CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to ConocoPhillips' issuance of senior unsecured notes. The company expects to use the net proceeds to redeem $1.5 billion in 4.60% notes due 2015 and for general corporate purposes. ConocoPhillips Company will be the issuer of the notes, while ConocoPhillips will guarantee the notes. A full list of ConocoPhillips' ratings follows at this end of this press release.
KEY RATING DRIVERS
ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent, 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 (as calculated by Fitch, approximately 62% of 2013 consolidated reserves and 56% of production), good operational metrics, ample liquidity and adequate debt metrics for the rating category. At Sept. 30, 2014 COP's total debt was $21.2 billion, debt to capitalization ratio was 28%, and cash and equivalents were $5.4 billion.
Credit concerns center on the company's policy of relatively aggressive shareholder distributions (with 20%-25% of cash flow from operations earmarked for shareholder distributions); the longer-term trend of declines in COP's production (Q3 '14 production of 1.48 million boepd versus over 2 million boepd in 2010); and the potential need to undertake additional measures to address funding gaps given the recent deterioration in oil prices.
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 Have Filled the Gap
COP has historically 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 approximately $20.1 billion in shares (although since 2012 it has not bought back shares), and paid down approximately $7.7 billion in debt. Looking forward, Fitch expects 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.
Solid Financial Performance
COP's latest 12 months (LTM) financial performance was reasonable. As calculated by Fitch, on a consolidated basis debt/EBITDA leverage at June 30, 2014 was approximately 1.02x and EBITDA/interest coverage was 15.6x. COP's free cash flow was
-$2.42 billion, a modest improvement from the prior year's -$2.78 billion, and was comprised of cash flow from operations (including discontinued operations) of $17.57 billion, minus capex of $16.58 billion and common dividends of $3.42 billion.
As calculated by Fitch, the company had consolidated debt/boe 1p reserves of $3.19/boe, debt/boe PD reserves of $4.37, and debt/flowing barrel of $15,937/barrel at June 30, 2014, levels that are consistent with the current rating.
ConocoPhillips' liquidity is robust. At Sept. 30, 2014, the company had cash and equivalents of $5.408 billion; marketable securities of $374 million; and availability of 88% ($6.14 billion) on its senior unsecured $7 billion revolver after backing out CP usage of $860 million. COP's revolver matures in 2019 and backstops the company's two commercial paper programs, ConocoPhillips CP and ConocoPhillips Qatar Funding.
There are no financial covenants on the company's revolver or unsecured debt, but the revolver does contain a cross default provision for COP and its consolidated subsidiary debt exceeding $200 million. Near-term debt maturities are light.
COP's other obligations are manageable. The pension liability for its U.S. 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.
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 currently rates Conoco as follows:
--Issuer Default Rating (IDR) 'A';
--Senior unsecured notes 'A';
--Bank revolver 'A';
--CP program 'F1';
--Short-term IDR 'F1'.
ConocoPhillips Qatar Funding
--Short-term IDR 'F1'
--Senior Unsecured 'A'.
Polar Tankers, Inc.
--Senior Unsecured Notes 'A'.
--Senior notes 'A'.
ConocoPhillips Canada Funding Company I
--Senior Unsecured 'A'.
ConocoPhillips Canada Funding Company II
--Senior Unsecured 'A'.
The Rating Outlook is Stable.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Shale and North American Energy (European Investor Tour)' 23 October, 2014;
--'Full Cycle Costs for North American E&P (Production Costs Moderate in 2013)' (July 30, 2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16, 2014);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'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).