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Rating Action:

Moody's changes ConocoPhillips' rating outlook to positive

23 Mar 2018

Approximately $17.5 billion of rated debt affected

New York, March 23, 2018 -- Moody's Investors Service, ("Moody's") changed ConocoPhillips' (COP) rating outlook to positive from stable. Moody's simultaneously affirmed the company's Baa1 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.

"The positive outlook reflects COP's significant progress towards debt reduction, lowering its cost structure and improving overall financial flexibility that should enable healthier margins and returns and a more defensible credit profile," said Sajjad Alam, Moody's Senior Analyst. "Since year-end 2016, the company has repaid roughly $10 billion of debt, divested over $16 billion of low margin assets, aggressively slashed operating and capital costs, and consistently generated free cash flow. Management remains committed to further deleveraging, keeping its focus on high-return projects and increasing free cash flow through 2019."

Debt List:

Affirmations:

..Issuer: Burlington Resources Finance Company

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Burlington Resources, Inc.

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Conoco Funding Company

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: ConocoPhillips

....Issuer Rating, Affirmed Baa1

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Senior Unsecured Notes, Affirmed Baa1

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

..Issuer: ConocoPhillips Canada Funding Company II

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: ConocoPhillips Company

....Issuer Rating, Affirmed Baa1

....Senior Unsecured Notes, Affirmed Baa1

....Senior Unsecured Shelf, Affirmed (P)Baa1

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

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Louisiana Land & Exploration Company

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Polar Tankers, Inc.

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Tosco Corporation

....Senior Unsecured Notes, Affirmed Baa1

..Issuer: Valdez (City of) AK

....Senior Unsecured Revenue Bonds, Affirmed Baa1 (VMIG-2)

..Issuer: ConocoPhillips Qatar Funding Ltd.

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

Outlook Actions:

..Issuer: Burlington Resources Finance Company

....Outlook, Changed To Positive from Stable

..Issuer: Burlington Resources, Inc.

....Outlook, Changed To Positive from Stable

..Issuer: Conoco Funding Company

....Outlook, Changed To Positive from Stable

..Issuer: ConocoPhillips

....Outlook, Changed To Positive from Stable

..Issuer: ConocoPhillips Canada Funding Company II

....Outlook, Changed To Positive from Stable

..Issuer: ConocoPhillips Company

....Outlook, Changed To Positive from Stable

..Issuer: Louisiana Land & Exploration Company

....Outlook, Changed To Positive from Stable

..Issuer: Polar Tankers, Inc.

....Outlook, Changed To Positive from Stable

..Issuer: Tosco Corporation

....Outlook, Changed To Positive from Stable

RATINGS RATIONALE

ConocoPhillips' Baa1 rating reflects its large resource base, globally diversified operations in mostly developed markets, well balanced commodity mix, deep technical and project management expertise, as well as its improving balance sheet. COP remains the largest E&P company within Moody's rated universe with almost 1.2 million barrels of oil equivalent of daily production despite selling large blocks of assets in 2017. The remaining asset portfolio is largely comprised of low-cost unconventional assets, low-decline conventional oil and natural gas properties and long-life liquefied natural gas assets. The company has a growing exposure to short-cycle unconventional assets in the Eagle Ford and Permian Shale plays, where management plans to invest heavily over the next several years and further improve capital efficiency. COP generates very strong cash margins compared to its peers, and its earnings are highly correlated with oil prices given the company's liquids-weighted production base (~60%), unhedged product sales, and strong exposure to Brent-linked pricing. The disposition of low-margin Canadian bitumen and North American natural gas assets in 2017, high-graded drilling program, and the lowering of operating and capital costs since 2016 have also contributed to margin expansion.

COP's ratings are constrained by its weak retained cash flow to debt (RCF/debt), which was only 23% at December 31, 2017, historically inconsistent full-cycle returns, and significant off-balance sheet liabilities relative to other investment grade E&P companies. While leverage and return metrics have improved following a series of drastic management actions since 2016, future rating increases will be primarily driven by the company's ability to demonstrate sustained capital discipline, profitable growth, free cash flow generation and conservative financial management. Moody's expects COP to reach its $15 billion balance sheet debt target and prioritize debt reduction over share repurchases through 2019 as it continues to work towards its long term objective of securing a strong credit profile.

The affirmation of the short term Prime-2 ratings reflects COP's excellent liquidity. The company should generate over $2 billion of free cash flow after covering capital expenditures and cash dividends even if Brent crude averages $55 per barrel. COP also plans to buy back $2 billion in shares in 2018. The company had roughly $5.6 billion in cash and cash equivalents at December 31, 2017 pro forma for the $2.25 billion of debt repayment and the $400 million Alaska acquisition in early 2018. COP also has a $6.75 billion multi-year committed bank credit facility maturing in June 2019 that is fully available today. Additionally, COP will receive $262 million in legal settlements payments from the Ecuador government in April and has 208 million shares of Cenovus Energy Inc. (Ba2 stable) that had a market value of $1.75 billion at March 22, 2018. 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, 2017.

COP's ratings could be upgraded if the company improves its leverage metrics and capital efficiency while delivering reliable free cash flow. More specifically, if the company can sustain the RCF/debt ratio above 40%, the leveraged full-cycle ratio (LFCR) above 2x and the debt/PD reserves ratio near $5 per boe, an upgrade would be considered. Ratings are unlikely to be downgraded in 2018 barring a sharp and sustained drop in oil prices. Longer term, if the LFCR falls below 1x or the RCF/debt ratio falls below 20%, the Baa1 rating would come under pressure.

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

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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