DBRS Comments on Downgrade of ConocoPhillips’ Issuer Rating

DBRS Limited (DBRS) has today downgraded the Issuer Rating of ConocoPhillips (Conoco or the Company) to BBB (high) from A (low) (see DBRS press release titled, “DBRS Takes Rating Actions on Investment-Grade Oil & Gas Portfolio”). The trend has been changed to Stable from Negative. The downgrade reflects the significant decline in the Company’s key credit metrics and the low probability that DBRS foresees (assuming DBRS’s mid-cycle West Texas Intermediate (WTI) oil price forecast of $50 per barrel (bbl) to $60/bbl) of the Company’s key credit metrics improving to a range commensurate with an “A” rating within two years. For the last 12 months ended June 30, 2016, Conoco’s lease-adjusted debt-to-cash flow ratio was 5.93 times and the lease-adjusted debt-to-capital ratio was 46.4%, both below the “A” rating category. Factoring in the Company’s cash balance, the net debt-to-cash flow ratio was 4.84 times.

The Company has taken steps to reduce the size of this year’s expected free cash flow deficit (cash flow after capital spending and dividends) compared to prior years by sharply curtailing capital spending ($5.5 billion planned in 2016, down 68% relative to 2014) and slashing quarterly dividend payouts (a 66% reduction announced earlier this year). For the first six months of 2016 the free cash flow deficit was estimated at $1.7 billion versus $3.1 billion for the same period in 2015. Asset sales targeted at $1.0 billion in 2016 ($0.4 billion completed to date) has further reduced cash outflows.

At a WTI oil price in excess of $50/bbl DBRS estimates the Company should reach cash flow neutrality in 2017 and debt levels should stabilize. As a result, DBRS is changing the trend to Stable from Negative. However, barring a large asset disposition program or significant injection of equity capital, the Company’ debt levels are likely to stay elevated relative to underlying cash flows and outside the range for an “A”-rated entity, resulting in DBRS’s downgrade by a notch to BBB (high).

The Company has a reasonable liquidity profile with (as at June 30, 2016) $2.8 billion of cash and cash equivalents, as well as $1.3 billion in short-term investments and it is undrawn on its $6.75 billion revolving credit facility. In addition, the Company entered into a $1.6 billion three-year senior unsecured term loan facility in the first quarter of 2016. The Company is also the largest independent exploration and production company in the world and the current rating is underpinned by the Company’s significant scale (over 1.5 million barrels of oil equivalent per day of production and 8.2 billion barrels of oil equivalent of reserves), well-balanced product mix (58% liquids production) and geographically well-diversified production base with operations in 20 countries around the globe.

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

The applicable methodology is Rating Companies in the Oil and Gas Industry (September 2016), which can be found on our website under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

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