Rating Action: Moody’s rates Occidental Petroleum notes issue Ba2
Global Credit Research – 12 Aug 2020
New York, August 12, 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 sizable near-term debt maturities,” commented Andrew Brooks, Moody’s Vice President. “OXY’s credit profile remains significantly weakened and its prospects for near-term improvement are uncertain.”
..Issuer: Occidental Petroleum Corporation
….Senior Unsecured Notes, Assigned Ba2 (LGD4)
While OXY’s acquisition of Anadarko Petroleum Corporation (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 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 spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. OXY’s negative outlook, in part, reflects the impact on it of the deterioration in credit quality it has triggered, given its exposure to oil prices, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
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 $1.0 billion of balance sheet cash as of June 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. Moody’s expects that OXY will continue to prioritize debt reduction. 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 its near-term debt maturities, which in the aggregate total $10 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 its near-term debt maturities.
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.
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.
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.
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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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.
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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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