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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed ConocoPhillips' (COP) Issuer Default Rating (IDR) and associated ratings at 'A', as well as the company's short-term IDR and commercial paper (CP) ratings at 'F1'. In addition the ratings have been removed from Rating Watch Negative and assigned a Stable Outlook given the expected completion of the tax-free spin-off of Phillips 66 (NYSE:PSX). See the full list of rating actions at the end of this release.

This rating action affects approximately $22.6 billion of debt.

Ratings Rationale: ConocoPhillips' ratings reflect the company's size and scale as the largest North American independent (1.6 million barrels of oil equivalent per day [boepd]) following the expected spin-off of PSX; planned debt reductions which should reduce COP's stand-alone debt to $18 billion from $22.6 billion at YE 2011; and additional reductions in other key liabilities for COP following the spin-off, including substantial reductions in equity affiliate debt, net pension liabilities, 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 was comprised of liquids), and ample expected post-spin liquidity.

Credit concerns center on the loss of earnings diversification following the spin-off; the company's more aggressive financial policy (with 20%-25% of cash flow from operations earmarked for dividends and share buybacks) which is likely to reduce financial flexibility in a period of sustained lower oil prices; the need to execute on the plan to raise $/boe margins; and over the longer term, potential pressure on COP to compete with faster-growing large independents by raising reserve and production growth, which could increase free cash flow (FCF) pressures.

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 Dec. 31, 2011, COP's FCF was $2.75 billion. Fitch anticipates the company will be modestly FCF negative in 2012 using base case assumptions ($87.50/boe WTI, $3.25/mcf natural gas).

Liquidity: ConocoPhillips' liquidity remains good. Near-term debt maturities include $897 million due 2012, $1.25 billion due 2013, and $1.5 billion due 2014. The company recently renewed its main $7.5 billion unsecured revolver to 2016 and retains access to its separate $500 million revolver until July 2012.

COP's credit facilities are used to backstop the company's $6.35 billion CP program.

Covenant restrictions are light, and include a change in control provision, limitations on asset sales, and no financial covenants. A separate $1.5 billion Qatar Funding CP program is a carve-out of the main revolver. As of Dec. 31, 2011, availability across all facilities was approximately $6.83 billion.

Other Liabilities: COP's other obligations are manageable, and in a number of cases are expected to decline post-spin-off as a portion of liabilities migrates to Phillip 66. The company's net pension liability (FV assets-Pension Benefit Obligation) is expected to drop to less than $2 billion, versus a pre-spin net liability of $2.78 billion. COP is similarly expected to see reductions in environmental liabilities and legal liabilities. Most of COP's equity affiliate debt will migrate to PSX as well following the split. Cross-indemnification agreements will exist between COP and PSX following the separation.

Catalysts: Catalysts for an upgrade are limited and include long-term adoption of a more conservative financial policy on a sustained basis. An upgrade is unlikely in the near term given the company's reduced business diversification and the need to see how COP's strategic plan pans out. Catalysts for negative rating actions include higher leverage stemming from an inability to fund capex and dividends because of lower oil prices, or operational issues. Fitch would note that the current rating is dependent on strong oil prices given relatively high projected capex and dividends, and there is less headroom at the 'A' level following the split.

Fitch has affirmed the following:

ConocoPhillips
--Issuer Default Rating (IDR) at 'A';
--Senior unsecured notes at 'A';
--Bank revolver at 'A';
--CP program at 'F1';
--Short-term IDR at 'F1'.

ConocoPhillips Qatar Funding
--CP at 'F1'.
--ST IDR at 'F1'

Burlington Resources
--Senior Unsecured at 'A'.

Polar Tankers, Inc.
--IDR at 'A'.
--Senior Unsecured Notes at 'A'

ConocoPhillips Co.
--IDR at 'A';
--Senior notes at 'A'.

ConocoPhillips Canada Funding Company I
--IDR at 'A';
--Senior Unsecured at 'A'.

ConocoPhillips Canada Funding Company II
--IDR at 'A';
--Senior Unsecured at 'A'.

Additional information is available at [ www.fitchratings.com ]. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Updating Fitch's Oil & Gas Price Deck' (Feb. 6, 2012);
--Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow Stress (Feb 29, 2012)
--'2012 Outlook: North American Oil & Gas' (Dec. 16, 2011);
--'2012 Outlook: Midstream Services' (Dec. 7 2011);
--'Liquids Rich Shale Boom--A Tailwind for North American Chemicals' (April 18, 2011);
--'Integrated and Upstream Oil & Gas Companies - Sector Credit Factor Compendium' (March 25, 2011).

Applicable Criteria and Related Research:
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=672197 ]
Updating Fitch's Oil & Gas Price Deck -- Midyear Update
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648586 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Integrated and Upstream Oil and Gas Companies: Sector Credit Factor Compendium
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610352 ]
Liquids-Rich Shale Boom -- A Tailwind for North American Chemicals
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=619445 ]
2012 Outlook: Midstream Services
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659211 ]
2012 Outlook: North American Oil & Gas
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=660649 ]

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