Fitch Rates Occidental's $1.75B Senior Unsecured Notes 'A'
Fitch Ratings has assigned an 'A' rating to Occidental Petroleum Corporation's (NYSE: OXY) issuance of $1.75 billion in 5.5 and 10.5-year unsecured notes. Occidental's Rating Outlook remains Positive.
Net proceeds from the offering will be used for general corporate purposes. This may include working capital increases, acquisitions, stock repurchases, debt retirement, and other business opportunities.
OXY's ratings as follows:
--Long term IDR at 'A';
--Senior unsecured revolver and notes at 'A';
--Commercial paper at 'F1';
--Short-term IDR at 'F1'
Rating Rationale: OXY's ratings reflect
--The company's large size;
--Strong operational track record;
--Diverse resource base;
--Significant exposure to liquids (72.2% of 2011 production was oil and NGLs, among the highest for any upstream peer);
--Robust cash flow generation; and
--Low debt levels
The debt levels remain at the upper end of the range for the 'A' category and are comparable to levels seen at larger integrated oil companies. OXY also enjoys modest integration benefits (chemicals and midstream) which account for approximately 15% of total earnings, and low geological risk, stemming from its enhanced oil recovery (EOR) strategy.
Credit concerns are minimal and center on
--The possibility of a leveraging transaction;
--Exposure to the politically volatile Middle East and North Africa (MENA) region (37% of 2011 production and 24% of reserves);
--The need for periodic property acquisitions as part of OXY's EOR model; and
--Transparency issues associated with commodities trader Phibro.
Visible longer-term production growth is projected of 5-8% over the next several years. There is also a large backlog of higher margin opportunities in U.S. onshore plays and elsewhere. As such, Fitch believes there is limited need to go out and do a leveraging deal to grow. Fitch also has a positive view of the appointment of Steve Chazen as CEO in 2011. Under Chazen's longstanding tenure as CFO, financial policy at the company has been very conservative and is expected to remain so.
Recent Financial Performance: OXY's latest twelve months (LTM) financial performance has been very strong, prompted by high oil prices. As calculated by Fitch, for the period ending March 31, 2012, OXY generated near-record EBITDA of $14.72 billion versus $11.05 billion in 2010. This resulted in debt/EBITDA leverage of just 0.4 times (x), EBITDA/gross interest coverage of 74.1x, and FFO-interest coverage of 65.2x.
Free cash flow was $2.72 billion, comprised of cash flow from operations of $12.86 billion minus capex of $8.61 billion and common dividends of $1.5 billion. As per its base case assumptions ($87.50/bbl WTI and $3.25/mcf natural gas), Fitch anticipates OXY will be strongly FCF positive in 2012 despite record high capex of $8.3 billion.
Upstream Performance: OXY's 2011 operational metrics were reasonable. However, they were negatively impacted by a relatively light year of reserve additions. As calculated by Fitch, OXY's total proven reserves grew a modest 0.3% to 3.176 billion. This was primarily due to stronger reserve growth in the U.S., The growth was significantly offset by reserve debookings linked with lower natural gas prices, and on the oil side, debookings linked to production sharing contracts (PSCs).
All-in reserve replacement was a modest 103% but remain solid on a three year basis at 150%. At year-end 2011 approximately 1 billion boe of OXY's reserves were PSC-linked. Proven developed reserves remained high at 76% of OXY's total reserves. OXY's one year FD&A rose to $39.34/boe. This was in large part due to low reserve adds mentioned above, but three year FD&A remained competitive at $19.64/boe.
Liquidity: OXY's liquidity remains very robust. Cash on hand at year end was $3.78 billion. OXY's $2 billion credit facility (maturing 2016) remained untapped. Covenant restrictions on the revolver are light and exclude MAC clauses or ratings triggers. Covenants include maximum adjusted debt/adjusted tangible net worth of 2.6x and a change of control put. The revolver also has a $1 billion sub limit for Letters of Credit (LCs).
OXY maintains a CP program to fund seasonal cash needs. Near-term maturities are light, with no maturities due until 2013, when $600 million in 1.45% notes come due. After that, there are no major maturities that come due until 2016. Fitch does not view share repurchases as a significant credit issue, given the company's track record of buying back shares out of FCF and historical preference for funding growth over repurchases.
Other Liabilities: OXY's other obligations are manageable. OXY's 2011 Asset Retirement Obligation (ARO) increased to $1.089 billion from $800 the year prior, due primarily to acquisitions. Total rental expense at year-end 2011 was $190 million. This was primarily linked to leases for railcars, power plants, manufacturing facilities, tankage, and office space. Environmental reserves were $360 million at year-end 2011 and covered expected costs at 160 sites. The funding deficit on OXY's pension at year-end 2011 was negative $125 million, which is very modest when scaled to OXY's underlying cash flows.
Catalysts for Future Rating Action: Catalysts for positive rating actions include continued strong operational performance and maintenance of conservative balance sheet debt levels. This includes total debt/boe of 1p reserves of less than $2.50/boe and E&P debt/flowing barrel of less than $12,000/barrel.
Catalysts for negative rating action include a change in philosophy on use of the balance sheet; a major operational issue; a sustained collapse in crude prices without offsetting adjustments to the capital program; or a large increase in the scope of Phibro's trading activities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Updating Fitch's Oil & Gas Price Deck' (Feb. 6, 2012);
--'Statistical Review of US E&P Companies' (May 10, 2012)
--'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow Stress' (Feb 29, 2012);
--'2012 Outlook: Midstream Services' (Dec. 7 2011);
--'Liquids Rich Shale Boom-A Tailwind for North American Chemicals' (April 18, 2011);
--'Integrated and Upstream Oil & Gas Companies - Sector Credit Factor Compendium' (March 25, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Updating Fitch￢ﾀﾙs Oil and Gas Price Deck
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress
2012 Outlook: Midstream Services
Liquids-Rich Shale Boom -- A Tailwind for North American Chemicals
Integrated and Upstream Oil and Gas Companies: Sector Credit Factor Compendium
Statistical Review of U.S. E&P Companies
Mark C. Sadeghian, CFA, +1-312-368-2090
Fitch, Inc., 70 W. Madison Street, Chicago, IL 60602
Sean T. Sexton, CFA, +1-312-368-3130
Dave Peterson, +1-312-368-3177
Brian Bertsch, New York, +1-212-908-0549
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