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
