Morningstar DBRS Confirms Ratings on ConocoPhillips at “A” with Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed ConocoPhillips’ (Conoco or the Company) Issuer Rating at "A" with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The confirmation and Stable trend reflect Morningstar DBRS’ view that no material changes to Conoco’s credit fundamentals are expected in the near term. The Issuer rating is based on Conoco's (1) superior size as one of the world's largest independent exploration and production (E&P) companies; (2) large, low-cost oil and gas resource base; (3) geographically diversified assets; and (4) operating and capital flexibility. The key business risk factors affecting the rating include a (1) relatively high sensitivity to commodity price fluctuations; (2) large planned return of cash to shareholders; and (3) relatively high production decline rate related to short-cycle assets held in the lower 48 states (the Lower 48).

CREDIT RATING DRIVERS
Morningstar DBRS does not expect to take a positive credit rating action in the near term. However, Morningstar DBRS may consider an upgrade if, in combination with a strengthening in Conoco’s business risk profile, the Company reduces gross debt and improves its lease-adjusted debt-to-cash flow ratio to consistently at or below 1.00x. Conversely, Morningstar DBRS may consider a negative credit rating action if oil and gas prices, Conoco’s operating performance, and credit metrics materially weaken for an extended period.

EARNINGS OUTLOOK
Looking ahead, Conoco expects a 5.5% increase in production to 1.93 million barrels per day (boe/d) in 2024 (midpoint of its guidance) from 1.83 million boe/d reported in 2023. The forecast increase in production will largely be driven by organic growth from ongoing efficiency gains in the Lower 48; organic growth at Surmont in Canada and the incremental addition of the remaining 50% interest there, purchased in October 2023; increasing production from subsea tiebacks in Norway; and growth in output from the Montney play in Canada. However, we forecast Conoco’s consolidated revenue to sequentially decline by 3%-4% to between $53 billion and $55 billion and for the EBITDA margin to modestly decline to 38% in 2024. The increase in annual production and reduction in unit operating costs Morningstar DBRS incorporates for 2024 are offset by a lower crude oil price assumption. Our base-case commodity price assumptions can be found in Morningstar DBRS’ commentary, “Oil and Gas Outlook: Slowing Economies and War are Driving Prices and Could Potentially Impact Credit Risk Profiles in 2024” dated January 17, 2024.

FINANCIAL OUTLOOK
Conoco’s 2024 total capital expenditure guidance is $11.0 billion to $11.5 billion. Based on its base-case commodity price assumptions, Morningstar DBRS forecasts Conoco to generate significant free cash flow (i.e., cash flow after capex and dividends) surpluses in 2024 and 2025. At December 31, 2023, total debt was $18.9 billion. While Conoco is expected to allocate a majority of the free cash flow surplus to share repurchases, Morningstar DBRS expects the Company to make gradual progress towards its long-term total debt target of $15 billion. The Company’s liquidity position is adequately supported by cash and short-term investments totaling $6.6 billion at year-end 2023 and a $5.5 billion revolving credit facility, which was undrawn at December 31, 2023.

CREDIT RATING RATIONALE
For the past several years, Conoco has continuously worked to high-grade its global resource portfolio by focusing on cost of supply. As a result, Conoco currently controls a large, geographically diversified, low-cost resource base with a leading unconventional position in the Lower 48, including the Permian Basin, Eagle Ford Shale, and Bakken Shale.

This confirmation follows several of Conoco’s operational and development accomplishments in 2023, including the acquisition of the remaining 50% interest in the Surmont oil sands project in Alberta, well-known to Conoco as operator; achieving first production on other projects in Norway, Canada, and China; and progressing its LNG strategy with expansion in Qatar, advancement of the Port Arthur LNG export project, and securing re-gas agreements in the Netherlands and offtake agreements in Mexico, among others.

Morningstar DBRS expects Conoco to maintain a lease-adjusted debt-to-cash flow ratio between 1.0 times (x) and 1.5x, commensurate with the "A" rating range and underpinning the Stable trend. The Company’s liquidity position should remain strong, with committed credit facilities totaling $5.5 billion forecast to remain largely undrawn through the forecast period.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Conoco. This factor is relevant because ever-increasing environmental regulations targeting the reduction of GHG emissions will likely limit the growth potential and add costs for all oil and gas companies. Conoco’s balance sheet strength and ongoing emission reduction initiatives provide it with the financial flexibility to navigate the energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of Conoco, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of Conoco, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of Conoco, the BRA carries greater weight than the FRA.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (August 16, 2023; https://dbrs.morningstar.com/research/419228)

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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