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Rating Action:

Moody's downgrades Occidental Petroleum to A2

02 Dec 2014

Approximately $7 billion of debt affected

New York, December 02, 2014 -- Moody's Investors Service (Moody's) downgraded Occidental Petroleum's (Oxy) senior unsecured rating to A2 from A1 and confirmed the Prime-1 commercial paper rating following the completion of the spin-off of the company's California assets, which comprise the newly formed California Resources Corporation (CRC, Ba1 stable). As part of the spin-off, Oxy received a $6.1 billion distribution from CRC which will be used to fund the company's newly-expanded share repurchase program, dividends, and modest debt reduction. This rating action completes the review that commenced in February 2014 when the spin-off and share repurchase program was announced.

"The spin-off of CRC, along with the sale and monetization of other non-strategic assets, leaves Oxy a smaller and less diversified company," said Stuart Miller, Moody's Vice President and Senior Credit Officer. "While its credit metrics are strong for its A2 rating, the increased focus on shareholder returns and the execution risk associated with ramping up the development of unconventional resources in the Permian Basin are reflected in the new debt rating."

Ratings downgraded:

Long-term issuer rating - downgraded to A2 from A1

Senior unsecured rating -- downgraded to A2 from A1

Senior unsecured shelf -- downgraded to (P)A2 from (P)A1

Subordinate shelf -- downgraded to (P)A3 from (P)A2

Preferred shelf -- downgraded to (P)Baa1 from (P)A3

MTN program -- downgraded to (P)A2 from (P)A1

Industrial revenue bonds -- downgraded to A2 from A1

Pollution control bonds -- downgraded to A2 from A1

Ratings confirmed:

Prime -1 commercial paper rating

VMIG-1 Industrial revenue bonds

Outlook

Changed to Stable from RUR -- Down

RATINGS RATIONALE

The A2 senior unsecured debt rating is supported by the company's substantial scale and diversification, its predominantly long-lived US oil and gas assets, its high level of operating cash flow, and low financial leverage. Because of its depleting resource base, Occidental has sizable reinvestment needs to maintain its asset base. However, even after taking into account the reinvestment requirements, Occidental still compares favorably to other A-rated industrial companies with higher profit margins and lower leverage than most. The California spin-off, along with the sale of other non-strategic assets, will reduce Oxy's total production by more than 20%, from roughly 750,000 Boe/day to less than 600,000 Boe/day as of year-end 2014. As a result, Oxy's scale and diversity is somewhat diminished with a greater percentage of its cash flow generated in the Middle East and in Colombia. While Moody's believes the company could return to its pre-spin-off production levels by 2017, it is only possible if it successfully implements its strategy of developing its unconventional resources in the Permian Basin.

The rating also takes into account the larger emphasis Oxy is placing on shareholder returns. Oxy's board recently approved an expansion of its share repurchase program by 60 million shares, representing a notable shift in financial policy versus past behavior where cash was used primarily for re-investment and dividends. Moody's expects most of the proceeds from the CRC spin-off and announced non-strategic asset sales to be used for dividends and share re-purchases, eliminating some of the credit protection previously available to the company's bondholders.

Oxy has excellent liquidity supported by its ability to generate free cash flow, its cash balance of approximately $8 billion, and its $2 billion undrawn committed credit facilities. While weakening oil prices could lead to negative free cash in 2015, the company has discretion to manage down its capital expenditure program or use asset sales proceeds to maintain its liquidity without tapping into its cash balances or committed revolving credit facility. The unused revolving credit facility expires in August 2019. The facility does not contain a MAC clause or a ratings trigger, and the company is well within its financial covenants. The credit facility fully backs the company's $2.0 billion commercial paper program.

The stable outlook contemplates that that Oxy invest heavily in its Permian Basin resource opportunities as well as spend heavily to re-purchase shares over the next 12 to 18 months. The ratings could be downgraded if debt to average daily production is sustained above $10,000 per Boe or if debt to proved developed reserves is sustained above $4.00 per Boe. Additionally, an increase in debt while share re-purchases are taking place would be viewed as a signal that the company's financial policy has weakened further. An upgrade is unlikely in the near future given the company's diminished scale and diversity, as well as the increased emphasis on share re-purchases.

Occidental Petroleum Corporation is a large independent exploration and production company with upstream operations in the US, the Middle East, and in South America. The company also has significant investments in energy midstream assets that complement its upstream operations and a large chemicals business. The company is headquartered in Houston, Texas.

The methodologies used in these ratings were Global Independent Exploration and Production Industry published in December 2011 and Global Chemical Industry Rating Methodology published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stuart Miller
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Occidental Petroleum to A2
No Related Data.
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