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Rating Action:

Moody's Upgrades Occidental Petroleum Long-Term Debt to A2

14 Aug 2008
Moody's Upgrades Occidental Petroleum Long-Term Debt to A2

New York, August 14, 2008 -- Moody's Investors Service upgraded Occidental Petroleum Corporation's long-term debt to A2 from A3 and its commercial paper rating to Prime-1 from Prime-2. The rating upgrades reflect Occidental's position as one of the largest independent exploration and production (E&P) companies in North America, with strong cash flow coverage measures and significant free cash flow, its large reserve base and good visibility on future production growth, and its modest financial leverage, all of which support a higher rating level and are likely to be sustainable in the future. The rating outlook is stable.

Tom Coleman, Senior Vice President, said "Occidental's upgrade reflects a steady improvement in its operating and financial leverage profile and our view that the company will be able to sustain its differential credit strength and higher rating in a universe of E&P companies that is generally lower rated because of commodity price and reinvestment risk."

Occidental has reported record earnings and cash flow from operations over the last few quarters, bolstered not only by high commodity prices, but also by continued strong operating results. Cash flow coverage of total debt was almost 190% in the twelve months ended June 30, 2008, the highest level among the investment grade E&P companies. In the first half of 2008, Occidental generated $2.6 billion of free cash flow after dividends and capital spending, and during the 2005-2007 period free cash flow totaled almost $8 billion.

With almost 2.9 billion barrel of oil equivalent (BOE) of proved reserves, Occidental ranks among the largest E&P companies, with a proved developed reserve life of almost 11 years. Oil and gas production from continuing operations is expected to increase by about 6% in 2008, averaging in the area of 604,000 BOE/day. Underpinning this production are growth in the Middle East from the Dolphin natural gas project, core production from enhanced recovery operations in the Permian Basin and Elk Hills, and some production increases in the Rockies and in Argentina. With production over the medium-term also supported by other projects in Oman and Qatar, total output in 2010 is projected to be some 24% higher than 2007 levels.

Since its acquisition of Vintage Petroleum in 2006, Occidental's strong free cash flow and proceeds from asset sales have enabled it to reduce debt and financial leverage to among the lowest levels in its peer group, with adjusted debt of approximately $1.46 per proved developed (PD) BOE as of June 30, 2008. Occidental should be able to maintain a modest leverage profile, given its strong free cash flow profile, even under lower commodity price scenarios, and based on management's conservative financial posture, which includes internal funding of capital spending and share repurchases linked to the outlook for free cash flow.

Moody's notes that in early 2008 the company used cash on hand to fund $1.55 billion of property purchases from Plains Exploration and Production. With leverage at a cyclical low point and $1.5 billion of cash on the balance sheet, Occidental retains considerable flexibility to pursue future acquisitions. However, very large acquisitions would likely have to be evaluated in relation to equity funding, although such transactions do not appear to be on the horizon.

Occidental's crude oil production currently totals almost 80% oil of its BOE production, and strong price realizations contribute to among the highest cash margins in the peer group and a strong leveraged full cycle ratio of almost 3.8 X (LTM June 2008). Nevertheless, operations concentrated in enhanced recovery and mature areas, coupled with sector cost inflation, are contributing to rising unit production and capital (F&D) costs. Occidental's full cycle costs have climbed over the past few years, and are currently in the area of $38/BOE, above most of its peers'. However, Moody's believes the company will be able to manage its costs and maintain a leading competitive position within its highly rated peer group.

Another challenge for Occidental will be increasing political risk as it expands international operations in areas such as the Middle East, Libya, Latin America and other higher growth locales. The company's international capital spending is likely to grow over the medium-term as it invests in several major existing and prospective projects in the Middle East and Libya. To an extent this risk is mitigated by its gradual evolution, its still substantial long-lived U.S. production, and management's goal to maintain stable North American assets as the core of its operations.

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 industrial chemicals.

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

New York
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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