DBRS Confirms ConocoPhillips at BBB (high), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of ConocoPhillips (Conoco or the Company) at BBB (high) with a Stable trend. Conoco’s rating continues to be underpinned by its exceptional size, well-balanced production mix and above-average market diversification. The Stable trend reflects the Company’s improved financial outlook based on steps taken to improve its financial profile, DBRS’s expectation of gradually improving commodity prices in 2017 (see DBRS commentary, “DBRS Updates its Outlook for the Oil & Gas Industry: Financial Stresses Ease with a Modest Improvement in Market Conditions,” published on September 21, 2016) and Conoco’s reasonable liquidity profile.

Conoco has taken significant actions to improve its financial profile, including: (1) substantially cutting production and operating expenses to $5.7 billion in 2016 (down approximately 36% relative to 2014) and to $5.2 billion in 2017; (2) sharply curtailing capital expenditure (capex) guidance to $5.2 billion in 2016 (down approximately 70% relative to 2014) and to $5.0 billion in 2017; (3) slashing quarterly dividend payouts with a 66% reduction announced earlier in 2016; (4) announcing an acceleration of the Company’s asset sale program to $5.0 billion to $8.0 billion from $1.0 billion to $2.0 billion per year over the next two years; and (5) intending to repay approximately $7.0 billion in debt to reduce the Company’s gross debt balance to $20.0 billion by 2019. DBRS notes, however, that Conoco also plans to repurchase $3.0 billion in shares starting in Q4 2016, which will place a greater burden on the Company’s already-stressed cash flows as these funds cannot be used toward capex funding or debt reduction.

DBRS previously downgraded Conoco to BBB (high) from A (low) (see DBRS press release, “DBRS Comments on Downgrade of ConocoPhillips’ Issuer Rating,” published on October 7, 2016). The downgrade reflected the deterioration of Conoco’s key credit metrics and DBRS’s opinion of a low probability that the Company’s key credit metrics could improve to a range commensurate with an “A” rating within two years, assuming DBRS’s mid-cycle West Texas Intermediate oil price forecast of $50 per barrel (bbl) to $60/bbl.

For the last 12 months ended September 30, 2016, Conoco’s key credit metrics remained well below the BBB rating category; however, DBRS notes that, for the three months ended September 30, 2016, with an average Brent price of less than $50/bbl, Conoco has reached cash flow neutrality for the quarter. At a Brent oil price of approximately $50/bbl in combination with Conoco’s efforts to improve its financial profile, DBRS expects the Company to be free cash flow neutral and estimates that key credit metrics will improve; however, if Conoco does not succeed in its efforts to improve its financial profile as planned or if commodity prices further deteriorate, DBRS may take further negative rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Oil and Gas Industry (September 2016), which can be found on our website under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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