Fitch Affirms ConocoPhillips' IDR at 'A'; Outlook Stable

  Fitch Affirms ConocoPhillips' IDR at 'A'; Outlook Stable

Business Wire

CHICAGO -- April 23, 2013

Fitch Ratings has affirmed ConocoPhillip's (COP) Issuer Default Rating (IDR)
and associated ratings at 'A', as well as the company's short-term IDR and
commercial paper (CP) ratings at 'F1'. The Outlook is Stable. A full list of
rating actions is included at the end of this release.

Approximately $21.7 billion of debt is affected by today's rating action.

Key Rating Drivers

ConocoPhillips' ratings reflect the company's size and scale as the largest
North American independent E&P following the spin-off of Phillips (PSX), with
2012 production of 1.578 million barrels of oil per day (boepd), more than
twice as big as the next largest independents Apache (779,000 boepd), OXY
(763,200 boepd) and Anadarko (731,800 boepd). The ratings are also supported
by the company's high leverage to liquids (approximately 62% of consolidated
reserves and 55% of production), good operational metrics, ample liquidity and
modest reduction in debt and other liabilities following the PSX separation
(pension, environmental and legal, operating leases).

Credit Concerns

Credit concerns center on COP's aggressive shareholder distribution policy
(with 20%-25% of cash flow from operations earmarked for shareholder
distributions); the reduced financial flexibility that could arise during a
period of sustained lower oil prices; COP's need to close asset sales to
bridge a funding gap associated with its current growth plan; as well as the
need to execute on its plan to raise $/boe margins and volumes.

Strategic Repositioning

COP's plan to pursue lower-growth, higher-profit barrels centers on raising
$/boe cash margins by 3%-5%, as well as 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.

Asset Sales to Fill the Gap

COP expects to use asset sale proceeds to help close a multi-year funding gap
associated with its transition to higher-margin production. Total asset sales
announced in 2012 were $9.6 billion, with major pieces including Kashagan ($5
billion), Algeria ($1.8 billion), Nigeria ($1.8 billion) and Cedar Creek
Anticline ($1.0 billion). The criteria for asset sales include a focus on
non-strategic and mature properties, which can be tax-efficiently sold.

Good 2012 Upstream Results

COP's 2012 operational metrics were solid. As calculated by Fitch, total
proven reserves for the year rose by 3%, to 8.642 billion boe, led by the
sanctioning of new bitumen equity operations in Canada at Foster Creek and
Christina Lake, as well as additions in the Eagle Ford, Barnett, and Bakken
shales. Liquids continue to make up most of the company's production (55.2%)
and reserves (62.2%). As calculated by Fitch, COP's 2012 organic and all-in
reserve replacement was 156% and 137%, respectively, levels that are good for
an entity with its size and liquids focus. FD&A for 2012 came in at a solid
$18.86/boe, and full-cycle netbacks were $18.23/boe.

Recent Financial Performance

COP's latest 12 months (LTM) financial performance was reasonable. As
calculated by Fitch, debt/EBITDA leverage was 1.02x and EBITDA/interest
coverage was 11.6x, both metrics slightly weaker than year-ago levels. Free
cash flow was -$3.53 billion, comprising cash flow from operations including
discontinued operations of $13.92 billion, minus capex of $14.17 billion and
common dividends of $3.28 billion. Looking forward, Fitch expects the company
will continue to be significantly free cash flow (FCF) negative over the next
two years as it invests for higher margin growth. However, as stated
previously, asset sales are expected to bridge funding gaps over this period.

Liquidity

ConocoPhillips' liquidity remains good. At YE 2012, the company had a $7.5
billion senior unsecured revolver (due August 2016) with availability of
approximately 85% after Qatar CP of $1.05 billion; and cash of $3.68. Nearly
all of this cash could be tax-efficiently deployed to the U.S. The revolver
backstops the company's two commercial paper programs, ConocoPhillips CP
($6.35 billion) and ConocoPhillips Qatar Funding ($1.15 billion), 100%. There
are no financial covenants on the company's revolver or unsecured debt, and
other covenant restrictions are light. Near-term debt maturities are
manageable and include $955 million due 2013, $414 million due 2014, and $1.54
billion due 2015.

Other Liabilities

COP's other obligations are manageable. Its net pension liability (Pension
Assets minus Pension Benefit Obligation) for US plans stood at $1.49 billion
at year-end 2012 versus $2.03 billion the year prior. Its asset retirement
obligations rose to $9.16 billion versus $8.92 billion the year prior. COP's
environmental accruals totaled $364 million versus $922 million at Dec.
31,2011, with the decrease due to the migration of a large portion of
environmental liabilities to PSX post-separation. COP's derivative exposure is
modest as the company's policy is to generally remain exposed to commodity
price risk.

Rating Sensitivities

Positive: Future developments that could lead to positive rating actions
include:

--Evidence of a long-term adoption of a more conservative financial policy. An
upgrade is unlikely in the near term given the company's large dividend payout
as well as the funding needs associated with its strategic growth plan.

Negative: Future developments that could lead to negative rating action
include:

--An inability to execute planned asset sales to fill funding gaps or achieve
projected $/boe cash margins;

--A major operational problem or negative reserve revision; or a sustained
period of low oil prices without offsetting adjustments in spending.

--Some combination of the following metrics on a sustained basis: debt/proven
(1p) boe in the $3.50-$3.75/boe range; debt/proven developed boe in the
$4.75-$5.00/boe range; debt/flowing barrel above $17,000/boepd.

Fitch has affirmed the following ratings with a Stable Outlook:

ConocoPhillips

--IDR at 'A';

--Senior unsecured notes at 'A';

--Bank revolver at 'A';

--CP program at 'F1';

--Short-term IDR at 'F1'.

ConocoPhillips Qatar Funding

--CP at 'F1'.

--ST IDR at 'F1'.

Burlington Resources

--Senior Unsecured at 'A'.

Polar Tankers, Inc.

--IDR at 'A'.

--Senior Unsecured Notes at 'A'.

ConocoPhillips Co.

--IDR at 'A';

--Senior notes at 'A'.

ConocoPhillips Canada Funding Company I

--IDR at 'A';

--Senior Unsecured at 'A'.

ConocoPhillips Canada Funding Company II

--IDR at 'A';

--Senior Unsecured at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'2013 Outlook: North American Oil & Gas' (Dec. 13, 2012);

--'2013 Outlook: Midstream Services and MLPs' (Nov. 29, 2012);

--'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow
Stress' (Feb. 29, 2012).

Applicable Criteria and Related Research

2013 Outlook: Midstream Services and MLPs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695530

2013 Outlook: North American Oil & Gas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=697097

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789304

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Contact:

Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60604
or
Secondary Analyst
Sean T. Sexton, CFA
Managing Director
+1-312-368-3130
or
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Senior Director
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or
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brian.bertsch@fitchratings.com
 
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