Fitch lowers Conoco's unsecured rating on Gulf Acquisition

Rating firm Fitch on Tuesday has downgraded the unsecured debt ratings of Conoco, Inc. to `BBB+' from `A-` after the closing of its acquisition of Gulf Canada Resources, Limited. Fitch has also affirmed Conoco's commercial paper rating of `F2'. In addition, Fitch has assigned a rating of `BBB' to the Gulf Canada senior notes, a rating of `BBB-` to the Gulf Canada senior subordinated debentures, and a rating of `BB+' to the Gulf Canada preferred stock. The Rating Outlook for Conoco is Stable.

The downgrade results from the additional leverage Conoco has incurred in connection with the acquisition. The transaction, valued at nearly $6.3 billion, is being initially financed with approximately $4 billion of bank debt, the assumption of approximately $1.6 billion in Gulf Canada debt as well as the assumption of $385 million in Gulf Canada preferred stock and $170 million of minority interests. Resultantly, Conoco's debt rises to approximately $10 billion from approximately $4.4 billion. After making adjustments for off-balance-sheet items such as operating leases, Conoco's adjusted debt-to-capital is now greater than 60%.

While debt repayment is expected over the next year and a half through free cash flow and potential asset sales, the firm's pace of debt reduction is dependent upon hydrocarbon prices. Assuming current strip prices, Conoco's adjusted debt-to-capital will likely be above 50% until at least 2003. Interest coverages should, however, remain fairly strong. In 2002, coverages, as measured by EBITDA-to- interest, should remain at or above 6 times (x) even in a `midcycle' pricing environment.

As a result of the transaction, Conoco's proved reserves rise to 3.7 billion barrels of oil equivalent (boe) from 2.7 boe and the company's reserve life remains over 11 years. The company's production is now approximately 915,000 boe per day split 55% oil and 45% natural gas, with more than 75% coming from North America and Europe. Operationally, the acquisition provides Conoco with a larger portfolio of longer-term exploration and development projects, particularly in Canada and Southeast Asia. Conoco now has 4 million acres of undeveloped acreage in western Canada and the Mackenzie Delta. Southeast Asia is now Conoco's fourth core area with the addition of Gulf Canada's 72% interest in Gulf Indonesia Resources, Ltd. In Southeast Asia. Conoco's reserves will more than double to 365 million boe and its production will more than triple.

Conoco, Inc. is a major integrated energy company active in more than 40 countries worldwide. (*)