Morningstar DBRS Confirms Ratings on ConocoPhillips at "A" With Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed ConocoPhillips (Conoco or the Company) Issuer Rating at "A" with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The confirmation and Stable trend reflect Morningstar DBRS' view that no material changes to Conoco's credit fundamentals are expected in the near term. The Issuer rating is based on Conoco's (1) exceptional size as one of the world's largest independent exploration and production (E&P) companies; (2) large, low-cost oil and gas resource base; (3) geographically diversified assets; and (4) operating and capital flexibility. The key business risk factors affecting the rating include a (1) relatively high sensitivity to commodity price fluctuations, (2) large, planned return of cash to shareholders, and (3) relatively high production decline rate related to short-cycle assets held in the lower 48 states (the Lower 48).

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening of Conoco's business risk profile, the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently at or below 1.00 times (x). A negative credit rating action is possible if oil and gas prices materially weaken and the Company's operating performance deteriorates below current expectations, causing the lease-adjusted debt-to-cash flow ratio to stay at or above 1.75x for an extended period.

EARNINGS OUTLOOK
Looking ahead, Conoco expects an 18.6% increase in production to 2.36 million barrels per day (boe/d) in 2025 (midpoint of its guidance) from 1.99 million boe/d reported in 2024. The forecast increase in companywide production will largely be driven by the addition of production in the Lower 48 from Marathon Oil Corporation, which was acquired on November 22, 2024; organic growth from ongoing efficiency gains across Conoco's expanded Lower 48 portfolio; growth in output from the North Slope in Alaska and the Montney play in Canada; and organic growth from other Company projects. Morningstar DBRS forecasts Conoco's consolidated revenue to sequentially increase by 14% to 15% to between $62 billion and $63 billion and for EBITDA to modestly increase versus 2024. The increase in annual production and reduction in unit operating costs Morningstar DBRS incorporates for 2025 are partially offset by a lower crude oil price assumption. Morningstar DBRS' base-case commodity price assumptions can be found in the commentary titled "Marketplace Frets Over Burgeoning Trade War and Negative Implications for Crude Oil Demand, Weighing on Oil Prices," dated February 13, 2025.

FINANCIAL OUTLOOK
Conoco's 2025 total capital expenditure (capex) guidance is approximately $12.9 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Conoco to generate significant free cash flow (i.e., cash flow after capex and dividends) surpluses in 2025 and 2026. On December 31, 2024, gross debt was $24.3 billion. While Conoco is expected to allocate a majority of the free cash flow surplus to share repurchases, Morningstar DBRS forecasts the Company to make gradual progress on the reduction of its long-term debt. The Company's liquidity position is adequately supported by cash, cash equivalents, and short-term investments totaling $6.1 billion at year-end 2024 and a $5.5 billion revolving credit facility, which was undrawn on December 31, 2024.

CREDIT RATING RATIONALE
For the past several years, Conoco has continuously worked to high-grade its global resource portfolio by focusing on cost of supply. As a result, Conoco currently controls a large, geographically diversified, low-cost resource base with a leading unconventional position in the Lower 48, including the Permian Basin, Eagle Ford Shale, and Bakken Shale. The inclusion of Marathon Oil's high-quality, low-cost reserves adjacent to Conoco's holdings in these plays adds scale and should yield significant synergies there.

In addition to the purchase of Marathon Oil, this confirmation follows several of Conoco's operational and development accomplishments in 2024, including achieving first production at the Eldfisk North subsea tieback in Norway; first production at the Nuna project in Alaska and the Bohai Phase 5 project offshore China; and progressing its liquefied natural gas (LNG) strategy with securing a long-term re-gas agreement at the Zeebrugge LNG terminal in Belgium and a long-term sales agreement in Asia, among others.

Morningstar DBRS expects Conoco 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 should remain strong, with committed credit facilities totaling $5.5 billion forecast to remain largely undrawn through the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS 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 emission 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of Conoco, the BRA factors are considered in the order of importance contemplated in the methodology.

B) Weighting of FRA Factors
In the analysis of Conoco, the FRA factors are considered in the order of importance contemplated in the methodology.

C) Weighting of the BRA and the FRA
In the analysis of Conoco, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Oil and Gas, Oilfield Services, Pipeline and Midstream Energy Industries (August 12, 2024) https://dbrs.morningstar.com/research/437739.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025)
https://dbrs.morningstar.com/research/447186

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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