OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to ConocoPhillips' $1.6 billion senior unsecured term loan. The term loan, which matures in March 2019,
will be guaranteed by ConocoPhillips Company (Issuer Default Rating 'A-'/Negative Outlook). Net proceeds from the issuance will be used for general corporate purposes. See the full list of ratings at the end of this release.

KEY RATING DRIVERS

The main driver of Fitch's recent downgrade of ConocoPhillips (COP) was the downward revision of our energy price deck on February 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 YE2015 rose to 3.0x versus 1.2x the year prior. Gross debt over the same period (and excluding recent issuance) rose by approximately $2.3 billion, primarily due to the company's 2015 debt issuance. As calculated by Fitch, COP's free cash flow (FCF) at YE2015 weakened to -$6.24 billion, and comprised 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 dividend 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 YE2015.

SIZE AND SCALE

ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent E&P company following the spin-off of Phillips 66 (PSX). COP's 2015 production was 1.589 million boepd, which represents production growth of 5% 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 has 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 (liquid natural 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.

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 forgo 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 Sands in Canada.

Recently, COP announced a 66% cut in its dividend, from 74 cts/share to 25 cts/share, freeing up about $2.4 billion in cash flow per year. We believe the company had 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 (4.0%) 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 remove the Negative Outlook at 'A-':
--Midcycle debt/EBITDA below approximately 2.5x, 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 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 YE2015, 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 commercial paper (CP) from the company's Qatar CP program. COP's revolver matures in June 2019 and backstops the company's two CP 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; however, the three-year term loan includes a 65% debt-to-capitalization ratio. Other covenant restrictions are light and include a negative pledge (with carveouts), 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 (i.e. FV assets-pension benefit obligation) edged up to ($1.16 billion) at YE2015 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.

ConocoPhillips' ratings are as follows:

ConocoPhillips
--Long-term IDR 'A-';
--Senior unsecured notes 'A-';
--Bank revolver 'A-';
--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 Outlook is Negative