Fitch Rates ConocoPhillips' Senior Unsecured Notes 'A'; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to ConocoPhillips' (COP) proposed issuance of senior unsecured fixed- and floating-rate notes. The notes will be issued by ConocoPhillips Company and guaranteed by ConocoPhillips. Proceeds from the issuance will be used for general corporate purposes.

KEY RATING DRIVERS

ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent oil producer following the spin-off of Phillips 66 (PSX), with 2014 production of 1.54 million boepd, substantially larger than next largest independents such as Apache, OXY, Anadarko, or Devon. The ratings are also supported by the company's high leverage to liquids (approximately 69% of consolidated reserves and 57% of production), good operational metrics, ample liquidity and adequate debt metrics for the rating category. At Dec. 31, 2014, COP's total debt edged up to $22.56 billion from $21.66 billion the year prior.

Credit Concerns

Credit concerns center on the company's relatively aggressive shareholder distributions; the cash flow stresses that prolonged lower oil prices are likely to place on COP's credit metrics and its ability to return to free cash flow (FCF) neutrality; and execution risk associated with reaching its long-term cash margin and volume targets. Lower oil prices are also likely to make asset sales more difficult as an interim funding source. While Fitch expects credit metrics to widen for issuers across the energy space in 2015 as the full impact of oil prices hits results, COP had relatively little headroom at its 'A' rating prior to the downturn, which is what drove the Negative Outlook.

Strategic Repositioning

COP's plan to pursue lower growth, higher-profit barrels centers on raising $/boe cash margins by 3%-5%, as well as achieving volume growth of 2%-3% to fund growth and dividends. Higher-margin production will center on Lower 48 liquids plays (Eagle Ford, Bakken, Permian), Asia-Pacific LNG, and Canada SAG-D - areas with cash margins that are meaningfully above COP's portfolio average. Visibility on new production growth is reasonably good. COP's production in 2014 rose by 2.5%, to 1.54 mboepd, after several years of declines linked to asset sales.

Asset Sales Have Filled the Gap

COP has used asset sale proceeds over the last few years to help fund capex, pay dividends, repurchase shares, and pay down debt. As calculated by Fitch, cumulative asset sales have totaled more than $35.5 billion since 2010 (including Lukoil shares and downstream assets prior to the Phillips 66 spin-off). Asset sales for 2014 were modest and totaled just $1.6 billion (primarily Nigerian assets). The company's criteria for asset sales include a focus on non-strategic and mature properties, which can be tax-efficiently sold.

Good Recent Financial Performance

COP's latest 12 months (LTM) financial performance was reasonable. As calculated by Fitch, on a consolidated basis debt/EBITDA leverage was approximately 1.21x vs. 1.04x the year before, while EBITDA/interest coverage was 16.5x (versus 16.3x the year before). COP's FCF was -$3.87 billion, and was comprised of cash flow from operations (including discontinued operations) of $16.74 billion, minus capex of $17.08 billion and common dividends of $3.53 billion. Looking forward Fitch expects COP will be significantly FCF negative in 2015 and 2016 in our base case, and expects gaps will be funded by a combination of existing cash balances and new incremental debt, including today's issuance. Additional asset sales, though not considered in Fitch's base case, may be another source of funding

As calculated by Fitch, the company had consolidated debt/boe 1p reserves of $3.52/boe, debt/boe PD reserves of $4.86, and debt/flowing barrel of $17,199/barrel at YE 2014.

Liquidity

ConocoPhillips' liquidity is robust. At YE 2014, the company had cash and equivalents of $5.06 billion, and availability on the company's $7 billion senior unsecured revolver of $6.14 billion after commercial paper borrowings of $860 million. COP's revolver matures in June 2019 and backstops the company's two commercial paper programs, ConocoPhillips CP ($6.1 billion) and ConocoPhillips Qatar Funding ($900 million).

There are no financial covenants on the company's revolver or unsecured debt. Other covenant restrictions are light and include limitations on secured debt, restrictions on asset sales, and a cross-default provision for COP and its consolidated subsidiary debt exceeding $200 million. Near-term debt maturities are manageable and include $1.25 billion due 2016, $1 billion due 2017, and $797 million due 2018.

Other Liabilities

COP's other obligations are manageable. The pension liability for its U.S. pension plan (Pension Assets-Pension Benefit Obligation) rose to -$1.12 billion at YE 2014 versus -$862 million at YE 2013. The main drivers of the increase include actuarial losses and lower returns on assets. COP's asset retirement obligation & accrued environmental obligations rose to $11.28 billion versus $10.43 billion the year prior. COP's derivative exposure is modest as the company's policy is to generally remain exposed to commodity price risk.

KEY ASSUMPTIONS

--WTI oil prices of $50/bbl in 2015, $60/bbl in 2016, and $75/bbl in 2017;

--2015 capex of $11.5 billion;

--$500 million per year in asset sales across the forecast period;

--Production volume increasing to approximately 1.7 billion by 2017;

--No material equity repurchases;

--Modest dividend growth.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Long-term adoption of a more conservative financial policy.

An upgrade is unlikely in the near term given the company's large dividend payout, the funding needs associated with its strategic growth plan, and the headwinds created by low oil prices

Negative: Future developments that could lead to negative rating action include:

--An inability to achieve margin and volume growth targets, resulting in an increased FCF deficit and higher leverage.

--Some combination of the following metrics on a sustained basis: debt/1p boe above the $3.50-$3.75/boe range; debt/proven developed above the $4.75-$5.00/boe range; debt/flowing barrel above $17,000/boepd.

Fitch rates the company's debt as follows:

ConocoPhillips

--IDR at 'A';

--Senior unsecured notes at 'A';

--Bank revolver at 'A';

--CP program at 'F1';

--Short-term IDR at 'F1'.

ConocoPhillips Qatar Funding

--CP at 'F1'.

--Short-term IDR at 'F1'

Burlington Resources

--Senior Unsecured at 'A'.

Polar Tankers, Inc.

--IDR at 'A';

--Senior Unsecured Notes at 'A'.

ConocoPhillips Co.

--IDR at 'A';

--Senior notes at 'A'.

ConocoPhillips Canada Funding Company I

--Senior Unsecured at 'A'.

ConocoPhillips Canada Funding Company II

--Senior Unsecured at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'Full Cycle Costs Drop for North American E&Ps: Efficiency Gains Show Up in 2014 Numbers' (March 24, 2015);

--'Fitch Oil and Gas Assumptions Summary' (Feb. 11, 2015);

--'Production Sharing Contracts; Countercyclicality Supports Debt in a Low Oil Price Environment' (Jan. 28, 2015);

--'E&P Borrowing Base Redeterminations: History Suggests Lenders May Go Easy in a Downturn' (Dec. 5, 2014);

--'North American Exploration and Production Handbook' (July 16, 2014).

Applicable Criteria and Related Research:

North American Exploration and Production Handbook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557

E&P Borrowing Base Redeterminations (History Suggests Lenders May Go Easy in a Downturn)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=829628

Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=857828

Fitch Oil and Gas Assumptions Summary Feb 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984597

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Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA, +1-312-368-2090
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60604
or
Secondary Analyst
Dino Kritikos, +1-312-368-3150
Director
or
Committee Chairperson
Shalini Mahajan, +1-212-908-0351
Managing Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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