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Rating Action:

Moody's changes ConocoPhillips' rating outlook to positive

30 Mar 2017

Approximately $27 billion of rated debt affected

New York, March 30, 2017 -- Moody's Investors Service, ("Moody's") changed ConocoPhillips' (COP) rating outlook to positive from negative. At the same time, Moody's affirmed COP's Baa2 issuer and senior unsecured ratings, as well as all the other debt ratings at various COP guaranteed subsidiaries. Moody's also affirmed the Prime-2 short-term commercial paper ratings of ConocoPhillips and ConocoPhillips Qatar Funding Ltd.

This action follows COP's announcement on March 29, 2017 that it has agreed to sell its 50 percent non-operated interest in the Foster Creek Christina Lake (FCCL) oil sands partnership, as well as the majority of its western Canada Deep Basin natural gas assets to Cenovus Energy Inc. (Cenovus, Ba2 stable) for $13.3 billion. The transaction is expected to close in the second quarter of 2017.

"This large sale will enable COP to substantially and quickly reduce debt, lower overall operating costs, and reduce exposure to low-margin North American natural gas without materially impacting its operating cash flows in 2017," said Sajjad Alam, Moody's Senior Analyst. "While the FCCL assets represent a stable source of production with a very long reserve life, by reducing its exposure to SAGD oil sands, which sells at a considerable discount to WTI prices, COP will boost its overall price realizations, minimize price related reserves revision risk and have a more competitive asset portfolio in today's lower commodity price environment."

Affirmations:

..Issuer: Burlington Resources Finance Company

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Burlington Resources, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Conoco Funding Company

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: ConocoPhillips

.... Issuer Rating, Affirmed Baa2

....Backed Senior Unsecured Shelf, Affirmed (P)Baa2

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: ConocoPhillips Canada Funding Company II

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: ConocoPhillips Company

.... Issuer Rating, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

....Backed Senior Unsecured Shelf, Affirmed (P)Baa2

..Issuer: ConocoPhillips Holding Company (Assumed by ConocoPhillips Company)

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: ConocoPhillips Qatar Funding Ltd.

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Louisiana Land & Exploration Company

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Polar Tankers, Inc.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Tosco Corporation

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa2

..Issuer: Valdez (City of) AK

....Backed Senior Unsecured Revenue Bonds, Affirmed Baa2

....Backed Senior Unsecured Revenue Bonds, Affirmed VMIG 2

Outlook Actions:

..Issuer: Burlington Resources Finance Company

....Outlook, Changed To Positive From Negative

..Issuer: Burlington Resources, Inc.

....Outlook, Changed To Positive From Negative

..Issuer: Conoco Funding Company

....Outlook, Changed To Positive From Negative

..Issuer: ConocoPhillips

....Outlook, Changed To Positive From Negative

..Issuer: ConocoPhillips Canada Funding Company II

....Outlook, Changed To Positive From Negative

..Issuer: ConocoPhillips Company

....Outlook, Changed To Positive From Negative

..Issuer: Louisiana Land & Exploration Company

....Outlook, Changed To Positive From Negative

..Issuer: Polar Tankers, Inc.

....Outlook, Changed To Positive From Negative

..Issuer: Tosco Corporation

....Outlook, Changed To Positive From No Outlook

RATINGS RATIONALE

The positive outlook reflects the high likelihood that COP will achieve significant debt reduction in 2017. COP's management will accelerate its deleveraging process by using the cash received from Cenovus to cut balance sheet debt to about $20 billion in 2017 from $27.3 billion at the end of 2016. If the sale closes as currently structured and management delivers on its debt reduction promise, Moody's would likely upgrade COP's ratings. COP will receive $10.6 billion in cash, 208 million of Cenovus shares valued at $2.7 billion on March 28, 2017, and additional contingent payments over the next five years provided WCS crude oil price exceeds certain pre-established thresholds. The company is also actively marketing several other asset packages and expects to achieve $16 billion in total asset sales in 2017 and additional disposition proceeds in 2018-2019. Management believes that it will be able to drive down COP's debt balance to $15 billion by the end of 2019.

Despite the sale to Cenovus, COP will remain the largest and one of the most diversified E&P companies in terms of production and reserves. The company will have a production base of about 1.3 million boe/day and proved reserves of 5.1 billion boe. The divested assets had a net book value of $10.9 billion and 1.3 billion barrels of oil equivalent (boe) in proved reserves at year-end 2016, and were estimated to produce about 280,000 boe/day (67% liquids) with associated operating costs of about $400 million in 2017.

ConocoPhillips' Baa2 rating reflects its large scale and vast resource base, globally diversified reserves and production, as well as a large cash flow platform underpinned by mostly low-decline oil and oil-linked LNG assets, along with a meaningful legacy position in North American natural gas. COP however, has higher leverage than most other investment-grade E&P companies and its capital productivity and reserve replacement has been relatively weak since 2014. Moody's expects COP's cash flow based leverage metrics to improve significantly over the next several years as management successfully executes its asset sale plans and reduces debt. Operating margins should also increase modestly primarily because of higher average price realizations and reduced operating costs. Moody's expects COP to prioritize debt reduction over shareholder returns and exercise sound capital discipline through 2019 as it continues to work towards its long term financial goals and regaining a stronger credit profile.

The affirmation of the short term Prime-2 ratings reflects COP's excellent liquidity position. Including the Cenovus sale, COP would have about $4 billion in pro forma cash as of December 31, 2016 assuming $7.3 billion of debt reduction and $3 billion in share repurchases take place immediately after closing. COP also has a $6.75 billion multi-year committed bank credit facility maturing in June 2019 that is fully available today. The revolver backstops a $6.25 billion commercial paper (CP) program at COP and a $500 million CP program at ConocoPhillips Qatar Funding Ltd., both of which had no borrowings as of December 31, 2016.

COP's ratings would likely be upgraded to Baa1 if the company substantially achieves its debt reduction target in 2017. We would also look for continued improvements in margins, cash flow based leverage metric (retained cash flow/debt above 20%), reserve replacement and capital efficiency (leveraged full-cycle ratio (LFCR) comfortably above 1x).

COP's ratings are unlikely to be downgraded in 2017 barring a steep and sustained drop in oil prices. Longer term, if the LFCR remains below 1x or the retained cash flow/debt ratio cannot be sustained above 10%, the Baa2 rating would come under pressure.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ConocoPhillips is the largest E&P company in the world and is headquartered in Houston, Texas.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sajjad Alam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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