Fitch Ratings has affirmed Occidental Petroleum Corporation's (NYSE:
OXY) ratings as follows:
--Issuer Default Rating (IDR) at 'A';
--Senior Unsecured Revolver at 'A';
--Senior Unsecured Notes at 'A';
--Commercial paper at 'F1';
--Short-term IDR at 'F1'.
The Rating Outlook is Stable. Approximately $6.88 billion in debt is
affected by this rating action.
Key Ratings Drivers:
OXY's ratings reflect the company's large size, strong operational track
record, diverse resource base, significant exposure to liquids
(approximately 73% of 2013 production and reserves), historically robust
cash flow, and low debt levels. The company also enjoys modest
integration benefits from its chemicals and midstream segment, and low
geological risk, stemming from its enhanced oil recovery (EOR) strategy.
Credit Concerns:
Credit concerns center on what OXY's ultimate reserve and production
profile will be following the company's restructuring. Assets sold to
date include Hugoton E&P assets ($1.4 billion) and a 10% stake in Plains
Pipeline ($1.3 billion). The company also expects to receive a large
dividend from the pending spin-off of California Resources Corporation
(CRC), as well as proceeds from the sale of a stake in its Middle East
and North Africa (MENA) portfolio. Other credit concerns center on the
need for periodic property acquisitions as part of the company's EOR
model, and transparency issues associated with commodities trader Phibro.
Size and Timing of MENA Stake Uncertain:
Significant uncertainties remain as to the size and timing of the sale
of a stake in OXY's MENA portfolio. OXY's MENA assets are split across
seven countries - Iraq, Libya, Bahrain, Qatar, UAE, Oman and Yemen.
Fitch believes that the complexity of selling a multi-country portfolio
of assets, including the need to coordinate among multiple host
governments, makes the sale of a large stake in MENA less likely in the
near term. The most recent comparable asset sale in the region, Apache
Corporation's sale of a stake in its Egypt business in 2013 to Sinopec,
was limited to a 33% stake.
Fitch ran a number of scenarios to capture what OXY might look like
post-restructuring. These cases included the sale of MidContinent
assets, sale of additional stakes in Plains Pipeline (PAA), the spin-off
of CRC, and the sale of a minority stake in MENA portfolio ranging from
0%-49%. Under our most likely (base case) scenario, which assumed a 20%
MENA sale, OXY's credit metrics look reasonable for the 'A' category -
debt/EBITDA never climbs above 0.8x, debt/1p never rises above $2.65/1p,
and debt/flowing barrel does not exceed $13,000/barrel. As a result,
Fitch's Outlook for OXY remains Stable. Most other cases also looked
reasonable, although metrics do appear somewhat stretched for the rating
category as the MENA sale approached the upper end of the range,
indicating the possibility of rating pressure at that point.
The Stable Outlook is also supported by the significant amount of
headroom OXY had at the 'A' level prior to the restructuring, and by
projects coming online which should help make up for lost cash flow
associated with asset sales, including the Al Hosn gas project (200MM
cf/d of natural gas and 20,000 bpd liquids net to Oxy); the BridgeTex
pipeline (300,000 bpd, including 2.6 million barrels of storage); and a
new 182,500 tons per year chlor alki plant at OxyChem.
Recent Financial Performance:
OXY's latest 12 months (LTM) financial performance was strong, prompted
by high oil prices. As calculated by Fitch, for the period ending March
31, 2014, OXY generated EBITDA of $14.5 billion and had total debt of
$6.88 billion, resulting in debt/EBITDA leverage of just 0.5 times (x),
EBITDA/gross interest coverage of 55.1x, and FFO-interest coverage of
50.6x. OXY's free cash flow improved as well, at $1.61 billion,
comprised of cash flow from operations of $12.97 billion minus capex of
$9.24 billion and dividends of $2.7 billion. In Fitch's base case, OXY's
FCF is expected to be muted in 2014 and 2015, driven by the loss of
earnings power from asset sales and spun off California assets. Fitch
then expects FCF to improve as production steps up.
Upstream Performance:
OXY's 2013 operational metrics were good. Total proven reserves rose by
approximately 5.7% from 3.296 billion boe to 3.48 billion boe. As
calculated by Fitch, Oxy's 2013 organic and all-in reserve replacement
ratios (RRR) were a solid 155% and 166%. The main source of gains was
operating additions, with a small amount of purchased reserves. 2013
full cycle netbacks as calculated by Fitch were respectable at
$21.38/boe, while one year FD&A came in at an economical $16.43/boe
Liquidity:
OXY's liquidity is robust. Cash on hand at March 31, 2014 was $2.33
billion, and the company's $2 billion credit facility (maturing 2016)
remained untapped. Covenant restrictions on the revolver are light and
exclude MAC clauses or ratings triggers. The revolver also has a $1
billion sub limit for Letters of Credit (LCs). Near-term maturities are
light and include nothing due in 2014 or 2015, and $1.45 billion due
2016, comprised of $750 million of 4.125% notes and $700 million of 2.5%
notes.
Other Liabilities:
OXY's other obligations are manageable. The company's 2013 Asset
Retirement Obligation (ARO) increased to $1.332 billion from $1.266
billion the year prior. Approximately $415 million of this is expected
to migrate to CRC following the spin-off.
Total rental expense in 2013 was $204 million and was primarily linked
to leases for transportation equipment, power plants, machinery,
terminals, office space, storage facilities, and land. Environmental
reserves declined to $330 million at year-end 2013 and covered probable
remediation costs at 157 sites. OXY's pension plans were overfunded by
15 million at YE 2013, versus being underfunded by $116 million the year
prior. OXY expects to contribute $6 million to its defined pension plans
in 2014.
Ratings Sensitivities:
Positive: Future developments that may, individually or collectively,
lead to positive rating action include:
--Sustained lower debt levels (debt/boe 1p < $2.00- $2.50), increased
size and scale, and evidence the company will maintain a more
conservative financial policy after the restructuring. Fitch does not
anticipate any positive rating actions in the near term given the
uncertainties surrounding the company's restructuring.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Larger than expected asset sales program without offsetting
adjustments (e.g. selling more than a minority stake in MENA);
--Debt/boe 1p> $3.00-$3.25/boe, and debt/flowing barrel>$14,000;
--A sustained collapse in crude prices without offsetting adjustments to
the capital program.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Full Cycle Costs for North American E&P (Production Costs Moderate in
2013)' (July 30, 2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16, 2014);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent
and Subsidiary Linkage' (May 28, 2014);
--'Global Impact of US Shale Oil - Rising Production Tempers World
Prices' (Feb. 10, 2014);
--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism
Having an Impact' (Feb. 4, 2014);
--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=846355
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