DBRS Morningstar Confirms ConocoPhillips at “A,” Stable; Removes Rating from Under Review with Developing Implications

DBRS Limited (DBRS Morningstar) confirmed ConocoPhillips' (Conoco or the Company) Issuer Rating at “A” with a Stable trend. DBRS Morningstar also removed the rating from Under Review with Developing Implications, where it was placed on October 20, 2020, following the announcement of a definitive agreement to acquire Concho Resources (Concho) in an all-stock transaction. Prior to this announcement, Conoco's Issuer Rating was “A” with a Negative trend. The rating confirmation follows the closing of the transaction and DBRS Morningstar's view that the deal has a marginally positive impact on Conoco's business risk profile but is not sufficient to change the rating. The Stable trend reflects DBRS Morningstar's expectations that, under DBRS Morningstar's base-case commodity price assumptions, Conoco's key credit metrics will significantly improve in 2021–22 to support the “A” rating.

Conoco's rating is supported by its (1) superior size as one of the world's largest independent exploration and production companies with pro forma production of approximately 1.43 million barrels of oil equivalent per day (boe/d) over the nine months ended September 30, 2020; (2) large, low-cost resource base; (3) above-average geographic diversification; and (4) positive operating and capital flexibility. The key business risk factors tempering the rating include (1) the relatively higher sensitivity to in commodity price changes, (2) historically large cash returns provided to shareholders, and (3) higher production decline rates resulting from the acquisition of Concho.

The acquisition of Concho adds modestly to Conoco's size and improves Conoco's capital flexibility by enabling the Company to allocate capital to the highest-margin assets. The Company also expects to capture annual cost and capital savings of approximately $750 million from the transaction by 2022. However, the acquisition increases Conoco's exposure to high-decline unconventional production, which increases the level of capital intensity. Although the acquisition added approximately 9 billion barrels of oil equivalent of low cost-of-supply resources, Conoco's proved reserve life index at YE2019 decreased marginally to 7.4 years from 7.7 years.

During 2021, the Company expects to produce approximately 1.5 million boe/d, excluding Libya, and expects to spend about $5.5 billion in capital expenditures (capex), about $400 million more than estimated sustaining capex. The Company expects to meet its sustaining capex and dividend commitments at a breakeven Brent crude oil price of less than $40 per barrel (/bbl). The low breakeven allows Conoco to mitigate material increases in debt even at lower oil prices.

Conoco's financial leverage is expected to slightly increase because of the relatively higher leverage at Concho. However, DBRS Morningstar expects the Company to generate significant free cash flow (FCF; cash flow after dividend and capex) surpluses in 2021 and 2022 under DBRS Morningstar's revised base-case Brent oil price assumptions of $55/bbl in 2021 and $56/bbl in 2022 and beyond. The Company plans to use FCF surpluses toward share buybacks and reducing net indebtedness.

The Company’s liquidity position is adequately supported by large cash balance of $6.6 billion at YE2020 and availability under a $6.0 billion revolving credit facility, with $5.7 billion available as at December 31, 2020. In addition, Conoco continues to hold 208 million common shares of Cenovus Energy Inc. (rated BBB with a Stable trend by DBRS Morningstar), which was valued at approximately $1.3 billion at YE2020 and could provide an additional source of liquidity.

A positive rating action, which DBRS Morningstar believes is unlikely in the near term, would require a substantive improvement in the Company’s business risk profile and credit metrics. A negative rating action is possible if the Company's financial risk profile weakens materially because of a prolonged and significant decline in crude oil prices.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 17, 2020; https://www.dbrsmorningstar.com/research/365808/rating-companies-in-the-oil-and-gas-and-oilfield-services-industries) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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 Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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