Fitch Ratings has affirmed Occidental Petroleum Corporation's (NYSE: OXY) ratings as follows:
--Issuer Default Rating (IDR) at 'A';
--Senior Unsecured Revolver at 'A';
--Senior Unsecured Notes at 'A';
--Commercial paper at 'F1';
--Short-term IDR at 'F1'.
The Rating Outlook remains Positive. Approximately $7.62 billion in debt is affected by this rating action.
Rating Rationale: OXY's ratings reflect the company's large size, strong operational track record, diverse resource base, significant exposure to liquids (approximately 72% of 2012 production and reserves), and historically robust cash flow and low debt levels, which remain at the upper end of the range for the 'A' category. The company also enjoys modest integration benefits from its chemicals and midstream segment, and low geological risk, stemming from its enhanced oil recovery (EOR) strategy.
Credit concerns center on uncertainty as to who might replace CEO Steve Chazen and what changes, if any, a successor might make to OXY's current financial policies. This follows the unexpected announcement by OXY in February that it had formed a search committee to find a successor to Chazen. Fitch viewed Chazen's appointment as CEO in 2011 as a positive for the credit, given the conservatism of financial policy under his longstanding tenure as CFO.
Other credit concerns center on the possibility of a leveraging transaction, the need for periodic property acquisitions as part of the company's EOR model, and transparency issues associated with commodities trader Phibro. The high level of investor activism in the energy sector is also a background concern.
Recent Financial Performance: OXY's latest 12 months (LTM) financial performance has been strong, prompted by high oil prices. As calculated by Fitch, for the period ending Dec. 31, 2012, OXY generated EBITDA of $14.05 billion, resulting in debt/EBITDA leverage of just 0.5 times (x), EBITDA/gross interest coverage of 55.3x, and FFO-interest coverage of 49.1x. Free cash flow was -$1.042 billion, comprised of cash flow from operations of $11.35 billion, minus capex of $10.23 billion and common dividends of $2.13 billion. The modestly negative FCF was driven by a combination of higher capex spending for long-term projects, accelerated dividend payments to shareholders in Q4, and higher production costs during the year. Similar to other producers in 2012, OXY took a non-cash impairment of approximately $1.7 billion linked to low gas prices.
Fitch expects OXY's historically strong FCF to be muted in 2013, given the relatively high percentage of capex earmarked for long term projects that will not cash flow immediately. Approximately 25% of the company's 2013 capex budget of $9.6 billion is earmarked for such projects, including the Al Hosn gas project in Abu Dhabi, the 300,000 bpd BridgeTex pipeline in Texas, and a new 182,500 tons per year chlor-alki plant in Tennessee.
Upstream Performance: OXY's 2012 operational metrics were good. Total output for the year rose by 4.6%, from 732,800 boepd to 766,300 boepd. Total proven reserves rose by approximately 3.8% from 3.175 to 3.296 billion boe. As calculated by Fitch, Oxy's 2012 organic and all-in reserve replacement ratios (RRR) were a respectable 109% and 143%. These figures include revisions of approximately 180 million boe linked to low gas prices which we expect could be reversed in future years. Net of these revisions, RRRs would have been 175% and 209% respectively. At year-end 2012 approximately 900 million boe of OXY's reserves were PSC-linked. 2012 full cycle netbacks as calculated by Fitch were respectable at $18.08/boe.
Liquidity: OXY's liquidity is robust. Cash on hand at year end was $1.59 billion, and the company's $2 billion credit facility (maturing 2016) remained untapped. Covenant restrictions on the revolver are light and exclude MAC clauses or ratings triggers. The revolver also has a $1 billion sub limit for Letters of Credit (LCs). Near-term maturities are light and include $600 million in 1.45% notes due this year and no major maturities following that until 2016.
Other Liabilities: OXY's other obligations are manageable. The company's 2012 Asset Retirement Obligation (ARO) increased to $1.266 billion from $1.09 billion the year prior, due in part to acquisitions and new liabilities incurred. Total rental expense in 2012 was $180 million and was primarily linked to leases for transportation equipment, power plants, machinery, terminals, and office space. Environmental reserves declined to $344 million at year-end 2012 and covered probable remediation costs at 161 sites. The funding deficit on the company's pension at year-end 2012 was negative $116 million, which is very modest when scaled to OXY's underlying cash flows.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Continued strong operational performance and low debt levels (debt/boe 1p< $2.50 and debt/flowing barrel< $12,000), accompanied by evidence the company will keep its very conservative financial policy in place under new leadership
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A change in philosophy on use of the balance sheet;
--A sustained collapse in crude prices without offsetting adjustments to the capital program;
--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. 8, 2012);
--'2013 Outlook: North American Oil & Gas' (Dec. 13, 2012);
--'2013 Outlook: Midstream Services and MLPs' (Nov. 29, 2012);
--'Dividend Policy in the Energy Sector: Low Oil Prices Could Create Cash Flow Stress' (Feb. 29, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
2013 Outlook: North American Oil & Gas
2013 Outlook: Midstream Services and MLPs
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress
Mark C. Sadeghian, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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