The Long and Short

ConocoPhillips tweaks its capital structure

Meredith Contente | February 25, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

ConocoPhillips has recently announced both a $3.0 billion exchange offer and a $1.8 billion tender offer, and the premium for early participation looks attractive. The company is using a standard $30 early participation premium for both and has made the tender premiums most attractive for the company’s highest priorities. Investors who want to participate in either should submit bonds before the early participation deadline on March 7 at 5 pm ET as neither the tender nor the exchange are particularly attractive without the early tender premium.

The company is using both offers to extend its maturity profile while reducing interest expense ahead of the Fed rate hikes. The exchange is targeting debt with coupons higher than 5%, while the tender is looking to tackle some maturity walls in 2027 and 2028 while targeting legacy Concho Resources Inc. (CXO) debt that was exchanged back in December 2020 (Exhibit 1).

Exhibit 1. COP Exchange Offers

Source: Company Press Release, Amherst Pierpont Securities

Understanding The Exchange

The exchange is broken into two pools with Pool 1 targeting maturities in the back end of the curve and Pool 2 targeting intermediate bonds. The tender caps are $2.0 billion and $1.0 billion, respectively, as noted in Exhibit 1. Any holder participating in the exchange by the Early Participation deadline (3/7/22) will receive one new bond ($1,000 notional which includes the $30 Early Participation payment) as well as cash payment in the amount of the current trading premium on the old notes. At time of the announcement, all of the bonds targeted in the exchange were trading roughly 30% above par. Pool 1 participants will receive a new 2062 bond while Pool 2 participants will receive a 2042 bond. All new notes issued will be guaranteed by the parent ConocoPhillips and rank pari passu with existing debt.

Those who participate after the Early Participation deadline will not receive the full $1,000 notional of new bonds, as you must subtract the early $30 participation payment. Again, a reason why we believe it behooves investors that would like to participate to get in before the Early Participation deadline expires. It presents for a much cleaner exchange for existing holders.

Exhibit 2: COP tender offer

*Tender spread includes $30 per $1,000 notional Early Tender Payment
Source: Company Reports; APS

Tender Premiums Go Away Post Early Participation Deadline

While the tender premiums are relatively attractive, especially for the first six priorities, we note that they completely disappear after the Early Participation deadline as the tender spreads include the $30 Early Participation premium. That means that after the March 7 deadline, holders who participate in the tender would need to subtract three points from the bond price. For example, based on current treasuries, the bond price of Priority 1 at a 55 bp spread is $106.93. After the March 7 deadline, that price would be $103.93, which equates to roughly a 114 bp spread. At a 114bps spread, we note that is approximately 27 bp wider than where the bond was trading at the tender announcement. That said, the tender actually makes no sense for holders post the Early Participation deadline.

S&P and Fitch Affirm Ratings

S&P and Fitch both affirmed COP’s ratings and stable outlooks on the new issue and exchange/tender announcements. The agencies note that their ratings reflect the company’s scale and diversified low cost-portfolio coupled with its relatively low debt balances. COP is in the process of reducing $5 billion of debt through 2025, which will help to address maturity walls. As we noted earlier, the tender is also targeting maturity walls in 2027 and 2028. Furthermore, the company’s recent Concho and Shell Permian acquisitions were considered to be credit friendly transactions as the Concho deal (completed 1/19/21) was all-stock while the Permian Shell assets (completed 12/1/21) were funded with cash on hand.

Moody’s Maintains a Positive Outlook

While Moody’s did not issue a press release on the new issue, we note that they currently maintain a positive outlook on their A3 rating. Moody’s moved to a positive outlook in October 2021, post the two aforementioned acquisitions given the substantial improvement to COP’s scale. Additionally, Moody’s noted that the acquisitions further help COP to achieve it long-term goal of maintaining a high-grade asset base with a low cost of supply. Furthermore, they help to reduce carbon transition risks while aiming to deliver more competitive returns throughout cycles. Moody’s views COP’s balance sheet as strong and the tender and exchange offers will further bolster its balance sheet. COP’s financial policies are considered conservative as the company has demonstrated its willingness to fund growth transactions with stock and cash on hand.

While a positive outlook is not the same as a review for upgrade, Moody’s has noted that COP’s ratings could be upgraded if the company can continue to improve leverage with a retained cash flow/debt ratio above 70%. Cash on hand is expected to remain well above needs to ensure strong liquidity throughout economic cycles. We note that COP ended the most recent quarter with $5.5 billion of cash on hand. Street estimates put fiscal 2022 free cash flow at $14.6 billion, which equate to roughly $12.0 billion after dividends. Additionally, liquidity is supported by an untapped $6.0 billion revolver.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.