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Rating Action:

Moody's downgrades Occidental Petroleum to Ba2 negative; rates notes issue Ba2

25 Jun 2020

Approximately $38 billion of rated debt affected

New York, June 25, 2020 -- Moody's Investors Service (Moody's) downgraded Occidental Petroleum Corporation's (OXY) Corporate Family Rating (CFR) to Ba2 from Ba1, its Probability of Default Rating to Ba2-PD from Ba1-PD, its senior unsecured notes rating to Ba2 from Ba1 and its senior unsecured shelf rating to (P)Ba2 from (P)Ba1. Moody's has also assigned a Ba2 rating to OXY's proposed new issuance of senior unsecured notes. Its commercial paper program rating was confirmed at Not Prime. The Speculative Grade Liquidity rating is unchanged at SGL-3. The outlook is negative. This rating action concludes the review initiated on March 18, 2020 following OXY's downgrade to Ba1

The Ba2 rating assigned to OXY's proposed unsecured notes issue is the same as OXY's Ba2 CFR, reflecting the company's unsecured capital structure.

"Occidental Petroleum's August 2019 acquisition of Anadarko Petroleum Corporation (Anadarko) continues to burden the company's balance sheet with over $35 billion of debt and $10 billion of preferred stock, compromising its financial flexibility to confront the collapse in oil prices," commented Andrew Brooks, Moody's Vice President. "While OXY has made substantial progress capturing acquisition synergies, and is itself a low-cost operator with attractive Permian Basin acreage, asset sales initially projected to raise cash for debt reduction have been insufficient to meaningfully address sizable upcoming debt maturities, leaving OXY with a significantly weakened credit profile whose prospects for near-term improvement remain uncertain."

Downgrades:

..Issuer: Maryland Industrial Development Financ. Auth.

....Senior Unsecured Revenue Bonds, Downgraded to Ba2 from Ba1

..Issuer: Occidental Petroleum Corporation

.... Probability of Default Rating, Downgraded to Ba2-PD from Ba1-PD

.... Corporate Family Rating, Downgraded to Ba2 from Ba1

....Senior Unsecured Shelf, Downgraded to (P)Ba2 from (P)Ba1

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Ba2 from (P)Ba1

....Senior Unsecured Notes, Downgraded to Ba2 (LGD4) from Ba1

Assignments:

..Issuer: Occidental Petroleum Corporation

....Senior Unsecured Notes, Assigned Ba2 (LGD4)

Confirmations:

..Issuer: Maryland Industrial Development Financ. Auth.

....Senior Unsecured Revenue Bonds, Confirmed at S.G.

..Issuer: Occidental Petroleum Corporation

.... Commercial Paper (Local Currency), Confirmed at NP

Outlook Actions:

..Issuer: Occidental Petroleum Corporation

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

While OXY's acquisition of Anadarko afforded it strategic and cost benefits, it came at an excessive price which was largely debt-financed, and at the very high cost of a significantly eroded credit profile. The addition of Anadarko's sizable position in the Delaware Basin added meaningful production and proved reserves to OXY's core Permian Basin asset, with further development opportunities across an enlarged asset footprint. However, the full value of this significant acquisition has been compromised by 2020's collapse in crude oil prices.

The value accorded OXY's $100 billion asset base, its operating footprint that extends beyond North America and considerable EBITDA generated from non-E&P assets has been compromised by the drop in commodity prices and global demand stress. The stress imposed on OXY's credit metrics by approximately $40 billion of acquisition-related debt (OXY's September new issue notes and term loan, Anadarko's legacy debt which was exchanged into new OXY debt, proportionately consolidated Western Midstream debt and $10 billion preferred) has materially weakened OXY's leverage metrics. The challenges posed by its over-levered balance sheet have been further exacerbated by the sharp drop in crude oil prices and commensurate reduction in cash flow. OXY has reacted to the currently challenged oil price environment with several recent defensive measures including the virtual elimination of its cash dividend, a reduction in 2020's capital spending of over 50%, operating cost reductions and the payment of its preferred stock dividend in OXY common shares, which together will reduce its annual cash outflow by almost $8 billion. However, without significant and immediate debt reduction beyond the $7 billion achieved in the latter half of 2019, on a run-rate basis Moody's estimates that OXY's retained cash flow (RCF) to debt metric will remain well under 15% and E&P debt on production over $30,000 per barrel of oil equivalent (Boe), both measures weak for the company's rating.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, weak energy prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The oil and gas sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in OXY's credit profile has left it exposed to shifts in market sentiment in these unprecedented operating conditions and OXY remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on OXY of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

From a governance perspective, the composition of OXY's 11-member Board of Directors was materially reconstituted in 2020 with the addition of six new Board members including a new Chairman. Moody's understands that the Board is highly focused on restoring OXY's financial strength through debt reduction. The Board has also adopted certain corporate governance-enhancing amendments to its a by-laws, and has created a new Oversight Committee that will work closely with company management to provide regular Board input.

Moody's regards OXY's near-term liquidity as adequate, comprised of $1 billion of balance sheet cash as of April 30 and an undrawn $5 billion revolving credit facility having a January 2023 scheduled maturity date. The company should retain full access to its revolver, which does not have a MAC clause, nor stringent covenant limitations. Moreover, the dividend and capital spending cuts will relieve stress on cash flow, enabling OXY to operate in a modestly free cash flow mode. While Moody's expects that OXY will continue to prioritize debt reduction, that effort faces difficult headwinds. With the market for commodity-exposed and related asset sales compromised by weak commodity prices, OXY's weakened financial condition leaves the company with limited options for further debt reduction as it confronts sizable near-term debt maturities, which in the aggregate total $12.1 billion through 2022, including its zero coupon notes which are puttable for $992 million in October 2020. OXY intends to use proceeds from its proposed notes issue, limited asset sale proceeds and free cash flow to address near-term debt maturities of up to $7.4 billion into 2021.

The outlook is negative reflecting the challenges OXY confronts as it addresses its over-levered balance sheet in a weak oil and gas market.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Prospects for a ratings upgrade over the near-term are limited by OXY's weak balance sheet. Debt reduction exceeding $10 billion, debt on production approaching $20,000 per Boe and RCF/debt over 25% could support a rating upgrade. An inability to maintain RCF/debt above 15% or a failure to achieve further debt reduction could lead to a rating downgrade, as would the resumption of a meaningful cash dividend or share buybacks.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Occidental Petroleum Corporation is a large, publicly traded independent exploration and production (E&P) with operations focused in the Permian Basin, Colorado's DJ Basin, the Middle East in Oman, Qatar and the UAE, Algeria and Ghana, and Colombia. It also has significant Midstream and Chemicals businesses. The company is headquartered in Houston, Texas.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Andrew Brooks
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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