Fitch Affirms ConocoPhillips' IDR at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed ConocoPhillip's (COP) Issuer Default Rating (IDR) and associated unsecured ratings at 'A'. Fitch has also affirmed the company's short-term IDR and commercial paper (CP) ratings at 'F1'. The rating Outlook is Stable. A full list of rating actions follows at the end of this release.

Approximately $21.66 billion of debt is affected by today's rating action.

KEY RATING DRIVERS

ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent following the spin-off of Phillips (PSX), with 2013 production of 1.502 million boepd, substantially larger than next largest independents such as Apache, OXY, Anadarko, or Devon. The ratings are also supported by the company's high leverage to liquids (approximately 62% of consolidated reserves and 56% of production), good operational metrics, ample liquidity and adequate debt metrics for the rating category. At Dec. 31, 2013, COP's total debt edged down to $21.66 billion from $21.73 billion the year prior.

Credit Concerns

Credit concerns center on the company's relatively aggressive shareholder distributions (with 20% - 25% of cash flow from operations earmarked for dividends and share buybacks); the trend of declines in COP's production (2013 production of 1.502 million boepd versus over 2.0 million boepd in 2010); and significant asset sales which have helped bridge COP's funding gap, but have also driven production declines.

Strategic Repositioning

COP's plan to pursue lower growth, higher-profit barrels centers on raising $/boe cash margins by 3%-5%, as well as achieving volume growth of 3% - 5% to fund capex and higher shareholder payouts. Higher-margin production will center on Lower 48 liquids plays (Eagle Ford, Bakken, Permian), Asia-Pacific LNG, and Canada SAG-D, areas with cash margins that are meaningfully above COP's current portfolio average.

Asset Sales to Fill the Gap

COP has used asset sale proceeds to help fund capex, pay dividends, repurchase shares, and pay down debt. As calculated by Fitch, the company sold more than $32.5 billion in assets since 2010 (including Lukoil shares and downstream assets prior to the Phillips 66 spin-off), bought back just over $20 billion in shares, and paid down approximately $7.7 billion in debt. Looking forward, we expect COP will be significantly FCF negative in 2014 and 2015 as it invests for higher margin growth and will continue to rely on asset sales proceeds to fund the gap over this period. The company's criteria for asset sales include a focus on non-strategic and mature properties, which can be tax-efficiently sold.

Good Recent Financial Performance

COP's latest 12 months (LTM) financial performance was reasonable. As calculated by Fitch, on a consolidated basis debt/EBITDA leverage was approximately 1.04x and EBITDA/interest coverage was 15.85x. COP's free cash flow was -$2.78 billion, an improvement from the prior year's -$3.53 billion, and was comprised of cash flow from operations (including discontinued operations) of $16.08 billion, minus capex of $15.54 billion and common dividends of $3.33 billion. As calculated by Fitch, the company had consolidated debt/boe 1p reserves of $3.26/boe, debt/boe PD reserves of $4.46, and debt/flowing barrel of $16,700/barrel, levels that are consistent with the current rating.

Liquidity

ConocoPhillips' liquidity is robust. At YE 2013, the company had cash and equivalents of $6.25 billion; marketable securities of $272 million; and availability of 87% ($6.54 billion) on its senior unsecured revolver after backing out CP usage of $961 million. COP's revolver matures in August 2016 and backstops the company's two commercial paper programs, ConocoPhillips CP ($6.35 billion) and ConocoPhillips Qatar Funding ($1.15 billion).

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 a cross default provision for COP and its consolidated subsidiary debt exceeding $200 million. Near-term debt maturities are manageable and include $1.51 billion due 2015 and $1.25 billion due 2016.

Other Liabilities

COP's other obligations are manageable. The pension liability for its US pension plan (FV assets-Pension Benefit Obligation) declined to -$862 million at YE 2013 versus -$1.49 billion the year prior, driven by actuarial gains and improved returns on assets. COP's asset retirement obligation & accrued environmental obligations rose to $10.43 billion from $9.53 billion the year prior. COP's derivative exposure is modest as the company's policy is to generally remain exposed to commodity price risk.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Long-term adoption of a more conservative financial policy. An upgrade is unlikely in the near term given the funding needs associated with COP's strategic growth plan and large dividend payout.

Negative: Future developments that could lead to negative rating action include:

--An inability to fill funding gaps with planned asset sales or significant execution issues with plans to raise production and achieve cash margin improvement;

--A major operational problem or a sustained period of low oil prices without offsetting adjustments in spending.

--Some combination of the following metrics on a sustained basis: debt/1p boe above the $3.50 - $3.75/boe range; debt/proven developed above the $4.75 - $5.00/boe range; debt/flowing barrel above $17,000/boepd.

Fitch has affirmed the following:

ConocoPhillips

--Issuer Default Rating (IDR) at 'A';

--Senior unsecured notes at 'A';

--Bank revolver at 'A';

--CP program at 'F1';

--Short-term IDR at 'F1'.

ConocoPhillips Qatar Funding

--CP at 'F1'.

--ST IDR at 'F1'

Burlington Resources

--Senior Unsecured at 'A'.

Polar Tankers, Inc.

--IDR at 'A'.

--Senior Unsecured Notes at 'A'.

ConocoPhillips Co.

--IDR at 'A';

--Senior notes at 'A'.

ConocoPhillips Canada Funding Company I

--IDR at 'A';

--Senior Unsecured at 'A'.

ConocoPhillips Canada Funding Company II

--IDR at 'A';

--Senior Unsecured at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);

--Global Impact of US Shale Oil -- Rising Production Tempers World Prices (Feb. 10, 2014);

--Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact (Feb. 4, 2014);

--Scenario Analysis: Lifting the U.S. Crude Export Ban (Jan. 27, 2014);

--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug 12, 2013);

--Updating Fitch's Oil & Gas Price Deck (July 29, 2013);

--Energy Handbook--Upstream Oil & Gas (June 28, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055

Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715859

Updating Fitch's Oil & Gas Price Deck -- Midyear Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648586

Energy Handbook - Upstream Oil & Gas

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=706481

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827323

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60604
or
Secondary Analyst
Sean T. Sexton, CFA
Managing Director
+1-312-368-3130
or
Committee Chairperson
John C. Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60604
or
Secondary Analyst
Sean T. Sexton, CFA
Managing Director
+1-312-368-3130
or
Committee Chairperson
John C. Culver, CFA
Senior Director
+1-312-368-3216
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com