Fitch Expects to Rate ConocoPhillips' Senior Unsecured Notes 'A-'; Outlook Remains Negative
Fitch Ratings has assigned an 'A-(exp)' rating to ConocoPhillip's (COP)
pending issuance of senior unsecured notes. The notes, which will be
issued by ConocoPhillips Company, will be guaranteed by parent company
COP. Net proceeds from the issuance will be used for general corporate
purposes
Fitch currently rates COP and its subsidiaries as follows:
ConocoPhillips
--Long-term Issuer Default Rating (IDR) 'A-';
--Senior unsecured notes 'A-';
--Bank revolver 'A-';
--Commercial paper (CP) program 'F2';
--Short-term IDR 'F2'.
ConocoPhillips Qatar Funding
--CP 'F2';
--Short-term IDR 'F2'.
Burlington Resources
--Senior unsecured 'A-'.
Polar Tankers,Inc.
--Long-term IDR 'A-';
--Senior unsecured notes 'A-'.
ConocoPhillips Co.
--Long-term IDR 'A-';
--Senior notes 'A-'.
ConocoPhillips Canada Funding Company I
--Senior unsecured 'A-'.
ConocoPhillips Canada Funding Company II
--Senior unsecured 'A-'.
The Rating Outlook is Negative.
KEY RATING DRIVERS
The main driver of COP's recent downgrade was Fitch's downward revision
of its energy price deck on Feb. 24 and its impact on ConocoPhillips'
forecast credit metrics, including leverage and debt/boe metrics, which
had become weak for the 'A' rating category. The current rating also
reflects the company's large size and diverse upstream portfolio; high
exposure to liquids; track record of defending the rating through asset
sales and its recent dividend cut; good liquidity; and efficiency gains
in its core shale plays, which provide good visibility on future reserve
and production growth going forward.
WEAKER METRICS
As calculated by Fitch, COP's LTM debt/EBITDA leverage at YE 2015 rose
to 3.0x versus 1.2x the year prior. Gross debt over the same period (and
excluding today's issuance) rose by approximately $2.3 billion,
primarily due to the company's 2015 debt issuance. As calculated by
Fitch, COP's FCF at YE 2015 weakened to -$6.24 billion and was comprised
of cash flow from operations of $7.47 billion, capex of $10.05 billion,
and dividends of $3.66 billion. Looking forward, Fitch expects FCF to
drop to approximately -$2.5 billion in 2016 due to moderately lower
capex and the impact of the divided cut.
In terms of upstream metrics, COP's consolidated reserves (excluding
equity affiliates) declined by approximately 15% in 2015, to 5.45
billion boe from 6.41 billion boe the year prior. A key driver of the
decline was the impact of sharply lower prices on reserve calculations.
Given the combination of lower reserves and recent gross debt increases,
key upstream metrics weakened. As calculated by Fitch, the company's
consolidated debt/boe 1p reserves rose from $3.52/boe to $4.56/boe,
debt/boe proven developed(PD) reserves rose from $4.86/boe to $6.29/boe,
and debt/flowing barrel rose from $17,200/barrel to $18,860/barrel at YE
2015.
SIZE AND SCALE
ConocoPhillips' ratings reflect the company's size and scale as the
largest North American independent following the spin-off of Phillips 66
(PSX). COP's 2015 production was 1.589 million boepd, which represents
production growth of 5 percent from continuing operations excluding the
impact of asset sales, and is substantially larger than next largest
independents such as Apache, Occidental Petroleum, Anadarko, and Devon.
Production size, the size and quality of the reserve base, and portfolio
diversification are all important supporting factors for the credit
quality of upstream companies. Larger companies tend to have a bigger
pool of assets to sell from, giving them greater liquidity options, all
else equal. COP has a strong track record of monetizing assets, and as
calculated by Fitch, has sold off just under $16 billion in assets since
2012. This includes approximately $2 billion in assets in 2015, which
was a more challenging market. So far in 2016, the company had disposed
of $300 million en route to its target of $1 billion.
PORTFOLIO DIVERSIFICATION
COP also has significant portfolio diversification. The company's asset
base is large and diversified, and includes a strong portfolio of
international gas (LNG); low cost Canadian Oil Sands (Surmont, Christina
Lake); a presence in some of the best onshore shale plays (Permian,
Eagle Ford, Bakken); high growth Asian properties (Indonesia, Australia,
offshore) as well as Production Sharing Contracts (PSCs) in the North
Sea.
Having a diversified portfolio of projects with different decline rates
softens the near-term impact of cutting capex as the company is less
likely to experience the sharp drop in production seen among
shale-centric pure plays. After adjusting for the impact of asset sales,
COP expects 2016 production to be flat; versus declines in the high
single to double digit levels expected at several peers.
CAPEX AND DIVIDEND CUTS
COP has taken several steps to defend its rating, including capex cuts
and dividend reductions. COP's capex dropped from a high of $17.1
billion in 2014 to just $6.4 billion in 2016, a decline of 63%. Further
flexibility is possible, especially if the company decides to forego
growth targets in a lower priced environment. Near-term production
declines from lower capex are likely to be somewhat softened by new
projects that are coming online in the near term, including APLNG train
#2, and the production from Surmont Oil sand in Canada.
COP announced a 66% cut in its dividend recently, from 74 cts/share to
25 cts/share, freeing up about $2.4 billion in cash flow per year. Fitch
believes the company has gotten over its ski tips in terms of the size
of its dividend, so a cut of this size should help reduce cash flow
imbalances. Further dividend cuts might be necessary to preserve credit
quality if a lower for longer scenario persists.
KEY ASSUMPTIONS
Fitch's key assumptions for the issuer include:
--Base Case WTI oil prices of $35/bbl in 2016, $45/bbl in 2017, and $55
in 2018;
--Base Case Henry Hub natural gas prices of $2.25/mcf in 2016, $2.50/mcf
in 2017, and $2.75/mcf in 2018;
--Capex of $6.4 billion in 2016; $5.5 billion in 2017 and $6.25 billion
in 2018;
--Cumulative production growth of -4% from 2015 to 2018;
--Dividend growth of 3% per year following the 2016 cut;
RATING SENSITIVITIES
Positive: No upgrades are currently contemplated given weaker credit
metrics associated with low oil prices. However, future developments
that could lead to positive rating actions include:
To revise the Negative Outlook to Stable at 'A-':
--Midcycle debt/EBITDA below approximately 2.5x range, or midcycle
debt/flowing barrel at or below $17,500/barrel.
Negative: Future developments that could lead to negative rating action
include:
For a downgrade to 'BBB+':
--Midcycle debt/EBITDA above approximately 2.75x - 3.0x;
--Sustained debt/flowing barrel above the $17,500-$20,000/barrel range;
--Meaningful gross debt reductions, funded through either an equity
issuance, further reductions in dividend, or asset sales, could also be
a credit mitigant that would help stabilize the company's ratings at the
current level.
LIQUIDITY AND DEBT STRUCTURE
ConocoPhillips' liquidity is good. At YE 2015, the company had cash and
equivalents of $2.37 billion, and availability on the company's $7
billion senior unsecured revolver was approximately 88% after deducting
$803 million in CP from the company's Qatar CP program. COP's revolver
matures in June 2019 and backstops the company's two commercial paper
programs, ConocoPhillips CP ($6.1 billion) and ConocoPhillips Qatar
Funding ($900 million).
There are no financial covenants on the company's revolver or unsecured
debt. Other covenant restrictions are light and include limitations on
secured debt, restrictions on asset sales and sale/leasebacks,
limitations on mergers/consolidations, and a cross default provision for
COP and its consolidated subsidiary debt exceeding $200 million.
Near-term debt maturities are manageable and include $1.25 billion due
2016, $1 billion due 2017, and $1.5 billion due 2018.
Other Liabilities
COP's other obligations are manageable. The pension liability for its
U.S. pension plan (FV assets-Pension Benefit Obligation) edged up to
-$1.16 billion at YE 2015 versus -$1.12 billion the year prior. The main
drivers of the change were higher benefits paid, actuarial gains, and
plan curtailments. COP's asset retirement obligation & accrued
environmental obligations declined to $9.58 billion in 2015 versus
$10.65 billion the year prior. COP's derivative exposure is modest as
the company's policy is to generally remain exposed to commodity price
risk.
Date of Relevant Rating Committee: March 1, 2016
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000396
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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