Fitch Rates ConocoPhillips' Unsecured Notes Issuance 'A'
CHICAGO -- December 04, 2012
Fitch Ratings has assigned an 'A' to ConocoPhillip's (COP) proposed issuance
of senior unsecured notes. Net proceeds from the issuance will be used for
general corporate purposes, including the repayment of commercial paper (CP)
borrowings, which stood at approximately $1.54 billion at Sept. 30, 2012.
The notes, which will be issued by ConocoPhillips Company, are guaranteed by
parent ConocoPhillips, and will rank pari passu with ConocoPhillips' other
senior unsecured obligations.
A full list of ratings follows at the end of this release.
Ratings Rationale: ConocoPhillips' ratings reflect the company's size and
scale as the largest North American independent (1.54 million barrels of oil
equivalent per day [boepd] at Sept. 30, 2012); meaningful debt reductions made
since the spin-off of Phillips 66; decreases in other key liabilities
following the spin-off, including substantial reductions in equity affiliate
debt, net pension liabilities, and environmental and legal liabilities; and
lower operating lease expense. The ratings are also supported by the company's
high leverage to liquids in the upstream (approximately 54% of 2011
consolidated production and 57% of consolidated reserves), and ample
Credit concerns center on COP's relatively aggressive financial policy (with
20% - 25% of cash flow from operations earmarked for dividends and share
buybacks) which lowers financial flexibility, particularly in a period of
sustained lower oil prices; the reliance on asset sales to bridge interim
funding gaps, including the current $8 - $10 billion asset sales program; the
need to execute on the plan to raise $/boe margins and volumes; and over the
longer term, potential pressure to compete with faster-growing large
independents by raising reserve and production growth.
Strategic Repositioning: COP's plan to pursue lower growth, higher-profit
barrels centers on raising cash margins on production by 3% - 5%, in addition
to achieving volume growth of 3% - 5% to fund capex and higher shareholder
payouts. Higher-margin production will center on Lower 48 liquids plays (Eagle
Ford, Bakken, Permian), Asia-Pacific LNG, and Canada SAG-D, areas with cash
margins that are meaningfully above COP's current portfolio average.
While Fitch believes these payout levels are achievable under base case
assumptions, it is also anticipated that dividends are unlikely to be cut in
the event of a sustained downturn given the stock's repositioning as a
stronger dividend payer. As a result, there is less financial flexibility at
the 'A' level. Reviewing dividend payouts against peers, COP had the highest
payout as a percent of cash flow from operations of any peer at Dec. 31, 2011
(18%), versus XOM (16%), CVX (15%), OXY (12%), DVN (4%), and APA (2%).
Upstream Performance: COP's 2011 operational metrics were solid. As calculated
by Fitch, COP's consolidated proven reserves grew by 0.9% (1.4% on a
consolidated basis) to 8.39 billion boe from 8.31 billion boe, driven
primarily by additions in the Lower 48, Alaska, and sanctioning of North Sea
projects on the liquids side, and partially offset by a net decline in natural
gas reserves. Consolidated reserve replacement was 117% on an all-in basis and
121% on an organic basis. COP's one-year finding, development and acquisition
costs (FD&A) rose modestly to $16.94/boe. For the latest 12-month (LTM) period
ending Sept. 30, 2012, COP's FCF was -$2.87 billion, driven by a combination
of higher capex and weaker cash flow from operations. Fitch anticipates the
company will be moderately FCF negative in 2013.
Liquidity: ConocoPhillips' liquidity remains good. At Sept. 30, 2012, COP had
$6.0 billion in availability on its $7.5 billion revolving credit facility due
2016 after $1.54 billion in commercial paper outstanding. Cash and equivalents
were $1.27 billion at Sept. 30, 2012, which excludes $2.5 billion in
restricted cash from the Phillips 66 distribution. ConocoPhillips' near-term
debt maturities are manageable and include $850 million due in April 2013,
$400 million due 2014, and approximately $1.5 billion due 2015. COP's credit
facility is used to backstop the company's main $6.35 billion CP program and
$1.15 billion ConocoPhillips Qatar Funding Ltd CP program. The Qatar Funding
CP program is a carve-out of the main revolver. Covenant restrictions are
light, and include a change in control provision, limitations on asset sales,
and no financial covenants.
Other Liabilities: COP's other obligations are manageable. Upon the separation
with PSX, COP's pension plan saw a net decrease in sponsored pension plan
obligations of $1.13 billion. The company plans to make contributions to all
pension plans of $620 million in 2012, of which $419 million had been made as
of Sept. 30, 2012. COP's environmental accruals were $380 million, versus $922
million seen pre-separation at YE 2011. Cross-indemnification agreements exist
between COP and PSX following the separation for a range of liabilities.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions
--Adoption of a more conservative financial policy;
--Sustained improvement in debt/boe metrics achieved through debt reductions,
growth in reserves and production; or other credit supportive actions.
--An upgrade is unlikely in the near term given the company's reduced business
diversification and the need to see execution on its strategic profit growth
Negative: Future developments that could lead to negative rating action
--Higher leverage stemming from an inability to fund capex and dividends
because of lower oil prices;
---A sustained collapse in oil prices without offsetting adjustments;
-- An inability to execute on the plan to raise cash margins and volume growth
by 3 - 5% each which is expected to fund capex and payouts;
--A major operational issue or reserve impairment
Fitch rates ConocoPhillips and its affiliates as follows:
--Issuer Default Rating (IDR) 'A';
--Senior unsecured notes 'A';
--Bank revolver 'A';
--CP program 'F1';
--Short-term IDR 'F1'.
ConocoPhillips Qatar Funding
--ST IDR 'F1'
--Senior Unsecured 'A'.
Polar Tankers, Inc.
--Senior Unsecured Notes 'A'
--Senior notes 'A'.
ConocoPhillips Canada Funding Company I
--Senior Unsecured 'A'.
ConocoPhillips Canada Funding Company II
--Senior Unsecured 'A'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Updating Fitch's Oil & Gas Price Deck' (Aug. 15, 2012);
--'Rating Oil and Gas Production Companies Sector Credit Factors', (Aug. 9,
--'Statistical Review of U.S. E&P Companies' (May 10, 2012);
--Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow
Stress (Feb 29, 2012)
--'Liquids Rich Shale Boom--A Tailwind for North American Chemicals' (April
Applicable Criteria and Related Research:
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
Corporate Rating Methodology
Integrated and Upstream Oil and Gas Companies: Sector Credit Factor Compendium
Liquids-Rich Shale Boom -- A Tailwind for North American Chemicals
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70 W. Madison Street
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Dave Peterson, +1-312-368-3177
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