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Rating Action:

MOODY'S AFFIRMS OCCIDENTAL'S LONG-TERM RATINGS (SR. UNSEC. A3) AND MAINTAINS STABLE OUTLOOK; RATINGS OF VINTAGE PETROLEUM (Ba2 CORPORATE FAMILY RATING) PLACED UNDER REVIEW FOR POSSIBLE UPGRADE

14 Oct 2005
MOODY'S AFFIRMS OCCIDENTAL'S LONG-TERM RATINGS (SR. UNSEC. A3) AND MAINTAINS STABLE OUTLOOK; RATINGS OF VINTAGE PETROLEUM (Ba2 CORPORATE FAMILY RATING) PLACED UNDER REVIEW FOR POSSIBLE UPGRADE

Approximately $3.6 Billion of Debt Securities Affected

New York, October 14, 2005 -- Moody's Investors Service affirmed the ratings of Occidental Petroleum Corporation (Oxy, Senior Unsecured A3) and maintained the stable outlook. Moody's also placed the ratings of Vintage Petroleum, Inc. (Vintage, Ba2 Corporate Family Rating) under review for possible upgrade. These actions were taken following Oxy's announcement that it had entered into an agreement to acquire Vintage for total consideration of approximately $3.8 billion.

Under the terms of the agreement, Oxy will pay $20 cash per Vintage share (~$1.4 billion) and issue 0.42 Oxy shares for each Vintage share (~28.7 million Oxy shares). Oxy will also assume $550 million of existing Vintage debt. In addition, Oxy has announced that it plans to repurchase up to nine million shares of its stock; however Moody's expects that this share repurchase will be funded out of asset sales proceeds and free cash flow, with no net increase in debt. These rating actions reflect Oxy's increased scale and diversification, exploitation growth opportunities and cost-saving synergies, while not materially impacting leverage; offset by a higher cost structure and lower cash margins (principally in Argentina), resulting in a lower leveraged full-cycle ratio, and the integration risk of a corporate acquisition.

Oxy's acquisition of Vintage provides increased scale, geographic diversification and exploitation opportunities for production growth. While Oxy typically has acquired assets, this corporate acquisition fits its strategy of focusing on several core areas. Vintage's primary oil and gas assets are in Argentina and Bolivia (67% of 2004 total proved reserves), which expands upon Oxy's Latin American operations in Colombia and Ecuador, and California (16% of reserves), where Oxy operates the large Elk Hills field. Pro forma for the Vintage acquisition, combined with its earlier Permian Basin acquisitions, Oxy should have in excess of 3 billion barrels of oil equivalent (boe) of total proved reserves or about 20% more than its year-end 2004 reserves. About 80% of Oxy's reserves are expected to be proved developed. Oxy's political risk will be diversified, as Middle East production will drop from 18% to 16% of total production. Both Argentina and California provide additional lower risk exploitation and development opportunities, which should add to Oxy's continued production growth.

Oxy's acquisition of Vintage will increase its cost structure and reduce its leveraged full-cycle ratio. Oxy is paying about $9 per boe of proved reserves for Vintage, which is considerably higher than its three-year all sources finding and development (F&D) costs of $5 per boe. This price is consistent generally with prices being paid for acquisitions in the current high commodity price environment and is similar to what Oxy paid earlier this year in the Permian Basin; however, we note that this will increase Oxy's full-cycle costs. Oxy may sell some non-core Vintage reserves in the U.S. that could lower the price paid per boe. In addition, Vintage's realized oil price in Argentina is suppressed by that country's export tax. This is mitigated somewhat by G&A cost saving synergies, but the net effect will be to lower Oxy's cash margin. The combination of a lower cash margin with higher average F&D costs will lower Oxy's leveraged full-cycle ratio, a measure of cash on cash return. Oxy's leveraged full-cycle ratio, which was 5x at the end of 2004, and the highest among the investment grade E&P peer group, will drop to about 4.5x on a standalone basis before Vintage and will drop further to just under 4x pro forma for Vintage. While this metric is down, we note that Oxy's leveraged full-cycle ratio is still consistent with its A3 rating.

Oxy's leverage and liquidity have been among the strongest in the investment grade E&P peer group and we do not expect this transaction to have a material effect on the company's leverage. The transaction will require $1.4 billion of cash, which Oxy can pay without incurring additional debt, considering its cash on hand, the sale of its Premcor stock and operating cash flow prior to closing. Oxy also owns 30 million shares of Lyondell, which are worth over $800 million. As part of the transaction, Oxy will assume $550 million of Vintage debt. We expect that Oxy's debt to proved developed (PD) boe of proved reserves, pro forma for the transaction, will be lower than its June 30 value of $2.23, considering that Oxy redeemed approximately $500 million of debt during the third quarter. Further, we would expect that Oxy will repay the higher cost Vintage debt out of free cash flow, providing additional deleveraging.

Ratings affirmed include those of Occidental Petroleum Corporation and its rated subsidiaries. Ratings placed under review include Vintage Petroleum's Ba2 Corporate Family Rating, Ba3 Senior Unsecured, and B1 Senior Subordinated.

Occidental Petroleum Corporation, headquartered in Los Angeles, California, is an international oil and gas company with primary operations in the U.S., the Middle East and Latin America. Occidental also manufactures and markets commodity chemicals.

Vintage Petroleum, Inc., headquartered in Tulsa, Oklahoma, is an independent oil and gas company with principal operations in Argentina, Bolivia, California, East Texas, the U.S. Mid-continent, and the Gulf Coast.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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