Nationalization Decree, Petróleos de Venezuela S.A. (PDVSA) or its affiliates directly assumed the activities associated with ConocoPhillips’ interests in the Petrozuata and Hamaca heavy-oil ventures and the offshore Corocoro oil development project. Based on Venezuelan statements that the expropriation of our oil interests in Venezuela occurred on June 26, 2007, management determined such expropriation required a complete impairment, under U.S. generally accepted accounting principles, of our investments in the Petrozuata and Hamaca heavy-oil ventures and the offshore Corocoro oil development project. Accordingly, we recorded a non-cash impairment, including allocable goodwill, of $4,588 million before-tax ($4,512 million after-tax) in the second quarter of 2007.

The impairment included equity-method investments and properties, plants and equipment. Also, this expropriation of our oil interests is viewed as a partial disposition of our Worldwide Exploration and Production reporting unit and, under the guidance in SFAS No. 142, “Goodwill and Other Intangible Assets,” required an allocation of goodwill to the expropriation event. The amount of goodwill impaired as a result of this allocation was $1,925 million.

Negotiations continue between ConocoPhillips and Venezuelan authorities concerning appropriate compensation for the expropriation of the company’s interests. We continue to preserve all our rights with respect to this situation, including our rights under the contracts we signed and under international and Venezuelan law. We will continue to evaluate our options, including international arbitration, in realizing adequate compensation for the value of our oil investments and operations in Venezuela.

We believe the value of our expropriated Venezuelan oil operations substantially exceeds the historical cost-based carrying value plus goodwill allocable to those operations. Although negotiations continue with Venezuelan authorities, it is not possible to predict with any certainty the outcome of these negotiations. Additionally, should we pursue other means of dispute resolution, U.S. generally accepted accounting principles require a claim that is the subject of litigation be presumed to not be probable of realization. Accordingly, any compensation for our expropriated assets was not considered when making the impairment determination, since to do so could result in the recognition of compensation for the expropriation prior to its realization.

At December 31, 2006, we had recorded 1,088 million barrels of oil equivalent of proved reserves related to Petrozuata and Hamaca, and 17 million barrels of oil equivalent of proved reserves related to Corocoro. The loss of proved reserves related to these projects will be reflected as a downward adjustment in our 2007 reserves.

Other Impairments

During the first six months of 2007 and 2006, we recognized the following net impairments:

		Millions of Dollars
		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Asset write-downs
E&P—United States		$	1				40				1				40
E&P—International			81				10				175				10
R&M—United States			16				—				49				—
Increase in fair value of previously impaired assets—R&M			—				—				(128	)			—
		$	98				50				97				50

During the second quarter and six-month period of 2007, we recorded property impairments for:

	•		The write-down of held-for-sale assets to fair value, less cost to sell.
	•		Changes in asset retirement obligations for properties at the end of their economic life.
	•		The write-down of abandoned properties or projects.

In addition and in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the six-month period of 2007 included a $128 million gain for the subsequent increase in the fair value of certain assets impaired in the prior year to reflect finalized sales agreements. This gain was netted with write-downs into the “Impairments” line of the consolidated income statement.

The second quarter and six-month period of 2006 included a $40 million property impairment as a result of our decision to withdraw an application for a proposed liquefied natural gas regasification terminal. We also impaired properties due to changes in asset retirement obligation estimates.

Note 11—Debt

At June 30, 2007, we had two revolving credit facilities totaling $5 billion that expire in October 2011. Also, we had a $2.5 billion revolving credit facility whose expiration date was extended one year, in the first quarter of 2007, to April 2012 at a reduced commitment level of $2.3 billion during the one-year extension period. These facilities may be used as direct bank borrowings, as support for the ConocoPhillips $7.5 billion commercial paper program, as support for the ConocoPhillips Qatar Funding Ltd. $1.5 billion commercial paper program, or as support for issuances of letters of credit totaling up to $750 million. At June 30, 2007 and December 31, 2006, we had no outstanding borrowings under these credit facilities, but $41 million in letters of credit had been issued at both dates. Under both commercial paper programs there was $535 million of commercial paper outstanding at June 30, 2007, compared with $2,931 million at December 31, 2006.

At June 30, 2007, we had classified $535 million of short-term debt as long-term debt, based on our ability and intent to refinance the obligation on a long-term basis under our revolving credit facilities.

At December 31, 2006, Phillips 66 Capital II (Trust II), an unconsolidated VIE, had outstanding $350 million of 8% Capital Securities (Capital Securities). The sole asset of Trust II was $361 million of the company’s 8% Junior Subordinated Deferrable Interest Debentures due 2037 (Subordinated Debt Securities II). Effective January 15, 2007, we redeemed the Subordinated Debt Securities II at a premium of $14 million, plus accrued interest, resulting in the immediate redemption of the Capital Securities. Upon redemption of the Capital Securities, Trust II was liquidated.

In January 2007, we redeemed our $153 million 7.25% Notes due 2007 upon their maturity. In February 2007, we reduced our Floating Rate Five-Year Term Note due 2011 from $5 billion to $4 billion, with a subsequent reduction in July 2007 to $3 billion. In April 2007, we redeemed our $1 billion Floating Rate Notes due 2007 upon their maturity.

In May 2007, Polar Tankers, Inc., a wholly owned subsidiary, issued an offering of $645 million 5.951% Notes due 2037. The notes are fully and unconditionally guaranteed by ConocoPhillips and ConocoPhillips Company.

Note 12—Contingencies and Commitments

In the case of all known non-income-tax-related contingencies, we accrue a liability when the loss is probable and the amount is reasonably estimable. We do not reduce these liabilities for potential insurance or third-party recoveries. If applicable, we accrue receivables for probable insurance or other third-party recoveries. In the case of income-tax-related contingencies, we adopted FIN 48, effective January 1, 2007. FIN 48 requires a cumulative probability-weighted loss accrual in cases where sustaining a tax position is less than certain. See Note 2—Changes in Accounting Principles and Note 21—Income Taxes, for additional information about income-tax related contingencies.

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 financial statements. As we learn new facts concerning contingencies, we reassess our position both with respect to accrued liabilities and other potential exposures. Estimates that are 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 federal, state and local environmental laws and regulations. These may result in obligations 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 sites. When we prepare our financial statements, we record accruals for environmental liabilities based on management’s best estimates, using all information that is available at the time. We measure estimates and base liabilities on currently available facts, existing technology, and presently enacted laws and regulations, taking into consideration the likely effects of societal and economic factors. 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. Environmental Protection Agency (EPA) or other organizations. We consider unasserted claims in our determination of environmental liabilities and we accrue them in the period that 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 state 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 of the cleanup costs related to any site at which we have been designated as a potentially responsible party. If we were solely responsible, the costs, in some cases, could be material to our, or one of our segments’, results of operations, capital resources or liquidity. However, settlements and costs incurred in matters that previously have been resolved have not been material to our results of operations or financial condition. 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 state agencies 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 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. We have not recorded accruals for any potential contingent liabilities that we expect to be funded by the prior owners under these indemnifications.

We are currently participating in environmental assessments and cleanups at numerous federal Superfund and comparable state sites. After an assessment of environmental exposures for cleanup and other costs, we make accruals on an undiscounted basis (except for 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 that future costs will be incurred and these costs can be reasonably estimated. At June 30, 2007, our balance sheet included a total environmental accrual of $1,027 million, compared with $1,062 million at December 31, 2006. We expect to incur the majority of these expenditures within the next 30 years. We have not reduced these accruals for possible insurance recoveries. In the future, we may be involved in additional environmental assessments, cleanups and proceedings.

Legal Proceedings

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 which have been scheduled for trial, as well as the pace of settlement discussions in individual matters. Based on our professional judgment and experience in using these litigation management tools and available information about current developments in all our cases, our legal organization believes there is only a remote likelihood 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 financial statements.

Other Contingencies

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 June 30, 2007, we had performance obligations secured by letters of credit totaling $1,143 million (of which $41 million was issued under the provisions of our revolving credit facilities, and the remainder was issued as direct bank letters of credit) and various purchase commitments for materials, supplies, services and items of permanent investment incident to the ordinary conduct of business.

See Note 10—Impairments, for additional information about expropriated assets in Venezuela and the contingencies related to receiving adequate compensation for our oil interests in Venezuela.

Note 13—Guarantees

At June 30, 2007, 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, we have not recognized a liability either because the guarantees were issued prior to December 31, 2002, or because the fair value of the obligation is immaterial.

Construction Completion Guarantees

	•		In June 2006, we issued a guarantee for 24 percent of the $2 billion in credit facilities of Rockies Express Pipeline LLC (Rockies Express), which will be used to construct a natural gas pipeline across a portion of the United States. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $480 million, which could become payable if the credit facility is fully utilized and Rockies Express fails to meet its obligations under the credit agreement. It is anticipated that construction completion will be achieved at the end of 2009, and refinancing will take place at that time, making the debt non-recourse. At June 30, 2007, the carrying value of the guarantee to third-party lenders was $11 million.
	•		In December 2005, we issued a construction completion guarantee for 30 percent of the $4.0 billion in loan facilities of Qatargas 3, which will be used to construct an LNG train in Qatar. Of the $4.0 billion in loan facilities, ConocoPhillips has committed to provide $1.2 billion. The maximum potential amount of future payments to third-party lenders under the guarantee is estimated to be $850 million, which could become payable if the full debt financing is utilized and completion of the Qatargas 3 project is not achieved. The project financing will be non-recourse upon certified completion, which is expected by December 31, 2009. At June 30, 2007, the carrying value of the guarantee to the third-party lenders was $11 million. For additional information, see Note 8—Investments, Loans and Long-Term Receivables.

Guarantees of Joint-Venture Debt

•

At June 30, 2007, we had guarantees outstanding for our portion of joint-venture debt obligations, which have terms of up to 17 years. The maximum potential amount of future payments under the guarantees is approximately $120 million. Payment would be required if a joint venture defaults on its debt obligations.

Other Guarantees

	•		The Merey Sweeny, L.P. (MSLP) joint-venture project agreement requires the partners in the venture to pay cash calls to cover operating expenses in the event the venture does not have enough cash to cover operating expenses after setting aside the amount required for debt service over the next 17 years. Although there is no maximum limit stated in the agreement, the intent is to cover short-term cash deficiencies should they occur. Our maximum potential future payments under the agreement are currently estimated to be $100 million, assuming such a shortfall exists at some point in the future due to an extended operational disruption.
	•		In February 2003, we entered into two agreements establishing separate guarantee facilities of $50 million each for two LNG ships. Subject to the terms of each such facility, we will be required to make payments should the charter revenue generated by the respective ship fall below certain specified minimum thresholds, and we will receive payments to the extent that such revenues exceed those thresholds. The net maximum future payments that we may have to make over the 20-year terms of the two agreements could be up to $100 million in total. To the extent we receive any such payments, our actual gross payments over the 20 years could exceed that amount. In the event either ship is sold or a total loss occurs, we also may have recourse to the sales or insurance proceeds to recoup payments made under the guarantee facilities.
	•		We have guarantees of the residual value of leased corporate aircraft. The maximum potential payment under these guarantees at June 30, 2007, was $200 million.
	•		We have other guarantees with maximum future potential payment amounts totaling $320 million, which consist primarily of dealer and jobber loan guarantees to support our marketing business, a guarantee to fund the short-term cash liquidity deficits of a lubricants joint venture, three small construction completion guarantees, a guarantee associated with a pending lawsuit, guarantees relating to the startup of a refining joint venture, a guarantee supporting a third-party pipeline

construction and guarantees of the lease payment obligations of a joint venture. The carrying amount recorded for these other guarantees, at June 30, 2007, was $50 million. These guarantees generally extend up to 15 years and payment would be required only if the dealer, jobber or lessee goes into default, if the lubricants or refining joint ventures have cash liquidity issues, if construction projects are not completed, if guaranteed parties default on lease payments, or if an adverse decision occurs in the pending lawsuit.

Indemnifications

Over the years, we have entered into various agreements to sell ownership interests in certain corporations and joint ventures and have sold several assets, including downstream and midstream assets, certain exploration and production assets, and downstream retail and wholesale sites that gave rise to qualifying indemnifications. Agreements associated with these sales include indemnifications for taxes, environmental liabilities, permits and licenses, employee claims, real estate indemnity against tenant defaults, and litigation. The terms of these indemnifications vary greatly. The majority of these indemnifications are related to environmental issues, the term is generally indefinite and the maximum amount of future payments is generally unlimited. The carrying amount recorded for these indemnifications at June 30, 2007, was $464 million. We amortize the indemnification liability over the relevant time period, 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 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. Included in the carrying amount recorded were $286 million of environmental accruals for known contamination that is included in asset retirement obligations and accrued environmental costs at June 30, 2007. For additional information about environmental liabilities, see Note 12—Contingencies and Commitments.

Note 14—Financial Instruments and Derivative Contracts

Derivative assets and liabilities were:

		Millions of Dollars
		June 30				December 31
		2007				2006
Derivative Assets
Current		$	530				924
Long-term			82				82
		$	612				1,006
Derivative Liabilities
Current		$	432				681
Long-term			86				126
		$	518				807

These derivative assets and liabilities appear as prepaid expenses and other current assets, other assets, other accruals, or other liabilities and deferred credits on the balance sheet.

Note 15—Comprehensive Income

ConocoPhillips’ comprehensive income was as follows:

		Millions of Dollars
		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Net income		$	301				5,186				3,847				8,477
After-tax changes in:
Defined benefit pension plans
Net prior service cost			5				—				10				—
Net actuarial loss			14				—				30				—
Non-sponsored plans			—				—				(3	)			—
Foreign currency translation adjustments			1,145				767				1,276				938
Hedging activities			(2	)			6				(3	)			7
Comprehensive income		$	1,463				5,959				5,157				9,422

Accumulated other comprehensive income in the equity section of the balance sheet included:

		Millions of Dollars
		June 30				December 31
		2007				2006
Defined benefit pension plans		$	(628	)			(665	)
Foreign currency translation adjustments			3,234				1,958
Deferred net hedging loss			(7	)			(4	)
Accumulated other comprehensive income		$	2,599				1,289

Note 16—Supplemental Cash Flow Information

		Millions of Dollars
		Six Months Ended
		June 30
		2007				2006
Non-Cash Investing and Financing Activities
Issuance of stock and options for the acquisition of Burlington Resources Inc.		$	—				16,343
Investment in an upstream business venture through issuance of an acquisition obligation			7,313				—
Investment in a downstream business venture through contribution of non-cash assets and liabilities			2,415				—
Cash Payments
Interest		$	532				327
Income taxes			5,525				5,835

Note 17—Joint Venture Acquisition Obligation

On January 3, 2007, we closed on the previously announced business venture with EnCana Corporation. As part of this transaction, we expect to add approximately 400 million barrels of oil equivalent to our proved reserves in 2007. In addition, we are obligated to contribute $7.5 billion, plus accrued interest, over a 10-year period, beginning in 2007, to the upstream business venture, FCCL Oil Sands Partnership, formed as a result of the transaction. An initial cash contribution of $188 million was made upon closing in January.

Quarterly principal and interest payments of $237 million began in the second quarter of 2007, and will continue until the balance is paid. This obligation is reflected as a liability on our June 30, 2007, consolidated balance sheet. Of the principal obligation amount, approximately $578 million is short-term and is included in the “Accounts payable—related parties” line on our consolidated balance sheet. The principal portion of these payments is presented on our consolidated statement of cash flows as an other financing activity. Interest accrues at a fixed annual rate of 5.3 percent on the unpaid principal balance.

Note 18—Employee Benefit Plans

Pension and Postretirement Plans

Three Months Ended

		Millions of Dollars
		Pension Benefits																Other Benefits
		June 30																June 30
		2007								2006								2007				2006
		U.S.				Int’l.				U.S.				Int’l.
Components of Net Periodic Benefit Cost
Service cost		$	44				24				44				22				4				3
Interest cost			57				41				53				34				11				12
Expected return on plan assets			(51	)			(37	)			(43	)			(31	)			—				—
Amortization of prior service cost			2				2				3				2				4				5
Recognized net actuarial loss (gain)			16				12				22				10				(6	)			(4	)
Net periodic benefit costs		$	68				42				79				37				13				16

Six Months Ended

		Millions of Dollars
		Pension Benefits																Other Benefits
		June 30																June 30
		2007								2006								2007				2006
		U.S.				Int’l.				U.S.				Int’l.
Components of Net Periodic Benefit Cost
Service cost		$	88				48				86				43				7				7
Interest cost			114				79				103				65				22				23
Expected return on plan assets			(102	)			(72	)			(83	)			(60	)			—				—
Amortization of prior service cost			5				4				5				4				7				10
Recognized net actuarial loss (gain)			31				23				44				20				(10	)			(8	)
Net periodic benefit costs		$	136				82				155				72				26				32

During the first six months of 2007, we contributed $218 million to our domestic qualified and non-qualified plans and $80 million to our international benefit plans. We currently expect to contribute a total of $430 million to our domestic plans and $190 million to our international plans in 2007.

Note 19—Related Party Transactions

Significant transactions with related parties were:

		Millions of Dollars
		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006*				2007				2006*
Revenues and other income (a)		$	2,884				2,435				5,502				4,219
Purchases (b)			4,089				1,802				7,299				3,320
Operating expenses and selling, general and administrative expenses (c)			98				101				206				180
Net interest income (d)			26				3				56				8

*	Restated to include additional related party amounts.

(a)		We sold natural gas to DCP Midstream and crude oil to the Malaysian Refining Company Sdn. Bhd (MRC), among others, for processing and marketing. Natural gas liquids, solvents and petrochemical feedstocks were sold to Chevron Phillips Chemical Company LLC (CPChem), gas oil and hydrogen feedstocks were sold to Excel Paralubes, and refined products were sold primarily to CFJ Properties and LUKOIL. Natural gas, crude oil, blendstock and other intermediate products were sold to WRB Refining LLC. We also sold various international marketing companies to LUKOIL in the second quarter of 2007. In addition, we charged several of our affiliates, including CPChem, Merey Sweeny L.P. (MSLP), and Hamaca Holding LLC, for the use of common facilities, such as steam generators, waste and water treaters, and warehouse facilities.
(b)		We purchased refined products from WRB Refining. We purchased natural gas and natural gas liquids from DCP Midstream and CPChem for use in our refinery processes and other feedstocks from various affiliates. We purchased crude oil from LUKOIL, upgraded crude oil from Petrozuata C.A. and refined products from MRC. We also paid fees to various pipeline equity companies for transporting finished refined products and a price upgrade to MSLP for heavy crude processing. We purchased base oils and fuel products from Excel Paralubes for use in our refinery and specialty businesses.
(c)		We paid processing fees to various affiliates. Additionally, we paid crude oil transportation fees to pipeline equity companies.
(d)		We paid and/or received interest to/from various affiliates, including FCCL Oil Sands Partnership.

Elimination amounts related to our equity percentage share of profit or loss on the above transactions were not material.

Note 20—Segment Disclosures and Related Information

We have organized our reporting structure based on the grouping of similar products and services, resulting in six operating segments:

	1)		E&P—This segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis. At June 30, 2007, our E&P operations were producing in the United States, Norway, the United Kingdom, the Netherlands, Canada, Nigeria, Ecuador, Argentina, offshore Timor Leste in the Timor Sea, Australia, China, Indonesia, Algeria, Libya, Vietnam, and Russia. The E&P segment’s U.S. and international operations are disclosed separately for reporting purposes.
	2)		Midstream—This segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. The Midstream segment primarily consists of our 50 percent equity investment in DCP Midstream.
	3)		R&M—This segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. At June 30, 2007, we owned or had an interest in 12 refineries in the United States, one in the United Kingdom, one in Ireland, two in Germany, two in the Czech Republic, and one in Malaysia. The R&M segment’s U.S. and international operations are disclosed separately for reporting purposes.
	4)		LUKOIL Investment—This segment represents our investment in the ordinary shares of LUKOIL, an international, integrated oil and gas company headquartered in Russia. At June 30, 2007, our ownership interest was 20 percent, based on issued shares, and 20.5 percent, based on estimated shares outstanding.
	5)		Chemicals—This segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Chemicals segment consists of our 50 percent equity investment in CPChem.
	6)		Emerging Businesses—The Emerging Businesses segment represents our investment in new technologies or businesses outside our normal scope of operations. Activities within this segment are currently focused on power generation and other items, such as carbon-to-liquids, technology solutions, and alternative energy and programs, such as advanced hydrocarbon processes, energy conversion technologies, new petroleum-based products, and renewable fuels.

Corporate and Other includes general corporate overhead, most interest income and expense, restructuring charges, and various other corporate activities. Corporate assets include all cash and cash equivalents.

We evaluate performance and allocate resources based on net income. Intersegment sales are at prices that approximate market.

See Note 2—Changes in Accounting Principles, for information affecting the comparability of sales and other operating revenues presented in the following tables of our segment disclosures.

Analysis of Results by Operating Segment

		Millions of Dollars
		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Sales and Other Operating Revenues
E&P
United States		$	9,465				8,798				17,737				18,117
International			5,480				7,080				11,493				14,524
Intersegment eliminations—U.S.			(1,496	)			(1,517	)			(2,652	)			(2,722	)
Intersegment eliminations—international			(1,476	)			(2,121	)			(2,917	)			(3,375	)
E&P			11,973				12,240				23,661				26,544
Midstream
Total sales			1,109				1,179				2,214				2,200
Intersegment eliminations			(45	)			(247	)			(104	)			(531	)
Midstream			1,064				932				2,110				1,669
R&M
United States			24,614				24,900				44,653				48,441
International			9,793				9,356				18,428				17,712
Intersegment eliminations—U.S.			(119	)			(201	)			(263	)			(401	)
Intersegment eliminations—international			(3	)			(5	)			(5	)			(9	)
R&M			34,285				34,050				62,813				65,743
LUKOIL Investment			—				—				—				—
Chemicals			3				4				6				7
Emerging Businesses
Total sales			131				135				300				316
Intersegment eliminations			(91	)			(104	)			(205	)			(228	)
Emerging Businesses			40				31				95				88
Corporate and Other			5				4				5				4
Other adjustments			—				(112	)			—				—
Consolidated sales and other operating revenues		$	47,370				47,149				88,690				94,055
Net Income (Loss)
E&P
United States		$	1,055				1,300				1,971				2,481
International			(3,459	)			2,004				(2,046	)			3,376
Total E&P			(2,404	)			3,304				(75	)			5,857
Midstream			102				108				187				218
R&M
United States			1,879				1,433				2,775				1,730
International			479				275				719				368
Total R&M			2,358				1,708				3,494				2,098
LUKOIL Investment			526				387				782				636
Chemicals			68				103				150				252
Emerging Businesses			(12	)			(12	)			(13	)			(4	)
Corporate and Other			(337	)			(412	)			(678	)			(580	)
Consolidated net income		$	301				5,186				3,847				8,477

		Millions of Dollars
		June 30				December 31
		2007				2006
Total Assets
E&P
United States		$	35,258				35,523
International			54,026				48,143
Goodwill			25,811				27,712
Total E&P			115,095				111,378
Midstream			2,058				2,045
R&M
United States			24,071				22,936
International			9,252				9,135
Goodwill			3,786				3,776
Total R&M			37,109				35,847
LUKOIL Investment			10,350				9,564
Chemicals			2,312				2,379
Emerging Businesses			1,028				977
Corporate and Other			2,916				2,591
Consolidated total assets		$	170,868				164,781

Note 21—Income Taxes

Our effective tax rate for the second quarter and first six months of 2007 was 91 percent and 60 percent, respectively, compared with 40 percent and 41 percent for the same two periods of 2006. The change in the effective tax rate for the second quarter and six months of 2007, versus the same periods of 2006, was primarily due to the impact of the expropriation of our oil interests in Venezuela (see Note 10—Impairments, for additional information). In addition to the Venezuela expropriation, the effective tax rate in excess of the domestic federal statutory rate of 35 percent was primarily due to the impact of foreign taxes.

Effective January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” See Note 2—Changes in Accounting Principles, for additional information about the adoption of this Interpretation.

Unrecognized tax benefits increased to $1,100 million at June 30, 2007, mainly due to increases occurring in the second quarter related to tax positions taken during the current year. Included in this balance is $673 million which, if recognized, would affect our effective tax rate.

We and our subsidiaries file tax returns in the U.S. Federal jurisdiction and in many foreign and state jurisdictions. Audits in major jurisdictions, including the United States, Canada, Norway and the United Kingdom, are generally complete through 2001. Issues in dispute for audited years and audits for subsequent years are ongoing and in various stages of completion in the many jurisdictions in which we operate around the world. As a consequence, the balance in unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible that such changes could be significant when compared to our total unrecognized tax benefits, but the amount of change is not estimable.

Note 22—New Accounting Standards

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This Statement permits an entity to choose to measure financial instruments and certain other items similar to financial instruments at fair value, with all subsequent changes in fair value for the financial instrument reported in earnings. By electing the fair value option in conjunction with a derivative, an entity can achieve an accounting result similar to a fair-value hedge without having to comply with complex hedge accounting rules. This Statement is effective January 1, 2008. We are currently evaluating the Statement, but we do not expect any significant impact to our consolidated financial statements.

Supplementary Information—Condensed Consolidating Financial Information

We have various cross guarantees among ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to publicly held debt securities. ConocoPhillips Company is wholly owned by ConocoPhillips. ConocoPhillips Australia Funding Company is an indirect, wholly owned subsidiary of ConocoPhillips Company. ConocoPhillips Canada Funding Company I and ConocoPhillips Canada Funding Company II are indirect, wholly owned subsidiaries of ConocoPhillips. ConocoPhillips and ConocoPhillips Company have fully and unconditionally guaranteed the payment obligations of ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II, with respect to their publicly held debt securities. Similarly, ConocoPhillips has fully and unconditionally guaranteed the payment obligations of ConocoPhillips Company with respect to its publicly held debt securities. In addition, ConocoPhillips Company has fully and unconditionally guaranteed the payment obligations of ConocoPhillips with respect to its publicly held debt securities. All guarantees are joint and several. The following condensed consolidating financial information presents the results of operations, financial position and cash flows for:

	•		ConocoPhillips, ConocoPhillips Company, ConocoPhillips Australia Funding Company, ConocoPhillips Canada Funding Company I, and ConocoPhillips Canada Funding Company II (in each case, reflecting investments in subsidiaries utilizing the equity method of accounting).
	•		All other non-guarantor subsidiaries of ConocoPhillips.
	•		The consolidating adjustments necessary to present ConocoPhillips’ results on a consolidated basis.

This condensed consolidating financial information should be read in conjunction with the accompanying consolidated financial statements and notes. Certain prior year amounts have been reclassified to conform to current period presentation.

		Millions of Dollars
		Three Months Ended June 30, 2007
										ConocoPhillips
										Australia				ConocoPhillips				ConocoPhillips
						ConocoPhillips				Funding				Canada Funding				Canada Funding				All Other				Consolidating				Total
		ConocoPhillips				Company				Company				Company I				Company II				Subsidiaries				Adjustments				Consolidated
Income Statement
Revenues and Other Income
Sales and other operating revenues		$	—				30,915				—				—				—				16,455				—				47,370
Equity in earnings of affiliates			329				632				—				—				—				780				(235	)			1,506
Other income			4				(70	)			—				—				—				587				—				521
Intercompany revenues			58				791				30				20				12				4,754				(5,665	)			—
Total Revenues and Other Income			391				32,268				30				20				12				22,576				(5,900	)			49,397
Costs and Expenses
Purchased crude oil, natural gas and products			—				25,780				—				—				—				9,989				(4,949	)			30,820
Production and operating expenses			—				1,109				—				—				—				1,469				(21	)			2,557
Selling, general and administrative expenses			6				375				—				—				—				235				(12	)			604
Exploration expenses			—				24				—				—				—				235				—				259
Depreciation, depletion and amortization			—				361				—				—				—				1,655				—				2,016
Impairment—expropriated assets			—				1,925				—				—				—				2,663				—				4,588
Impairments			—				—				—				—				—				98				—				98
Taxes other than income taxes			—				1,295				—				—				—				3,472				(70	)			4,697
Accretion on discounted liabilities			—				14				—				—				—				67				—				81
Interest and debt expense			99				291				28				19				13				482				(613	)			319
Foreign currency transaction (gains) losses			—				10				—				91				67				(347	)			—				(179	)
Minority interests			—				—				—				—				—				19				—				19
Total Costs and Expenses			105				31,184				28				110				80				20,037				(5,665	)			45,879
Income before income taxes			286				1,084				2				(90	)			(68	)			2,539				(235	)			3,518
Provision for income taxes			(15	)			1,090				1				5				6				2,130				—				3,217
Net Income (Loss)		$	301				(6	)			1				(95	)			(74	)			409				(235	)			301