DBRS Confirms ConocoPhillips at “A” and R-1 (low), Stable Trends

DBRS has today confirmed the Issuer Rating and Unsecured Long-Term Notes & Debentures rating of ConocoPhillips (COP or the Company) at “A” and its Commercial Paper rating at R-1 (low). DBRS has also confirmed Burlington Resources Inc.’s Senior Unsecured Notes and Debentures rating at “A”. All trends are Stable. The rating confirmations reflect the Company’s (1) global scope of operations; (2) good financial profile and solid cash flow; and (3) balanced production mix.

The Company benefits from its position as one of the world’s largest exploration and production (E&P) companies. The size and scope of COP’s operations provide it with economies of scale and significant geographic diversity, which offers the Company some protection against regional pricing volatility.

COP’s financial profile remained relatively unchanged after the spinoff of its downstream operations to Phillips 66. Through repayment of significant debt using proceeds from the $7.8 billion special distribution from Phillips 66, the Company maintained key credit ratios within, albeit toward the higher end of, parameters for the rating category, with DRBS adjusted leverage of 33.7% and debt-to-cash flow of 1.54 times (x).

One of the key challenges facing the Company will be its limited financial flexibility post-spinoff. With significant planned capex ($16 billion per year through 2017) and dividends expected, near-to-medium term cash flow deficits are anticipated and could pressure the balance sheet. The Company has historically used proceeds from asset sales to fund cash flow deficits, and this is expected to continue for the near term (approximately $10 billion of divestiture proceeds expected for 2013).

The Company also has a focus on shareholder returns, with dividends being its top priority in terms of use of funds. DBRS views shareholder-friendly transactions (such as increasing dividends and share repurchases) as negative for bondholders, particularly during periods of negative free cash flow. DBRS expects the Company to manage these transactions appropriately based on availability of liquidity. DBRS also expects the Company to continue to maintain its credit metrics within the parameters of the current rating category by employing a prudent financing strategy to fund cash flow deficits anticipated for the near term. Should metrics increase from current levels (above 35% adjusted debt-to-capital and/or debt-to-cash flow approaching 2.0x), DBRS would take 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 Oil and Gas Companies, which can be found on our website under Methodologies.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.