DBRS Morningstar Upgrades ConocoPhillips to “A,” Maintains Stable Trend

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of ConocoPhillips (Conoco or the Company) to “A” from A (low) and maintained the trend at Stable. The rating upgrade follows better-than-expected results of the Company’s strategy to optimize its portfolio by directing capital expenditure (capex) toward higher-margin, lower-capital intensity, and shorter-cycle assets, which has led to an improvement in the Company’s operating efficiency and ability to withstand market volatility. As a result, Conoco has been able to maintain its key credit metrics and build a sizeable strategic cash reserve, despite oil and gas (O&G) prices trending lower in 2019 than DBRS Morningstar’s base-case assumptions at the time of the last review. The Company’s rating is underpinned by its superior size, above-average geographic diversification, balanced product mix, and capital flexibility. The Stable trend acknowledges Conoco’s ability to manage capex and cash returns to shareholders within cash flow, and DBRS Morningstar’s expectation that credit metrics will remain supportive of the rating.

As part of the portfolio optimization strategy, the Company has disposed of low-margin, high-capital intensity assets and used the proceeds to reduce its debt from $27.3 billion at YE2016 to $14.9 billion at September 30, 2019. Portfolio optimization has also allowed the Company to materially reduce its reserve replacement costs while improving its reserve life index. These efforts, coupled with the accumulation of $8.1 billion in cash and cash equivalents, have improved the Company’s ability to generate sufficient cash flow from operations (OCF) to fund its capex program and return capital to its shareholders, even in a relatively lower O&G price environment. Conoco’s key credit metrics for the last 12 months ended September 30, 2019, are stronger than at YE2014, despite a 40% decline in West Texas Intermediate (WTI) crude oil prices and 12% decline in production over the same period.

OCF in 2020 is expected to be lower than in 2019 because DBRS Morningstar’s 2020 base-case price assumptions (WTI of $55/bbl and Brent oil of $60/bbl) are lower than the average WTI and Brent oil prices during the nine months ended September 30, 2019 of approximately $57/bbl and $65/bbl respectively. However, DBRS Morningstar expects Conoco will generate adequate OCF to fund the budgeted capex of $6.5 billion to $6.7 billion, common dividends, and planned share repurchases of $3.0 billion. While the Company does not anticipate further debt reductions, DBRS Morningstar does not expect Conoco’s debt to increase materially, because the Company expects to fund its sustaining capex (capex to maintain flat production) and common-dividend payments from OCF in a $40/bbl crude oil price environment. However, DBRS Morningstar notes that Conoco’s key credit metrics could weaken and put negative pressure on the rating if there is a material and sustained reduction in O&G prices.

The Company’s liquidity position is adequately supported by cash balances and availability under the $6.0 billion revolving credit facility, which was undrawn at September 30, 2019. In addition, Conoco continues to hold 208 million common shares of Cenovus Energy Inc. (rated BBB with a Stable trend by DBRS Morningstar), currently valued at approximately $2.0 billion, that provide an additional source of liquidity. Any further positive rating action would require a significant improvement in the Company’s business risk profile and stronger credit metrics.

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 and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, which can be found on dbrs.com under Methodologies & Criteria.

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 info@dbrs.com.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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