Fitch Revises Occidental's Outlook to Stable; Affirms IDR at 'A'
CHICAGO -- July 12, 2013
Fitch Ratings has revised Occidental Petroleum Corporation's (NYSE: OXY)
Rating Outlook to Stable from Positive and affirmed the company's ratings as
--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'.
Approximately $7.62 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
72% of 2012 production and reserves), historically robust cash flows, and low
debt levels, which remain at the upper end of the range for the 'A' category.
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.
Previous credit concerns had centered on uncertainty about changes in the
executive suite and their potential impact on OXY's financial policies. The
issue of succession has been resolved for now, with CEO Chazen staying on at
least until the end of 2014. However, the company has also suggested it was
considering a major restructuring to try to improve shareholder returns.
While there is significant uncertainty as to what form such a restructuring
could take - spin-off of a business, asset sale or other monetization, with
proceeds dedicated to shareholder distributions ? the fact that the company
has publicly stated such activity would need to be 'needle-moving' strongly
suggests credit quality is unlikely to move up from current levels. This is
what led to the revision in Outlook to Stable from Positive. Fitch notes that
while it is possible a future restructuring could be leveraging enough to
result in negative rating action, the combination of the lack of specifics
about such a restructuring, matched with OXY's significant headroom at the
current 'A' rating level, has resulted in a Stable Outlook for now.
Other credit concerns for Oxy center on the need for periodic property
acquisitions as part of the company's EOR model, and transparency issues
associated with commodities trader Phibro.
Recent Financial Performance: OXY's latest 12 months (LTM) financial
performance has been strong, prompted by high oil prices. As calculated by
Fitch, for the period ending March 31, 2013, OXY generated EBITDA of $13.67
billion, resulting in debt/EBITDA leverage of just 0.6x, EBITDA/gross interest
coverage of 50.5x, and funds from operations-interest coverage of 43.7x. Free
cash flow (FCF) was -$379 million, comprising cash flow from operations of
$11.3 billion, minus capex of $9.88 billion and common dividends of $1.75
billion. The modestly negative FCF was driven by a combination of higher capex
spending for long-term projects, accelerated dividend payments to shareholders
in the fourth quarter of 2012, and higher production costs during the year.
Similar to other producers, OXY took a non-cash impairment of approximately
$1.7 billion in 2012 linked to low gas prices.
Fitch expects OXY's historically strong FCF to be muted in 2013, given the
relatively high percentage of capex earmarked for long-term projects that will
not cash flow immediately. Approximately 25% of the company's 2013 capex
budget of $9.6 billion is earmarked for such projects, including the Al Hosn
gas project in Abu Dhabi, the 300,000 barrels per day (bpd) BridgeTex pipeline
in Texas, and a new 182,500 tons per year chlor-alki plant in Tennessee.
Upstream Performance: OXY's 2012 operational metrics were good. Total output
for the year rose by 4.6%, from 732,800 barrels of oil equivalent per day
(boepd) to 766,300 boepd. Total proven reserves rose by approximately 3.8%
from 3.175 million to 3.296 billion boe. As calculated by Fitch, Oxy's 2012
organic and all-in reserve replacement ratios (RRR) were a respectable 109%
and 143%, respectively. These figures include revisions of approximately 180
million boe linked mainly to low gas prices. Net of these revisions, RRRs
would have been 175% and 209% respectively. At year-end 2012 approximately 900
million boe of OXY's reserves were production-sharing contract (PSC)-linked.
Full-cycle 2012 netbacks as calculated by Fitch were respectable at
Liquidity: OXY's liquidity is robust. Cash on hand at March 31, 2013 was $2.14
billion, and the company's $2 billion credit facility (maturing 2016) remained
untapped. Covenant restrictions on the revolver are light and exclude material
adverse change (MAC) clauses or ratings triggers. The revolver also has a $1
billion sub-limit for letters of credit (LOCs). Near-term maturities are light
and include $600 million in 1.45% notes due in December of this year and no
major maturities following that until 2016.
Other Liabilities: OXY's other obligations are manageable. The company's 2012
asset retirement obligation (ARO) increased to $1.266 billion from $1.09
billion the year prior, due in part to acquisitions and new liabilities
incurred. Total rental expense in 2012 was $180 million and was primarily
linked to leases for transportation equipment, power plants, machinery,
terminals, and office space. Environmental reserves declined to $344 million
at year-end 2012 and covered probable remediation costs at 161 sites. The
funding deficit on the company's pension at year-end 2012 was negative $116
million, which is very modest when scaled to OXY's underlying cash flows.
Positive: Future developments that may, individually or collectively, lead to
positive rating action include:
--Continued strong operational performance and low debt levels (debt/boe 1p<
$2.50 and debt/flowing barrel< $12,000), accompanied by evidence the company
will keep its very conservative financial policy in place following the
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--A significantly leveraging transaction or change in philosophy on use of the
--A restructuring that significantly raises leverage on a debt/boe basis;
--A sustained collapse in crude prices without offsetting adjustments to the
--A large increase in the scope of Phibro's trading activities.
Additional information is available at www.fitchratings.com.
Applicable Criteria & Related Research:
--'Full Cycle Cost Survey for E&P Producers?2012 Numbers Up, but Adjustments
Tell a Different Story' (May 28, 2013);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'2013 Outlook: North American Oil & Gas' (Dec. 13, 2012);
--'2013 Outlook: Midstream Services and MLPs' (Nov. 29, 2012);
--'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow
Stress' (Feb. 29, 2012).
Applicable Criteria and Related Research:
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow
2013 Outlook: Midstream Services and MLPs
2013 Outlook: North American Oil & Gas
Corporate Rating Methodology
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Mark C. Sadeghian, CFA, +1-312-368-2090
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA, +1-312-368-3130
Jason Pompeii, +1-312-368-3210
Brian Bertsch, +1-212-908-0549
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