Occidental Petroleum Corporation -- Moody's rates Occidental Petroleum's notes issue Ba2
Rating Action: Moody's rates Occidental Petroleum's notes issue Ba2
Global Credit Research - 08 Dec 2020
New York, December 08, 2020 -- Moody's Investors Service (Moody's) assigned a Ba2 rating to Occidental Petroleum Corporation's (OXY) proposed issuance of senior unsecured notes. OXY's existing ratings, including its Ba2 corporate family rating (CFR) and Ba2 senior unsecured rating are not affected by this action. The Speculative Grade Liquidity rating is unchanged at SGL-3. The rating outlook is negative.
OXY will use the proceeds of the proposed notes offering to refinance upcoming debt maturities.
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 proposed notes offering is another step in addressing the company's near-term debt maturities," commented Andrew Brooks, Moody's Vice President - Senior Credit Officer. "OXY's credit profile remains weakened since its 2019 acquisition of Anadarko Petroleum Corporation (Anadarko) and its prospects for near-term improvement are uncertain."
Assignments:
..Issuer: Occidental Petroleum Corporation
....Senior Unsecured Notes, Assigned Ba2 (LGD4)
RATINGS RATIONALE
While OXY's acquisition of Anadarko afforded it strategic and cost benefits, it came at a very high price, which was largely debt-financed, and at the 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 existing Permian Basin asset, bringing further development opportunities across an enlarged asset footprint. However, the full value of this acquisition has been compromised by 2020's weakness in commodity prices and global demand uncertainty, exacerbated by the stress imposed on OXY's credit metrics by its incurrence of over $35 billion of acquisition-related debt. Considerable value is accorded OXY's $84.4 billion asset base and its operating footprint that extends beyond North America, supplemented by EBITDA generated from non-E&P assets, however, the drop in crude oil prices has weakened the earnings power of OXY's E&P assets. OXY reacted to the challenged oil price environment with a number of defensive measures including the virtual elimination of its cash dividend, a reduction in 2020's capital spending of over 50% together with operating cost reductions, which together will reduce its annual cash outflow by almost $6 billion.
OXY initially had targeted up to $15 billion of asset sale proceeds (net of taxes and economic adjustments) for debt reduction. It closed on approximately $5.5 billion of net asset sales in 2019, with another $2.4 billion achieved to date in 2020. Proceeds have been used to repay debt. Consequently, at September 30, OXY's debt balance (including Moody's standard adjustments, and proportionately consolidated for its interest in Western Midstream Partners, LP) stood at $40 billion, down almost 25% from the $53 billion year-ago amount (which also reflects the $5 billion debt equivalency adjustment no longer allocated to OXY's $10 billion preferred stock, in conformance with its speculative-grade debt rating). Subsequent to quarter-end, OXY repaid an additional $1.4 billion of debt from asset sale proceeds, and expects another $600 million of debt to be repaid prior to year-end from the proceeds of the sale of its onshore assets in Colombia. Notwithstanding debt reduction achieved to date, however, on a run-rate basis Moody's estimates that OXY's retained cash flow (RCF) to debt will remain under 15% with E&P debt on production approximating $30,000 per barrel of oil equivalent (Boe), both measures weak for the company's rating.
Environmental considerations for OXY include heightened societal concerns regarding climate change and other environmental air quality and safety issues that are leading to increasing environmental regulations on E&P company operations. OXY is a leading proponent of carbon capture and sequestration, and is the world's largest handler of CO2 for enhanced oil recovery. Environmental regulations have not materially affected OXY's resource access, ability to execute its operational plans or infrastructure build out.
Moody's regards OXY's near-term liquidity as adequate, comprised of $1.9 billion of balance sheet cash at September 30 and an undrawn $5 billion revolving credit facility having a January 2023 scheduled maturity date. During 2020's third quarter, OXY added a $400 million securitization facility, which was also unused. OXY has made substantial progress addressing its near-term 2021-2022 debt maturities which aggregated $12.1 billion at the beginning of the year (including $992 million of zero coupon debt puttable to the company in October 2020). The company issued $5 billion of unsecured notes in July and August and used the proceeds to tender for $4.3 billion and $700 million of 2021 and 2022 scheduled debt maturities, respectively. During September - November, OXY closed asset sales and applied the net proceeds of $1.3 billion to repay notes and a portion of the term loan. Since the beginning of 2020, OXY reduced 2021 and 2022 debt maturities by $6 billion, although with minimal impact on overall debt levels outstanding. However, OXY has successfully alleviated the building stress that the magnitude of this near-term maturity wall posed to the company's liquidity.
The outlook is negative reflecting OXY's excessive debt leverage and limited asset sale realizations.
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.
PRINCIPAL METHODOLOGY
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.
COMPANY PROFILE
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. 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.
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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
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