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Rating Action:

Moody's downgrades Occidental Petroleum to Baa3 with stable outlook

01 Aug 2019

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those of its guaranteed subsidiaries are retired through the exchange transaction, then its ratings are likely to be withdrawn.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therefore any notes that remain outstanding for Anadarko or its guaranteed subsidiaries will likely have their ratings withdrawn for lack of sufficient information for Moody's to maintain those ratings.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

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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