DBRS Confirms ConocoPhillips at BBB (high), Stable Trend

DBRS Limited (DBRS) confirmed the Issuer Rating of ConocoPhillips (Conoco or the Company) at BBB (high) with a Stable trend. Conoco’s rating is underpinned by its superior size, above-average geographic diversification, balanced product mix and capital flexibility. The Stable trend reflects the improvement in the Company’s financial profile over the last year as a result of a material reduction in debt, demonstrated ability to operate within cash flow and DBRS’s expectation of a modest increase in average crude oil prices in 2018.

In 2017, Conoco expects to conclude $16 billion of asset sales, the majority of which were already closed at September 30, 2017. The key assets disposed by the Company includes its interest in the Foster Creek Christina Lake oil sands partnership, the majority of its western Canada gas assets and the Company’s interests in the San Juan Basin. The asset dispositions have reduced the Company’s production, reserves and negatively affected the Company’s overall production decline rates as the oil sands assets in particular have lower decline rates relative to the overall portfolio. However, netbacks are expected to improve as the disposition is expected to reduce the contribution of lower-margin North American natural gas and bitumen assets to production from 31% in 2016 to ~13% in 2018. The asset sales have also reduced the Company’s capital intensity as Conoco expects now to be able to sustain production with annual capital expenditure (capex) of ~$3.5 billion. Consequently, DBRS deems the overall impact of the dispositions on the business risk profile to be neutral.

Conoco used a part of the proceeds from the asset dispositions to reduce gross debt to $21 billion at September 30, 2017, and, coupled with stronger earnings due to higher oil and gas (O&G) prices, the Company’s key credit metrics have improved. However, Conoco’s lease-adjusted debt-to-cash flow and lease-adjusted EBIT interest coverage ratios for the last twelve months (LTM) ended September 30, 2017, were outside the BBB rating range. DBRS notes that the Company plans to reduce gross debt to $15 billion by the end of 2019, which, along with a modest improvement in O&G prices, should result in the Company’s key credit metrics strengthening over the next two years. DBRS expects the Company’s strong business risk profile to continue supporting the overall BBB (high) rating in the interim.

The Company’s financial plan has budgeted annual capex of $5.5 billion over the next three years, with a focus on flexible and short-cycle unconventional resource development in North America. DBRS notes that Conoco has been able to meet its capex and dividend commitments from operating cash flow for the LTM ended September 30, 2017, and, given the base case Brent/WTI price assumption of $55 per barrel (bbl) for 2018 and 2019, DBRS expects the Company to fund its budgeted capex and dividends primarily from operating cash flow. Further, with the restructured production portfolio, the Company expects to meet its sustaining capex and dividend commitments from operating cash flow, even if crude oil prices decline to $40/bbl.

DBRS deems the Company’s liquidity position to be adequate, with $9.60 billion of cash balances and an undrawn revolving credit facility of $6.75 billion at September 30, 2017. In addition, the Company also holds 208 million common shares of Cenovus Energy Inc. valued at ~$2.0 billion currently, which provides an additional source of liquidity. Although the Company has earmarked a large part of its existing cash balances and investments for repaying debt and funding share repurchases, DBRS expects the Company to maintain adequate liquidity. DBRS may consider a positive rating action if the Company meets its stated plan to reduce debt ahead of plan and the O&G price environment remains supportive, leading to a further material improvement in key credit metrics.

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 principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

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

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

This is an unsolicited credit rating.

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