Moody's Affirms Ratings, Outlook on Occidental Petroleum (OXY) Following Recent Asset Purchases

November 2, 2016 2:19 PM EDT

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Moody's Investors Service (Moody's) affirmed Occidental Petroleum Corporation's (NYSE: OXY) A3 senior unsecured rating, its P-2 short term rating and its stable outlook. The rating affirmation follows Occidental's October 31 announcement that it had acquired leasehold acreage in the Permian Basin in a cash transaction for approximately $2.0 billion. Balance sheet cash was initially used to fund the acquisition, a use of cash which will be replenished with the proceeds of the notes offering.

"Occidental has maintained one of the healthiest balance sheets within its North American independent E&P peer group, and has pre-funded upcoming debt maturities with successive debt issues in 2015 and 2016; however, its credit metrics will be stressed by the additional debt issuance following its recently announced acreage acquisitions," commented Andrew Brooks, Moody's Vice President. "Moreover, while the extent of its cash balances are impressive, these balances are likely to be eroded under the combined pressure of Occidental's sizable cash dividend, capital spending - even at its reduced levels, its investment in working capital and acquisition funding."

Affirmations:

..Issuer: Occidental Petroleum Corporation

.... Commercial Paper, Affirmed P-2

.... Issuer Rating, Affirmed A3

....Senior Unsec. Shelf, Affirmed (P)A3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Regular Bond/Debentures, Affirmed A3

Outlook Actions:

..Issuer: Occidental Petroleum Corporation

....Outlook, Remains Stable

Affirmations:

..Issuer: Maryland Industrial Development Financ. Auth.

....Senior Unsecured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed VMIG 2

..Issuer: Maury (County of) TN, Indust. Devel. Board

....Senior Unsecured Revenue Bonds, Affirmed A3

RATINGS RATIONALE

Occidental Petroleum's A3 senior unsecured rating is supported by its substantial scale and diversification, its long-lived US oil and gas assets predominantly located in the Permian Basin and what has historically been its modest financial leverage, offset by weakness in cash flow brought about by the low prices of crude oil and US natural gas, and further exacerbated by its high cash dividend payout. Substantially sized, unlevered non-E&P EBITDA generated through its chemicals and midstream operations, however, augments Occidental's aggregate earnings and cash flow. Because of its relatively limited exposure to high decline rate unconventional resource production, Occidental can adjust downward the capital spending required to maintain its asset base while generating modest production growth. Occidental ended 2016's third quarter with a $3.2 billion cash balance, helping enable the company to maintain its high dividend payout, while cash from operations largely covers capital spending. The size of and Occidental's commitment to its annual dividend pressures retained cash flow, without which would be significantly higher. Notwithstanding healthy cash balances, minimal debt reduction is anticipated.

Occidental evidenced excellent liquidity at September 30, with a $3.2 billion cash balance and an undrawn $2.0 billion revolving credit facility, which has an August 2019 scheduled maturity date. The revolver does not contain a MAC clause nor ratings triggers, and the company is well within its financial covenants. The revolving credit facility fully backs Occidental's $2.0 billion commercial paper program, which had no amounts outstanding at September 30. While weak oil and natural gas prices have reduced 2016 cash flow, Occidental has substantially managed down its capital spending program, from 2015's $5.6 billion to a projected $3.0 billion in 2016. Furthering its liquidity was the receipt in full of a $900 million reimbursement from the government of Ecuador, which settled a long-standing contract expropriation arbitration ruling. Additionally, we expect Occidental to receive modest proceeds from non-core asset sales. Occidental repaid a $700 million debt maturity in February 2016 and June's $750 million maturity, largely pre-funded by its June 2015 $1.5 billion notes offering. April's $2.75 billion notes offering funded the early redemption in May of Occidental's $1.25 billion notes scheduled to mature in February 2017, resulting in Occidental's total debt levels remaining essentially unchanged. Occidental currently pays a $2.3 billion annual cash dividend, funded over the course of 2016 to date through free cash flow and balance sheet cash. Balance sheet cash was initially used to fund the $2.0 billion Permian acreage acquisition, a use of cash which will be replenished with the proceeds of the notes offering.

Occidental's stable outlook reflects its substantial scale and diversification, the high quality of its asset portfolio and its healthy balance sheet, notwithstanding leverage metrics which have retreated from mid-year strength as a consequence of incremental debt issuance. Occidental's ratings could be downgraded should debt to average daily production increase to and remain above $15,000 per barrel of oil equivalent (Boe) or should retained cash flow (RCF) to debt remain below 30%. Occidental's ratings could be upgraded should RCF to debt return to levels exceeding 70% and its leveraged full-cycle ratio is sustained above 1.5x.



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