MOODY'S DOWNGRADES DEBT RATINGS OF OCCIDENTAL PETROLEUM; SENIOR TO Baa3
Moody's Investors Service downgraded the senior unsecured debt ratings of Occidental Petroleum Corporation and its supported affiliates to Baa3 from Baa2, and its rating for commercial paper to Prime-3 from Prime-2. This concludes a review for downgrade which was initiated on January 26, 1999, based on concerns about the long term effects of significantly lower planned capital spending, and the risk of further deterioration of the company's financial and operating flexibility due to depressed conditions in its energy and commodity chemicals markets.
Moody's action reflects expectations that Occidental's earnings and cash flow coverage measures will remain under pressure over the intermediate term, due to the company's above average sensitivity to oil prices, the cyclical nature of its commodity chemicals business, and a high dividend pay-out relative to earnings. Occidental's financial measures have deteriorated over the past year due to capital spending and dividend outlays which exceeded cash from operations, and a large stock buyback program which was completed late last year. Based upon debt of about $5.4 billion, total debt is more than six times Moody's estimate for 1999 cash flow, and this ratio is unlikely to substantially improve until oil prices recover. While the company has slashed 1999 capital spending by over 65%, it continues to maintain a relatively high dividend pay-out particularly in view of unfavorable market conditions in oil, natural gas and commodity chemicals.
Occidental plans a substantial deferral of the growth objectives for reserves and production which underlay the company's 1997/1998 restructuring program, including the $3.6 billion acquisition of the Elk Hills oil and gas field. Moody's expects Occidental's oil and gas production to be essentially flat in 1999 and show modest growth in 2000. However, this represents about one-third less production in 2000 compared to the target which was announced by the company following its acquisition of Elk Hills.
The rating agency said that Occidental's Baa3 ratings are supported by its greater size and geographic diversification compared to peer companies in its rating category, and by above average upside leverage for improved performance when oil and gas prices and chemicals margins ultimately recover from current depressed levels. The company is expected to demonstrate significantly improved cost efficiency in finding and developing reserves due to the restriction of capital spending to higher value projects. Management has stated its intention to fund 1999 capital spending and dividends within cash flow, and has enacted a cost reduction program which is designed to reduce expenses by about $200 million within two years. The company has attempted to improve the cost structure of its operations by concentrating on fewer core assets in oil and gas, particularly Elk Hills and its interests in Qatar. The majority of its chemicals operations have been contributed to joint ventures which have the potential for cost savings from more efficient operation of combined facilities.
Moody's said that the rating outlook is stable, based on assumptions that the company will be able to internally fund its dividend and capital spending program over the medium term. Moody's also factors in an expectation that capital spending will need to rise from the $350 million planned in 1999 in order to maintain the company's operations in the longer term.
Ratings downgraded are:
Occidental Petroleum Corporation: senior notes, debentures, medium term notes, shelf registration, industrial revenue bonds, pollution control bonds, and counterparty rating to Baa3 from Baa2; subordinated to Ba1 from Baa3; preferred stock to "ba1" from "baa3".
OXY USA Inc. and OXYMAR: guaranteed debentures and bonds to Baa3 from Baa2.
Oxy Capital Trust I, II, and III: guaranteed trust originated preferred securities to "ba1" from "baa3".
Occidental Petroleum Corporation has operations in oil and gas exploration and production, and commodity and specialty chemicals, with headquarters in Los Angeles, California.
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