DBRS Comments on the Downgrade to ConocoPhillips

DBRS Limited (DBRS) today has downgraded the Issuer Rating on ConocoPhillips (the Company) to A (low) from “A” (see DBRS press release titled, “DBRS Reviews Ratings of Oil & Gas Portfolio”). The trend remains Negative. The downgrade reflects the significant decline in the Company’s key credit metrics, which are no longer commensurate with an “A” rating. For the last 12 months ended September 30, 2015 (LTM 2015), the lease-adjusted debt-to-cash flow ratio was 3.05 times and lease-adjusted debt-to-capital was 38.8%. Factoring in the Company’s cash balance, the net debt-to-cash flow ratio was 2.49 times. The Negative trend reflects continued pressure on key credit metrics under the low commodity pricing environment.

The Company has been incurring sizable free cash flow deficits ($6.9 billion for LTM 2015) and drawing on its cash resources. The Company has been active with asset sales but the amount of proceeds (approximately $0.5 billion for the LTM 2015) raised from sales to date have not been sufficient to offset the cash flow reduction ($9.0 billion the LTM 2015). Cash flow from the production of oil and gas is anticipated to be under further pressure this year as a result of the continued weak pricing environment. Dividend payments (the Company reaffirmed its commitment to approximately $3.65 billion of annualized dividend payments in early December) are taking up an increasingly higher proportion of cash flow further impairing liquidity.

The Company in early December announced a 2016 capex budget of $7.7 billion, which was based on a stronger price environment than currently realized. Even factoring in the possibility of capex cuts from plan, DBRS expects a continued drain on liquidity and further impairment of the Company’s financial risk profile, assuming the current dividend levels continue. The Company has a reasonable liquidity profile with (as at September 30, 2015) $2.4 billion of cash and $6.2 billion available on its credit facility. The Company is also the largest independent exploration and production company in the world and the A (low) rating is underpinned by the Company’s significant scale (1.6 million barrels of oil equivalent per day of production and 8.9 billion barrels of oil equivalent of reserves), well-balanced product mix (57% liquids production) and geographically well-diversified production from operations in 25 countries around the globe. Should the Company not take further measures to mitigate the free cash flow deficit in the future, additional negative rating actions could be taken by DBRS.

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

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