DBRS Updates Report on ConocoPhillips

DBRS has today updated its report on ConocoPhillips (COP or the Company). COP’s business and financial risk profiles remain within the bounds of its current “A” rating. The Company’s strong business profile reflects its (1) size and scope of operations; and (2) balanced production mix, which support a strong “A” rating. COP’s financial profile, while also supportive of its current ratings, is challenged by the Company’s key credit metrics that are pushed toward the higher end of the required benchmarks for the rating category.

COP is the world’s largest independent exploration and production company by production (over 1.5 million barrels of oil equivalent per day), with operations in 29 countries around the globe and a well-balanced production mix (56% liquids and 44% natural gas as at September 30, 2013).

The Company’s financial profile weakened after it spun off its downstream business into a separate stand-alone company in 2012. The consequent balance sheet restructuring resulted in its leverage being toward the higher end of the range for the ratings (adjusted debt to capital of 33.7% in 2012) and removed the natural hedge that COP enjoyed from the counter-cyclical refining and marketing business, hence leaving its earnings vulnerable to the volatility in commodity prices.

In addition, the Company is in the midst of a massive global capital investment program that has seen its capex requirements soar exponentially to an expected $16.0 billion for 2013 from $11.2 billion in 2011. Large capex, stable dividends and continued emphasis on returning capital to shareholders have resulted in substantial free cash flow deficits, which have largely been funded by proceeds from COP’s asset divestiture program ($12.4 billion received from asset sales from 2012 through to late 2013). COP plans to complete the announced non-core asset sales during 2014 to partly fund anticipated free cash flow deficits, which should allow COP’s key financial metrics to remain at the current levels. However, any further material weakness in the balance sheet that results in debt-to-cash flow in excess of 1.50 times (l.39 times in the last 12 months Q3 2013) on a sustained basis could result in a negative ratings action.

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

This rating did not include issuer participation and is based solely on publicly available information.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.