CHICAGO--(BUSINESS WIRE)--Fitch Ratings has revised Occidental Petroleum Corporation's (NYSE: OXY) Rating Outlook to Stable from Positive and affirmed the company's 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'.
Approximately $7.62 billion in debt is affected by this rating action.
Key Ratings Drivers
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), historically robust cash flows, 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.
Previous credit concerns had centered on uncertainty about changes in the executive suite and their potential impact on OXY's financial policies. The issue of succession has been resolved for now, with CEO Chazen staying on at least until the end of 2014. However, the company has also suggested it was considering a major restructuring to try to improve shareholder returns.
While there is significant uncertainty as to what form such a restructuring could take - spin-off of a business, asset sale or other monetization, with proceeds dedicated to shareholder distributions ? the fact that the company has publicly stated such activity would need to be 'needle-moving' strongly suggests credit quality is unlikely to move up from current levels. This is what led to the revision in Outlook to Stable from Positive. Fitch notes that while it is possible a future restructuring could be leveraging enough to result in negative rating action, the combination of the lack of specifics about such a restructuring, matched with OXY's significant headroom at the current 'A' rating level, has resulted in a Stable Outlook for now.
Other credit concerns for Oxy center on the need for periodic property acquisitions as part of the company's EOR model, and transparency issues associated with commodities trader Phibro.
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 March 31, 2013, OXY generated EBITDA of $13.67 billion, resulting in debt/EBITDA leverage of just 0.6x, EBITDA/gross interest coverage of 50.5x, and funds from operations-interest coverage of 43.7x. Free cash flow (FCF) was -$379 million, comprising cash flow from operations of $11.3 billion, minus capex of $9.88 billion and common dividends of $1.75 billion. The modestly negative FCF was driven by a combination of higher capex spending for long-term projects, accelerated dividend payments to shareholders in the fourth quarter of 2012, and higher production costs during the year. Similar to other producers, OXY took a non-cash impairment of approximately $1.7 billion in 2012 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 barrels per day (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 barrels of oil equivalent per day (boepd) to 766,300 boepd. Total proven reserves rose by approximately 3.8% from 3.175 million 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%, respectively. These figures include revisions of approximately 180 million boe linked mainly to low gas prices. 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 production-sharing contract (PSC)-linked. Full-cycle 2012 netbacks as calculated by Fitch were respectable at $18.08/boe.
Liquidity: OXY's liquidity is robust. Cash on hand at March 31, 2013 was $2.14 billion, and the company's $2 billion credit facility (maturing 2016) remained untapped. Covenant restrictions on the revolver are light and exclude material adverse change (MAC) clauses or ratings triggers. The revolver also has a $1 billion sub-limit for letters of credit (LOCs). Near-term maturities are light and include $600 million in 1.45% notes due in December of 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 following the expected restructuring
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significantly leveraging transaction or change in philosophy on use
of the balance sheet;
--A restructuring that significantly raises leverage on a debt/boe basis;
--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:
--'Full Cycle Cost Survey for E&P Producers?2012 Numbers Up, but Adjustments Tell a Different Story' (May 28, 2013);
--'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:
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow Stress
2013 Outlook: Midstream Services and MLPs
2013 Outlook: North American Oil & Gas
Corporate Rating Methodology