Fitch Ratings has placed ConocoPhillip's (COP) Issuer Default Rating (IDR) on Rating Watch Negative following today's announcement of a planned separation into an upstream and downstream company in a tax-free spin-off. ConocoPhillips' debt is currently rated as follows:
ConocoPhillips
--Issuer Default Rating (IDR) 'A';
--Senior unsecured notes 'A';
--Bank revolver 'A';
--CP program 'F1';
--Short-term IDR 'F1'.
ConocoPhillips Qatar Funding
--CP 'F1';
--ST IDR 'F1'
Burlington Resources
--Senior Unsecured 'A'.
Polar Tankers, Inc.
--IDR 'A';
--Senior Unsecured Notes 'A'
ConocoPhillips Co.
--IDR 'A';
--Senior notes 'A'.
ConocoPhillips Canada Funding Company I
--IDR 'A';
--Senior Unsecured 'A'.
ConocoPhillips Canada Funding Company II
--IDR 'A';
--Senior Unsecured 'A'.
This rating action affects approximately $23.2 billion of debt.
Ratings Rationale:
The main drivers for the Rating Watch Negative include: the loss of earnings diversification following the expected spin-off of the company's downstream assets into a separate company; the free cash flow pressures that could arise as a result of maintaining current levels of dividend payouts and share buybacks at COP despite the company's smaller asset and earnings footprint going forward; and, over the longer term, potential pressure on COP as a large independent E&P company to increase its capex or make upstream acquisitions in order to compete with faster-growing large independents such as Apache Corporation (rated 'A-' with a Negative Outlook by Fitch) and Occidental Petroleum (rated 'A' with a Stable Outlook).
These concerns are balanced by ConocoPhillips' size and scale; its high leverage to liquids in the upstream (approximately 51.5% of 2010 consolidated production was comprised of oil and natural gas liguid [NGLs]); and recent debt reduction efforts, which in turn have been driven by the recent shift in the company's strategy toward higher returns and organic growth.
At March 31, 2011, COP's total debt had dropped to $23.2 billion from a high of just under $30.5 billion in the third quarter of 2009, and its debt-to-capital ratio declined to the top end of the company's preferred 20%-25% range. Including cash on the balance sheet of approximately $6.17 billion and short-term investments of $2.23 billion, net debt was just $14.81 billion. As calculated by Fitch, LTM debt/EBITDA leverage was 0.94 times (x), EBITDA/gross interest coverage was 15.3x, and free cash flow (FCF) was $2 billion, comprised of cash flow from operations of $15.95 billion, capex of $10.57 billion, and common dividends of $3.38 billion. Share repurchases totaled $5.3 billion.
ConocoPhillips' liquidity remains good. Near-term debt maturities include $500 million due in 2011, $897 million due 2012, and $1.25 billion due 2013. The company has $7.85 billion in revolver capacity, consisting of its main $7.35 billion facility expiring September 2012, and a separate $500 million three-year facility expiring in July 2012. COP's credit facilities are used to backstop the company's $6.35 billion commercial paper (CP) program. Covenant restrictions are light, and include a change in control provision, limitations on asset sales, and no financial covenants. Note that a separate $1.5 billion Qatar Funding CP program is a carve-out of the main revolver; therefore COP's CP program is 100% backstopped. As of March 31, 2011, there were no direct borrowings on the revolvers but revolver capacity was used to support $1.16 billion in CP and $40 million in letters of credit, indicating remaining availability of approximately $6.7 billion.
COP's other obligations are manageable. The company's Asset Retirement Obligation, which was primarily linked to upstream well-plugging and environmental remediation, was $9.45 billion at March 31, 2011, while the funding deficit for ConocoPhillips' pension (FV Pension Assets - PBO) for U.S. and international pensions stood at -$2.26 billion at Dec. 31, 2010, versus -$2.72 billion the year prior.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'2011 Outlook: North American Exploration & Production' (Dec. 16, 2010);
--'2011 Outlook: North American Refining' (Dec. 16, 2010);
--'Liquids Rich Shale Boom--A Tailwind for North American Chemicals' (April 18, 2011)
--'US Oil & Gas Stats Quarterly--Fourth Quarter 2010' (April 25, 2011);
--'Political Turmoil in North Africa and the Middle East', (Feb. 25, 2011).
Additional information is available at 'www.fitchratings.com'
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 16, 2010);
--'2011 Outlook: North American Exploration & Production' (Dec. 16, 2010);
--'2011 Outlook: North American Refining' (Dec. 16, 2010);
--'Liquids Rich Shale Boom--A Tailwind for North American Chemicals' (April 18, 2011)
--'US Oil & Gas Stats Quarterly--Fourth Quarter 2010' (April 25, 2011);
--'Political Turmoil in North Africa and the Middle East', (Feb. 25, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
2011 Outlook: North American Refining
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578945
2011 Outlook: North American Oil & Gas Exploration and Production
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=587586
U.S. Oil & Gas Stats Quarterly -- Fourth-Quarter 2010
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=621149
Political Turmoil in North Africa and the Middle East (Implications for North American Upstream Companies)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=608025
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Contacts:
Fitch Ratings
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Mark C. Sadeghian, CFA,
+1-312-368-2090
Senior Director
Fitch, Inc.
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Street
Chicago, IL 60602
or
Secondary Analyst
Sean
T. Sexton, CFA, +1-312-368-3130
Managing Director
or
Committee
Chairperson
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Senior Director
or
Media
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