DBRS Upgrades ConocoPhillips to A (low), Maintains Stable Trend

DBRS Limited (DBRS) upgraded the Issuer Rating of ConocoPhillips (Conoco or the Company) to A (low) from BBB (high) and maintained the Stable trend. The rating upgrade follows the completion of the Company’s debt-reduction plan ahead of schedule which, in conjunction with higher oil and gas (O&G) prices, has led to a material improvement in Conoco’s key credit metrics. The Company’s rating is underpinned by its superior size, above-average geographic diversification, balanced product mix and capital flexibility. The Stable trend acknowledges Conoco’s ability to operate within cash flow and DBRS’s expectation that credit metrics will remain supportive of the rating.

Over the last two years, the Company has restructured its production portfolio by disposing lower-margin assets and using the proceeds to reduce total debt by $12.3 billion, which has also lowered interest expense. In addition, Conoco has reduced operating costs and directed capital expenditure (capex) toward higher-margin, lower-capital intensity and shorter-cycle assets. Consequently, the Company’s ability to operate profitably in a lower O&G price environment and its financial risk profile have improved materially. Conoco’s key credit metrics for the last 12 months ended September 30, 2018, are stronger than at YE2014 when the Brent oil price averaged $99/barrel (bbl) and average daily production was approximately 22% higher.

Cash flow from operations (OCF) is expected to be lower in 2019 as DBRS’s base-case price assumptions for 2019 (West Texas Intermediate (WTI) of $60/bbl and Brent oil of $65/bbl) are lower than the average realized year-to-date WTI and Brent oil prices of $65/bbl and $70/bbl, respectively. However, OCF should be adequate to fund the Company’s budgeted capex of $6.1 billion, common dividends and planned share repurchases of $3.0 billion. DBRS does not expect Conoco’s debt to increase materially as the Company expects to fund its sustaining capex (capex to maintain flat production) and common-dividend commitments from OCF, even if crude oil prices decline to $40/bbl. While marginally weaker in 2019 as a result of lower OCF, DBRS expects Conoco’s key credit metrics to remain supportive of the current rating. However, DBRS notes that the Company’s OCF is very sensitive to change in O&G prices; therefore, while there is some headroom to withstand O&G prices falling below DBRS’s base-case assumptions, a material and sustained reduction in prices could weaken Conoco’s credit metrics and put negative pressure on the rating.

DBRS deems the Company’s liquidity position to be adequate with $4.6 billion of cash balances and an undrawn revolving credit facility of $6.0 billion at September 30, 2018. In addition, Conoco holds 208 million common shares of Cenovus Energy Inc. (rated BBB with a Negative trend by DBRS) currently valued at approximately $2.1 billion, which provides an additional source of liquidity. While a rating action is unlikely over the next 12 months, any possibility of positive rating action would require the Company to further improve its credit metrics, manage share repurchases prudently and build up adequate cash on its balance sheet to act as an buffer against lower O&G prices.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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