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Rating Action:

MOODY'S AFFIRMS A3 AND Prime-2 RATINGS OF CONOCOPHILLIPS; CHANGES RATING OUTLOOK TO POSITIVE

29 Sep 2004
MOODY'S AFFIRMS A3 AND Prime-2 RATINGS OF CONOCOPHILLIPS; CHANGES RATING OUTLOOK TO POSITIVE

New York, September 29, 2004 -- Moody's Investors Service affirmed the A3 senior long-term and Prime-2 commercial paper ratings of ConocoPhillips and its guaranteed subsidiaries in response to the company's announcement that it had reached an agreement to acquire the Russian government's 7.59% stake in OAO LUKOIL for approximately $2 billion, forming a strategic alliance between the two companies. LUKOIL (Ba3 Issuer Rating), is one of Russia's largest integrated petroleum companies. Including plans to acquire an additional 2.4% equity stake in the open market, the total consideration for a 10% stake could reach $2.6 billion. The rating outlook for ConocoPhillips' is also changed to positive from stable.

The ratings affirmations reflect the substantial progress ConocoPhillips has made in reducing debt and streamlining the asset base in the wake of its 2002 merger, and the relatively minor effect this large transaction will have on its financial leverage and liquidity. Since the merger, ConocoPhillips has enjoyed the benefits of stronger commodity prices, downstream margins, and increased earnings, as well as substantial reductions in overhead costs. These factors, coupled with cash generated from a largely completed asset sales program, have enabled it to reduce on and off balance sheet debt by more than $10 billion, considerably strengthening its balance sheet and liquidity. Funding of the initial portion of the LUKOIL equity investment will come primarily from cash on hand and could also result in some re-leveraging. However, the overall effect should not significantly increase debt or deter ConocoPhillips from maintaining a lower leverage profile, particularly if commodity prices in the near to medium term remain at recent elevated levels.

In addition to achieving a 10% ownership stake in LUKOIL in the near-term, ConocoPhillips will also have the option to increase its total stake in LUKOIL up to a maximum 20%. A key aspect to the transaction is that ConocoPhillips will have proportional board membership, including one initial director on the LUKOIL board, and LUKOIL's charter will be amended to require unanimous board consent on certain issues, enhancing ConocoPhillips' role in governance of LUKOIL and the new joint-venture. Another important part of the alliance is that the companies will form a separate joint-venture whereby ConocoPhillips will pay $370 million to own a 30% stake in LUKOIL's reserves in the Timan-Pechora area of northern Russia and share pro-rata in the working capital and future development costs of those resources.

In Moody's view, the transactions are consistent with ConocoPhillips' efforts to expand its operations into new international growth areas, strengthening its own upstream reserve position and oil and gas production growth targets. While the political and capital risks in the investments are substantial, they are also mitigated by ConocoPhillips' large and diversified upstream and downstream operations, its stronger balance sheet, and by the governance protections and phased capital commitments implicit in the shareholder agreement.

Moody's is changing ConocoPhillips' rating outlook to positive. The ratings (both long-term and short term) could be upgraded in the near-term, subject to further monitoring of the company's earnings and cash flow prospects, management of its capital spending and share repurchases, the progress of its overall upstream development program, and successful evolution of the strategic alliance with LUKOIL. The positive rating outlook also factors in the expectation that sustaining a lower financial leverage position will remain a priority for management.

ConocoPhillips, a leading U.S. based integrated petroleum company, is headquartered in Houston, Texas.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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