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Rating Action:

Moody's downgrades ConocoPhillips' unsecured ratings to A2, stable outlook

20 Aug 2015

New York, August 20, 2015 -- Moody's Investors Service downgraded ConocoPhillips' (COP) senior unsecured and other long-term debt ratings to A2 from A1. At the same time, Moody's affirmed the Prime-1 short-term commercial paper ratings of ConocoPhillips and ConocoPhillips Qatar Funding Ltd, as well as the short-term ratings of guaranteed industrial revenue bonds. The rating outlook has been changed to stable from negative.

Ratings downgraded by one notch include the long-term debt ratings of ConocoPhillips, ConocoPhillips Company, ConocoPhillips Holding Company, Conoco Funding Company, ConocoPhillips Canada Resources, ConocoPhillips Canada Funding Company I and II, Tosco Corporation, Burlington Resources, Inc., Burlington Resources Finance Company, Polar Tankers, Inc., Louisiana Land and Exploration, and guaranteed industrial revenue bonds Valdez (City of) AK.

"The ratings downgrade reflects Moody's expectation that COP's financial leverage will remain high through 2017, with the company increasing its debt levels to fund negative free cash flow," commented Gretchen French, Moody's Vice President. "We positively note that in the face of a weak commodity price environment, COP has taken a number of steps to lower its cost structure, increase its financial and operating flexibility, and maintain a strong liquidity profile. However, the A2 rating positions the company with more flexibility within the rating and relative to its peers."

RATINGS RATIONALE

COP's A2 rating reflects the company's considerable scale and global geographic diversification of reserves and production, and a large cash flow profile generated from a wide base of mature producing assets. Its growing liquids production and oil-linked LNG projects support cash margins and cash flow. At the same time, COP's earnings remain subject to volatility and cyclicality. COP has a degree of production concentration in North American natural gas, estimated by Moody's to account for about a quarter of its total production in 2015, which will continue to be hurt by weak prices. COP's F&D unit costs are high, and given weak price realizations through 2016 from the current low commodity price environment, we expect low returns during this period.

We view COP's A2 rating as reasonably positioned relative to its independent exploration and production (E&P) peers, reflecting the benefit of a larger and more diversified reserves and production profile, but with a more elevated financial leverage profile. We expect COP's leverage metrics to deteriorate in 2015 and remain weak through 2016 relative to its E&P peers as it continues to maintain a high dividend payout through the downturn and a still heavy (albeit reduced) capital spending program in excess of internal cash flows. Based on Moody's price assumptions, we expect COP to be cash flow negative through 2017, although this could be offset somewhat by asset sales. However, cash flow outspending will materially narrow by 2017, positioning the company for cash flow neutrality or free cash flow post 2017.

The affirmation of COP's short term Prime-1 ratings reflects the company's strong liquidity position. COP has a $7.0 billion multi-year committed bank credit facility maturing in June 2019 that is available to back-stop commercial paper. COP had $6.2 billion of availability as of June 30, 2015, after accounting for CP outstanding (there were no letters of credit). COP had $3.8 billion of cash as of June 30, 2015.

The stable rating outlook reflects our expectation that COP will be successful in continuing to grow production and lower its costs even though debt balances will continue to rise through 2017. We expect that retained cash flow/debt improves from very weak levels of around 19% in 2015 to over 20% in both 2016 and 2017.

COP's A2 rating could be downgraded if the company's financial leverage profile considerably weakens (retained cash flow to debt remains below 20% through 2016 and early 2017). The rating could also be pressured by prolonged weak reserve replacement and reinvestment economics.

We do not expect a near-term ratings upgrade given COP's high capital spending needs and negative cash flow profile. However, the rating could improve in the future based upon its ability to lower its financial leverage (retained cash flow/debt above 40%) while maintaining competitive reserve replacement and reinvestment economics (leveraged full-cycle ratio approaching 1.5x).

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

ConocoPhillips 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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.

Gretchen French
VP - Senior Credit Officer
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.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades ConocoPhillips' unsecured ratings to A2, stable outlook
No Related Data.
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