DBRS Morningstar Confirms ConocoPhillips at “A,” Stable

DBRS Limited (DBRS Morningstar) confirmed ConocoPhillips' (Conoco or the Company) Issuer Rating at "A" with a Stable trend. The rating is underpinned by Conoco's (1) superior size as one of the world's largest independent exploration and production (E&P) companies; (2) large, low-cost resource base; (3) geographically diversified assets; and (4) operating and capital flexibility. The key business risk factors tempering the rating include (1) a relatively higher sensitivity to commodity price changes, (2) large planned return of cash to shareholders, and (3) higher production decline rates due to the exposure of short-cycle assets in the Lower 48. The Stable trend reflects DBRS Morningstar's expectations that Conoco's key credits metrics will support the "A" rating under DBRS Morningstar's base-case commodity price assumptions.

During 2021, Conoco completed the $9.7 billion all-stock acquisition of Concho Resources (Concho) and the $9.5 billion cash acquisition of Permian assets from Shell Enterprises LLC (Shell). The acquisition of Concho added complementary acreage across the Delaware and Midland basins, while the acquisition of Permian assets from Shell added significant acreage in the Delaware basin in Texas. The acquisitions improved the Company's business risk profile by adding modestly to its size and enhancing capital flexibility. However, the higher decline rates and short-cycle nature of the acquired assets increases the Company's capital intensity.

The Company expects to produce approximately 1.8 million barrels of oil equivalent per day in 2022 and spend about $7.2 billion in capital expenditures (capex; about 63% will be targeted towards the Lower 48). Under DBRS Morningstar's commodity price expectations of $67 per barrel (bbl) West Texas Intermediate (WTI) in 2022 and $60/bbl WTI in 2023, DBRS Morningstar expects Conoco to generate significant free cash flow (FCF; cash flow after dividend and capex) surpluses in 2022 and 2023. However, the Company is expected to allocate the majority of FCF surpluses to returning cash to shareholders. Conoco targets to return $8 billion of cash to shareholders in 2022 through a combination of a base dividend, share repurchases, and variable return of cash. DBRS Morningstar expects the Company to maintain a lease-adjusted debt-to-cash flow ratio between 1.0 times (x) and 1.5x, commensurate with the "A" rating range.

DBRS Morningstar notes that Conoco aims to reduce its gross debt to $15 billion by 2026 down from approximately $20 billion currently. The Company also targets asset divestitures of $4 billion to $5 billion by year-end (YE) 2023, of which $2 billion is planned from the sale of assets in the Permian basin. The Company’s liquidity position is adequately supported by a large cash balance of $5.5 billion at YE2021 and a $6.0 billion revolving credit facility, which was undrawn as at December 31, 2021.

A rating upgrade is not likely in the near term and would require a substantive improvement in the Company’s business risk profile and/or credit metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16,
2021; https://www.dbrsmorningstar.com/research/383104), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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