DBRS Changes Trend on Issuer Rating of ConocoPhillips to Negative from Stable, Confirms Rating at “A”

DBRS Limited (DBRS) has today changed the trend on the Issuer Rating of ConocoPhillips (COP or the Company) to Negative from Stable and has also confirmed the rating at “A.” The rating action reflects DBRS’s view that the Company’s financial credit metrics have weakened to a level that is no longer commensurate with the “A” rating level, largely because of prolonged weak crude oil prices in 2015. DBRS has withdrawn COP’s Commercial Paper and Unsecured Long-Term Notes & Debentures ratings as well as Burlington Resources Inc.’s Senior Unsecured Notes and Debentures rating at DBRS’s discretion.

Driven by weak commodity prices, COP’s financial risk profile has deteriorated significantly during H1 2015. Earnings in H1 2015 were materially lower than in 2014, more than offsetting the uplift from production volume increases as well as operating and corporate cost savings. Although COP has significantly curtailed its capital expenditures (capex) guidance to $11.0 billion for 2015 from $17.1 billion in 2014, capex of $5.7 billion in H1 2015 exceeded operating cash flow by $1.3 billion. Additionally, the Company continued to increase dividend in 2015, paying $1.8 billion to shareholders during the period. As a result, COP’s net free cash flow deficit grew to $4.2 billion during H1 2015, which the Company funded primarily with $2.4 billion in net debt issuances and $1.2 billion of cash and cash equivalents. Consequently, COP’s financial metrics have fallen significantly outside the “A” rating category, with the Company’s adjusted debt-to-capital, adjusted debt-to-cash flow and earnings before taxes and interest - interest coverage ratios decreasing to 36.7%, 2.40 times (x) and 2.27x, respectively, for the last 12 months ended June 30, 2015.

With the 2012 spinoff of COP’s downstream business into a separate, stand-alone entity (Phillips 66 Company), the Company has lost the benefits of natural hedging provided by integrated operations during depressed commodity price environments.

If the Company’s financial risk profile remains weak for the current rating category for a sustained period and key credit metrics do not improve materially, negative rating action may be taken.

The rating action is limited to a trend change as DBRS acknowledges that the Company is taking significant strides to control costs to weather the depressed pricing environment, such as substantially curtailing its capex program for 2015. After examining the Company’s asset portfolio, DBRS believes that a further capex cut could be executed, if necessary, as COP is shifting its capital allocation to projects with shorter cycles and higher capex flexibility, such as its unconventional assets in North America. The large-scale projects with limited capex flexibility, such as Surmont 2 (first oil in September 2015) and Australia Pacific LNG (first cargo expected in Q4 2015), are near completion. Additionally, COP is further cutting corporate, exploration and production expenses and also expects to continue to sell non-core assets.

Overall, COP’s rating has continued to be supported by its strong business risk assessment, which is underpinned by its significant size (1.6 million thousand barrels of oil equivalent (boe) per day of production as of June 30, 2015, and approximately 8.9 billion boe in proved reserves as of December 31, 2014), a well-balanced production mix (57% liquids and 43% natural gas as of June 30, 2015) and a well-diversified cash flow stream with operations in 25 countries around the world.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Oil and Gas Industry, September 2015, which can be found on our website under Methodologies.

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.