Anadarko's Ba1 rating remains on review pending debt exchange
New York, August 01, 2019 -- Moody's Investors Service ("Moody's") downgraded
Occidental Petroleum Corporation's (OXY) senior unsecured rating
to Baa3 from A3 and its short-term rating to Prime-3 from
Prime-2. The outlook is stable. These rating actions
conclude the review initiated on April 24, 2019 following OXY's
initial announcement that it had proposed an acquisition of Anadarko Petroleum
Corporation (Anadarko).
Anadarko's ratings and the ratings of its guaranteed subsidiaries
including its Ba1 Corporate Family Rating (CFR), its Ba1 unsecured
notes rating, its Ba1-PD Probability of Default Rating (PDR)
and its Not-Prime short-term rating remain under review
for upgrade following OXY's August 1 announcement that it will commence
a consent solicitation and offer to exchange newly issued OXY notes for
Anadarko's and its guaranteed subsidiaries' outstanding notes.
The Ba1 ratings for Anadarko and its guaranteed subsidiaries will remain
on review pending the completion of the consent solicitation and exchange
transactions. If the consent solicitation succeeds and all or substantially
all of Anadarko's notes and those of its guaranteed subsidiaries
are retired through the exchange transaction, then its ratings are
likely to be withdrawn. The new exchange notes are expected to
be rated Baa3 at close of the exchange. Following the consent solicitation,
Anadarko and its guaranteed subsidiaries are not expected to have any
future stand-alone financial reporting requirements, and
therefore any notes that remain outstanding for Anadarko or its guaranteed
subsidiaries will likely have their ratings withdrawn for lack of sufficient
information for Moody's to maintain those ratings.
These rating actions follow OXY's August 1 announcement of a planned
debt offering to which Moody's assigned a Baa3 rating. This debt
issuance is intended to finance part of the cash portion of OXY's $38
billion acquisition of Anadarko at the expected closing of the acquisition
on or about August 8. Under the merger agreement, Anadarko
shareholders will receive, in exchange for each share of Anadarko
common stock, $59.00 in cash and 0.2934 of
a share of Occidental common stock for each share of Anadarko common stock.
Total transaction value including Anadarko debt assumption and consolidating
for Western Midstream Operating, LP (WES, Ba1) is approximately
$57 billion.
On May 9, OXY and Anadarko entered into a merger agreement,
which was unanimously approved by Anadarko's board of directors
subject to the affirmative vote of a majority of Anadarko's outstanding
shares of common stock. The Anadarko shareholder vote is scheduled
for August 8.
"OXY's acquisition of Anadarko is a significantly leveraging transaction,
adding over $40 billion of debt to OXY's capital structure at its
outset," commented Andrew Brooks, Moody's Vice President.
"While the acquisition will strengthen and diversify OXY's upstream and
midstream asset base, adding further scale to its already large
position in the Permian Basin, the significant increase in debt
leaves the company with less flexibility to confront commodity price volatility.
Moreover, OXY could be challenged to deliver the full complement
of asset sales, capital and operating cost synergies and execution
on the acquired assets to fund the debt reduction required to improve
its materially weakened credit metrics."
RATINGS RATIONALE
OXY's acquisition of Anadarko will add meaningful production and
reserve increases, with further development opportunities in its
core Permian Basin asset reflecting the addition of Anadarko's sizable
position in the Permian's Delaware Basin. Anadarko's US Gulf
of Mexico production adds scale and positive free cash flow, as
does its Colorado asset base in the DJ Basin. WES provides OXY
with strategic gathering, processing and transportation infrastructure,
providing additional flow assurance to growing production volumes.
Overall, the acquisition affords strategic and cost benefits to
OXY, however, at the very high cost of a significantly eroded
credit profile.
Pro forma for the acquisition, OXY's leverage and coverage
rating factors individually and in totality map to Moody's scorecard-indicated
outcome which is not investment grade. Retained cash flow (RCF)
to debt falls by more than half from 2018's 52%, exacerbated
by OXY's substantial cash dividend, while E&P debt on
production more than doubles from 2018's $13,070 per
barrel of oil equivalent (Boe). Should crude prices weaken below
the $50 WTI bottom of Moody's price band, OXY is left
with less flexibility to weather a lower-priced oil environment,
stressing credit metrics to weaker levels still. However,
the scale and diversity of OXY's very large asset base gives it
the optionality to address its balance sheet through asset sales and other
cash generating measures that a smaller, less diversified E&P
company presumably would not have.
Achieving the full complement of $10 - $15 billion
of projected asset sales for debt reduction in the near term, are
fundamental to credit accretion from the weak level which the terms of
OXY's acquisition have imposed on the company. The $8.8
billion sale (contingent upon the closing of the merger) of Anadarko's
Mozambique LNG, Algeria, Ghana and South African assets to
Total S.A. (Aa3 positive) is a critical first step in raising
proceeds for debt reduction given the magnitude of acquisition debt incurred
to finance the merger. Asset sales for further debt reduction will
entail execution risk and require a supportive market environment,
and the starting point remains from an exceedingly high level of debt.
Depending on market conditions, there may be a limited appetite
for certain of the assets. OXY must also generate positive free
cash flow, executing on the $3.5 billion of operating
and capital synergies it projects it can generate through the combined
operations, while still adhering to the payment of its generous
cash dividend, and the 8% dividend on the Berkshire Hathaway
funded $10 billion of preferred equity (to which Moody's
assigns 50% equity credit).
Notwithstanding the leveraging of its balance sheet, we regard OXY's
liquidity to be good. Against the $30.3 billion aggregate
financing requirement entailed by its acquisition of Anadarko, on
June 3, OXY closed on a new $13 billion, 364-day
unsecured financing commitment from a syndicate of banks, supplemented
by an $8.8 billion term loan agreement ($4.4
billion 364-day facility and a $4.4 billion two-year
term loan). Supplementing the bank financing is the $10
billion Berkshire preferred equity. We assume that the $13
billion 364-day facility will be reduced pro rata for the proposed
notes issue, and that the $8.8 billion term loan will
be retired with asset sale proceeds. Also on June 3, Oxy
amended its $3.0 billion revolving credit facility,
increasing it in size to $5.0 billion, conditioned
upon the completion of the merger, with a January 2023 scheduled
maturity date. Like the previous facility, the revolver does
not contain a MAC clause nor ratings triggers, and company compliance
is well within its 65% debt to capital financial covenant.
The revolving credit facility fully backs the company's commercial paper
program, which had no amounts outstanding as of June 30.
At June 30, 2019, OXY reported $1.75 billion
of balance sheet cash and Anadarko $1.4 billion.
OXY's outlook is stable under the assumption that the company is
successful in its effort to reduce debt through asset sale proceeds,
and that it generates positive free cash flow. Presuming a smooth
integration of the operations of the two companies, OXY's
ratings could be upgraded should RCF/debt exceed 40%, debt
on production drop below $20,000 per Boe with its leveraged
full-cycle ratio (LFCR) remaining above 2x. Ratings could
be downgraded should an improvement in credit metrics falter, including
RCF/debt below 20%, debt on production exceeding $25,000
per Boe by the endo of 2020, or its LFCR falling below 1.5x.
Share buybacks at the expense of debt reduction would be viewed negatively.
Assignments:
..Issuer: Occidental Petroleum Corporation
....Senior Unsecured Regular Bond/Debenture,
Assigned Baa3
Downgrades:
..Issuer: Maryland Industrial Development Financ.
Auth.
....Senior Unsecured Revenue Bonds,
Downgraded to Baa3 from A3
....Senior Unsecured Revenue Bonds,
Downgraded to VMIG 3 from VMIG 2
..Issuer: Occidental Petroleum Corporation
.... Commercial Paper, Downgraded to
P-3 from P-2
.... Issuer Rating, Downgraded to Baa3
from A3
....Senior Unsecured Shelf, Downgraded
to (P)Baa3 from (P)A3
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa3 from (P)A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa3 from A3
Outlook Actions:
..Issuer: Occidental Petroleum Corporation
....Outlook, Changed To Stable From
Rating Under Review
Ratings Unchanged and Remain Under Review:
..Issuer: Anadarko Finance Company
....Gtd Senior Unsecured Regular Bond/Debenture,
Ba1 (LGD4), remains under review for upgrade
.....Outlook, remain Rating Under
Review
..Issuer: Anadarko Petroleum Corporation
....Senior Unsecured Regular Bond/Debenture,
Ba1 (LGD4), remains under review for upgrade
....Corporate Family Rating, Ba1,
remains under review for upgrade
....Probabiltiy of Default Rating, Ba1-PD,
remains under review for upgrade
.....Commerical Paper, NP, remains under review
for upgrade
.....Outlook, remain Rating Under
Review
..Issuer: Kerr-McGee Corporation
....Gtd Senior Unsecured Regular Bond/Debenture,
Ba1 (LGD4), remains under review for upgrade
....Senior Unsecured Regular Bond/Debenture,
Ba1 (LGD4), remains under review for upgrade
.....Outlook, remain Rating Under
Review
..Issuer: Union Pacific Resources Group Inc.
....Gtd Senior Unsecured Regular Bond/Debenture,
Ba1 (LGD4), remains under review for upgrade
.....Outlook, remain Rating Under
Review
The principal methodology used in these ratings was Independent Exploration
and Production Industry published in May 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Occidental Petroleum Corporation is headquartered in Houston, Texas.
Anadarko Petroleum Corporation is headquartered in The Woodlands,
Texas. Both companies are among the largest US independent exploration
and production companies.
REGULATORY DISCLOSURES
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead rating analyst and the Moody's legal entity that has issued
the ratings.
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
