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Rating Action:

MOODY'S UPGRADES OCCIDENTAL PETROLEUM'S LONG-TERM DEBT RATINGS TO A3; OUTLOOK IS STABLE

22 Jun 2005
MOODY'S UPGRADES OCCIDENTAL PETROLEUM'S LONG-TERM DEBT RATINGS TO A3; OUTLOOK IS STABLE

Approximately $3.4 Billion of Debt Securities Affected

New York, June 22, 2005 -- Moody's Investors Service raised the long-term debt ratings of Occidental Petroleum Corporation (Occidental or Oxy) to A3 from Baa1. This action reflects Oxy's consistently strong operating and financial performance, as measured by our key rating factors, compared to other investment grade exploration and production (E&P) companies. Occidental has developed a large durable portfolio of predominantly long-lived US oil and gas assets; Oxy has consistently grown its reserves and production at peer group leading finding and development (F&D) costs and has maintained a strong leveraged full-cycle ratio; and Oxy is conservatively capitalized with one of the lowest leverage levels as measured by debt to proved developed reserves. The outlook is stable.

Reserves and production characteristics -- At year end 2004, Occidental had 2,532 million barrels of oil equivalent (MMboe) of proved reserves and 1,969 MMboe of proved developed (PD) reserves, both of which are the largest among the North American E&P companies that Moody's rates. Of these amounts, 73% of Oxy's total proved reserves and 79% of its PD reserves were located in the US and 60% of its 2004 production came from its core assets in the US. Oxy's PD reserve life of 9.7 years (based on 2004 year end PD reserves and annualized 1Q05 production) is among the highest in the investment grade E&P peer group. Over 80% of Occidental's production is crude oil and liquids, whereas the average for the investment grade E&P peer group is closer to 50/50 oil and natural gas. While Oxy benefits from the current high oil price environment, the company is exposed to changes in oil prices to a greater extent than its peers. Oxy's proportion of oil is expected to remain high, but its natural gas production should increase once the Dolphin project comes on in 2006.

Occidental's US assets, particularly in the Permian Basin, California and Hugoton, are in mature areas and it will be increasingly difficult to maintain production at current levels. Therefore, Oxy has looked to international operations for growth, which exposes the company to increased political and country risk. At the end of 2004, 18% of Oxy's reserves and production were in the Middle East, primarily Qatar and Oman. Another 7% of reserves and 15% of production were in Ecuador and Colombia in Latin America, respectively. Oxy's risk profile is expected to increase going forward as areas like the Middle East and North Africa contribute an ever larger share of the company's production, including its expected return to Libya.

Re-investment risk and capital efficiency -- Over the period 2002 to 2004, Occidental's all-sources reserves replacement was 151%. Oxy had greater than 100% drilling only reserves replacement (improved recovery, extensions and discoveries, and revisions) in each of the past three years. During this period, Oxy also replaced about a third of its production through property acquisitions, which introduces a level of event risk regarding the timing, magnitude and financing of acquisitions. Moody's has factored this potential into Oxy's A3 rating. Year to date, Oxy has spent $1.3 billion on asset acquisitions in the Permian, including about $1 billion for a package of ExxonMobil properties. Occidental's annual F&D costs have consistently been among the lowest in the investment grade E&P peer group, with a three-year all-sources F&D through 2004 of $5.00 per boe. However, we note that Oxy paid just under $10 per boe for the Permian properties earlier this year, which will lead to increased annual and three-year average F&D costs going forward. The combination of Oxy's strong cash margins and low historical F&D results in a leveraged full-cycle ratio (defined as cash margin per boe divided by three-year average F&D costs per boe), a measure of cash on cash return, that was 5.0x for 2004, compared to a peer group median of about 2.2x. Oxy's leveraged full-cycle ratio is expected to drop to closer to 4x as higher F&D costs are reflected in its metrics; however this level still indicates quite strong coverage of full-cycle costs.

Leverage and cash flow coverage -- Occidental is conservatively capitalized with one of the lowest leverage levels, as measured by debt per proved developed barrel of oil equivalent (debt per PD boe). As of December 31, 2004, Oxy's debt/PD boe was $2.45, down from $2.94 at the beginning of 2004. Leverage dropped further to $2.23 at March 31, 2005, as the company repaid $459 million of long-term debt. Including future development costs, Oxy's debt plus future capex to total proved reserves was $1 higher at $3.45 per total proved boe in 2004. These leverage metrics are among the best in the peer group even before considering Oxy's substantial cash position, which was about $1.4 billion at the end of the first quarter, without any allocation to its commodity chemicals business and without giving any credit to its equity holdings in Lyondell and Premcor. Oxy has a substantial commodity chemicals business that has generated an annual average of about $430 million EBITDA over the past five years (2000 through 2004) and averaged $300 million of free cash flow per year over this same period. Allocating a portion of the company's debt to the chemicals business would drop leverage comfortably below $2 per PD boe.

Occidental's A3 senior unsecured rating reflects its durable portfolio of predominantly long-lived US oil and gas assets, its consistent reserves replacement at leading F&D costs, a strong leveraged full-cycle ratio and the company's low leverage and strong liquidity. Oxy's rating also considers its higher risk international assets that are expected to be a larger proportion of production going forward, its reserves and production mix that are heavily weighted toward oil, and its exposure to commodity chemical cycles and environmental liabilities.

We note that an A3 rating for an independent E&P company places substantial constraints on its strategic and financial flexibility. In light of this, Oxy's stable outlook reflects our expectation that management will execute its growth strategy while remaining fully committed to prudent financial and acquisition policies. Oxy's outlook could move to positive through a combination of successfully managing its international growth while minimizing risk, growing reserves and production at peer group leading F&D costs, while maintaining a leveraged full-cycle ratio above 4x and leverage near or below $2 per PD boe. An inability to execute its growth strategy, materially increased political risk, weaker reserves replacement costs and leveraged full-cycle ratio, higher leverage, greater environmental liabilities or reduced liquidity could lead to a negative outlook.

Ratings affected include those of Occidental Petroleum Corporation and its rated subsidiaries.

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

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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