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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
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.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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