Fitch Rates ConocoPhillips' Unsecured Notes Issuance 'A'Fitch RatingsNewsRx.com
By a News Reporter-Staff News Editor at Investment Weekly News -- Fitch Ratings has assigned an 'A' to ConocoPhillip's (COP) proposed issuance of senior unsecured notes. Net proceeds from the issuance will be used for general corporate purposes, including the repayment of commercial paper (CP) borrowings, which stood at approximately $1.54 billion at Sept. 30, 2012.
The notes, which will be issued by ConocoPhillips Company, are guaranteed by parent ConocoPhillips, and will rank pari passu with ConocoPhillips' other senior unsecured obligations.
A full list of ratings follows at the end of this release.
Ratings Rationale: ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent (1.54 million barrels of oil equivalent per day [boepd] at Sept. 30, 2012); meaningful debt reductions made since the spin-off of Phillips 66; decreases in other key liabilities following the spin-off, including substantial reductions in equity affiliate debt, net pension liabilities, and environmental and legal liabilities; and lower operating lease expense. The ratings are also supported by the company's high leverage to liquids in the upstream (approximately 54% of 2011 consolidated production and 57% of consolidated reserves), and ample liquidity.
Credit concerns center on COP's relatively aggressive financial policy (with 20% - 25% of cash flow from operations earmarked for dividends and share buybacks) which lowers financial flexibility, particularly in a period of sustained lower oil prices; the reliance on asset sales to bridge interim funding gaps, including the current $8 - $10 billion asset sales program; the need to execute on the plan to raise $/boe margins and volumes; and over the longer term, potential pressure to compete with faster-growing large independents by raising reserve and production growth.
Strategic Repositioning: COP's plan to pursue lower growth, higher-profit barrels centers on raising cash margins on production by 3% - 5%, in addition to 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.
While Fitch believes these payout levels are achievable under base case assumptions, it is also anticipated that dividends are unlikely to be cut in the event of a sustained downturn given the stock's repositioning as a stronger dividend payer. As a result, there is less financial flexibility at the 'A' level. Reviewing dividend payouts against peers, COP had the highest payout as a percent of cash flow from operations of any peer at Dec. 31, 2011 (18%), versus XOM (16%), CVX (15%), OXY (12%), DVN (4%), and APA (2%).
Upstream Performance: COP's 2011 operational metrics were solid. As calculated by Fitch, COP's consolidated proven reserves grew by 0.9% (1.4% on a consolidated basis) to 8.39 billion boe from 8.31 billion boe, driven primarily by additions in the Lower 48, Alaska, and sanctioning of North Sea projects on the liquids side, and partially offset by a net decline in natural gas reserves. Consolidated reserve replacement was 117% on an all-in basis and 121% on an organic basis. COP's one-year finding, development and acquisition costs (FD&A) rose modestly to $16.94/boe. For the latest 12-month (LTM) period ending Sept. 30, 2012, COP's FCF was -$2.87 billion, driven by a combination of higher capex and weaker cash flow from operations. Fitch anticipates the company will be moderately FCF negative in 2013.
Liquidity: ConocoPhillips' liquidity remains good. At Sept. 30, 2012, COP had $6.0 billion in availability on its $7.5 billion revolving credit facility due 2016 after $1.54 billion in commercial paper outstanding. Cash and equivalents were $1.27 billion at Sept. 30, 2012, which excludes $2.5 billion in restricted cash from the Phillips 66 distribution. ConocoPhillips' near-term debt maturities are manageable and include $850 million due in April 2013, $400 million due 2014, and approximately $1.5 billion due 2015. COP's credit facility is used to backstop the company's main $6.35 billion CP program and $1.15 billion ConocoPhillips Qatar Funding Ltd CP program. The Qatar Funding CP program is a carve-out of the main revolver. Covenant restrictions are light, and include a change in control provision, limitations on asset sales, and no financial covenants.
Other Liabilities: COP's other obligations are manageable. Upon the separation with PSX, COP's pension plan saw a net decrease in sponsored pension plan obligations of $1.13 billion. The company plans to make contributions to all pension plans of $620 million in 2012, of which $419 million had been made as of Sept. 30, 2012. COP's environmental accruals were $380 million, versus $922 million seen pre-separation at YE 2011. Cross-indemnification agreements exist between COP and PSX following the separation for a range of liabilities.
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