Fitch Revises ConocoPhillips' Outlook to Positive
Fitch Ratings has affirmed the debt ratings and issuer default ratings (IDR) of ConocoPhillips and ConocoPhillips Company. ConocoPhillips Company is the operating company for ConocoPhillips. In addition, Fitch has revised the Rating Outlooks on ConocoPhillips and ConocoPhillips Company to Positive.
The revision in Outlooks reflects the continued debt reduction the company has made during the past couple of years, as well as the significant free cash flow the company has generated and largely reinvested in its businesses. At the end of the third quarter, ConocoPhillips had balance sheet debt of approximately $13.5 billion, down from $20 billion at the end of 2002, which was shortly after Conoco Inc. and Phillips Petroleum merged to form ConocoPhillips. The company's debt reduction efforts coupled with its robust capital expenditure program has continued to improve ConocoPhillips' credit profile. Currently, the company's credit metrics are quite robust, given strong upstream and downstream margins. Both adjusted and unadjusted debt to EBITDA is currently under 1 times (x) and interest coverage, as measured by EBITDA/interest, is above 20x. Adjusted debt/capital is now well under 30%, down from 31% at the end of 2004. In a much lower commodity price environment (i.e. $25 WTI and $3.50 Henry Hub), ConocoPhillips' credit metrics would still be relatively strong with unadjusted debt/EBITDA of around 1x and interest coverages above 10x.
The company's current ratings are supported by its competitive position as a large, vertically integrated company in the global oil and gas industry and its moderately levered balance sheet. ConocoPhillips is the sixth largest publicly owned integrated oil and gas company in the world in terms of reserves and production. Globally, it ranks fifth in refining capacity. Over 70% of the company's consolidated upstream production is in stable Organization of Economic Cooperation and Development (OECD) countries, primarily North America and the North Sea. Including equity affiliates, proved reserves were approximately 8.5 billion barrels of oil equivalent (boe) at year-end 2004, with daily production amounting to approximately 1.6 million boe which results in a reserve life of nearly 15 years. Downstream, ConocoPhillips has refining capacity of 2.6 million barrels per day and markets through over 16,000 retail sites worldwide. The company now owns 50% of Duke Energy Field Services, which is a midstream company in the U.S. that gathers, processes, and markets natural gas and natural gas liquids. ConocoPhillips also owns 50% of ChevronPhillips Chemicals.
Offsetting risk factors include the company's investment in politically riskier countries, notably Venezuela and Russia. Approximately 17% of the company's reserve base is located in Venezuela although production in that country accounts for only approximately 7% of the company's overall production. In Russia, the company's 14.8% interest in LUKOIL makes up approximately 16% of the company's proven reserve base presently.
Fitch affirms the following ratings with a Positive Outlook:
- IDR 'A-';
- Senior unsecured notes 'A-';
- Junior subordinated debentures 'BBB+';
- USD CP program 'F2'.
- EUR CP program 'F2'.
- IDR 'A-';
- Senior unsecured notes 'A-'.
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