DBRS Morningstar Removes Rating of ConocoPhillips from Under Review–Negative, Confirms at “A,” Negative

DBRS Limited (DBRS Morningstar) removed the Issuer Rating of ConocoPhillips (Conoco or the Company) from Under Review with Negative Implications, where it was placed on March 26, 2020. At the same time, DBRS Morningstar confirmed Conoco’s Issuer Rating at “A” with a Negative trend.

DBRS Morningstar had placed the rating of Conoco Under Review with Negative Implications in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions on May 15, 2020, to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, and (3) the impact of production cuts recently implemented by OPEC Plus. Today’s rating action follows DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.

The rating confirmation accounts for Conoco’s (1) superior size as one of the world’s largest independent exploration and production companies with production of approximately 1.35 million barrels of oil equivalent per day in 2019; (2) large, low-cost resource base; (3) above-average geographic diversification; and (4) high level of capital and operating flexibility. The key business factors tempering the rating include (1) the sensitivity of the Company’s key credit metrics to changes in crude oil prices and (2) relatively higher operating costs compared with its multinational peers, primarily due to the fact that the predominant share of Conoco’s production comes from Organization for Economic Cooperation and Development countries.

The Company’s cash flow is sensitive to changes in the price of crude oil (both West Texas Intermediate (WTI) and Brent) because of its unhedged portfolio. As a result of the recent severe decline in crude oil prices, the Company’s key credit metrics have been under pressure and, at current oil price levels, are well below the “A” range. The Company has taken steps to reduce operating costs, decrease capital spending, and suspend its share repurchase program to protect the balance sheet to manage through the current challenging environment. The Company has cut its 2020 capex budget to $4.3 billion from the original plan of $6.5 billion to $6.7 billion and targeted a $0.6 billion reduction in annual operating costs in 2020. Also, the Company believes the current level of dividends can be sustained through the commodity price cycle. With the optimization of its asset portfolio by selling low-margin, high-capital-intensity assets over the past few years, Conoco’s sustaining capex has declined to approximately $3.8 billion. The Company estimates its WTI breakeven price to cover capex at under $30.00/barrel (bbl). DBRS Morningstar estimates free cash flow (FCF; after dividend and capex) breakeven at around $34.00/bbl WTI.

Conoco has sufficient liquidity to navigate the current weak price environment. At the end of March 2020, the Company had $7.8 billion in cash and cash equivalents and $6 billion (undrawn) available under its syndicated credit facility. The Company also has a well-spread-out debt maturity schedule with minimal amounts falling due in 2020 and 2021.

DBRS Morningstar expects Conoco’s key credit metrics under the base-case commodity price assumptions (see DBRS Morningstar’s May 15, 2020, commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”) to be weak in 2020 and below the “A” range. DBRS Morningstar projects a modest FCF deficit in 2020 with an anticipated return to FCF surpluses and improvement in key credit metrics in 2021 and 2022 as the price of crude oil recovers (based on DBRS Morningstar’s forecast). DBRS Morningstar assumes a more normalized operating environment by 2022 and anticipates the price of WTI oil reaching the $50.00/bbl level, the bottom end of DBRS Morningstar’s deemed midcycle pricing scenario.

In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to a more normalized operating and pricing environment. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an overall “A” rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices falls short of DBRS Morningstar’s base-case price assumptions and that Conoco’s overall financial risk profile will not support the current rating. The Negative trend is a reflection of this risk, which DBRS Morningstar currently deems to be elevated.

DBRS Morningstar will likely change the trend to Stable if the demand/supply fundamentals in crude oil markets continue to improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and/or the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (August 23, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.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.

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

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

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