DBRS Morningstar Confirms Ratings on ConocoPhillips at “A,” Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of ConocoPhillips (Conoco or the Company) at "A" with a Stable trend. The rating is underpinned by Conoco's (1) superior size as one of the world's largest independent exploration and production companies, (2) large, low-cost resource base, (3) geographically diversified assets, and (4) operating and capital flexibility. The key business risk factors affecting the rating include (1) a relatively higher sensitivity to commodity price changes, (2) a large, planned return of cash to shareholders, and (3) higher production decline rates because of the exposure to short-cycle assets in the lower 48 states (the Lower 48).

Conoco's operating performance in 2022 was in line with DBRS Morningstar's expectations. Production growth was in line with the Company's guidance range and Conoco’s reserve replacement ratio was a healthy 176%. While inflationary pressures did have an impact on Conoco's production and operating costs in 2022, it was more than offset by higher commodity price realizations. In 2022, the Company also focused on strengthening its liquified natural gas (LNG) business by acquiring an additional 10% stake in Australia Pacific LNG Pty. Ltd., participating in Qatar Energy's expansion projects, and executing an agreement to acquire 30% stake in Phase 1 of the Port Arthur LNG project. Stronger commodity prices resulted in Conoco generating a material free cash flow (FCF; i.e., cash flow after capital expenditures (capex) and base dividends) surplus in 2022. While Conoco directed the majority of the FCF surplus to shareholder distributions and acquisitions in the LNG business, the Company used part of the FCF surplus to reduce gross debt (excluding leases) to $16.6 billion at YE2022 (versus $19.9 billion at YE2021).

Conoco expects to produce approximately 1.8 million barrels of oil equivalent per day (boe/d) in 2023 and spend about $11 billion in capex (including about $9.2 billion for ongoing development drilling programs, the majority of which is expected to occur in the Lower 48). DBRS Morningstar expects Conoco to generate significant FCF surpluses in 2023 and 2024 under its base case commodity price assumptions. While the Company is expected to allocate a majority of the FCF surplus to shareholder distributions, DBRS Morningstar expects Conoco to make continued progress toward its long-term gross debt target of $15 billion. DBRS Morningstar expects the Company to maintain a lease-adjusted debt-to-cash flow ratio between 1.0 times (x) and 1.5x, commensurate with the "A" rating range and underpinning the Stable trend. The Company’s liquidity position is adequately supported by a large cash balance of $9.2 billion at YE2022 and a $5.5 billion revolving credit facility, which was undrawn as at December 31, 2022.

A rating upgrade is not likely in the near term and would require a substantive improvement in the Company’s business risk profile and/or credit metrics.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
DBRS Morningstar considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Conoco. This factor is relevant because ever-increasing environmental regulations targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies. Conoco’s balance sheet strength and ongoing emissions reduction initiatives provide it with the financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

The principal methodology applicable to the ratings is the Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 31, 2022; https://www.dbrsmorningstar.com/research/402196).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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