CHICAGO--(BUSINESS WIRE)--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 is Stable. Approximately $6.88 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 73% of 2013 production and reserves), historically robust cash flow, and low debt levels. 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 what OXY's ultimate reserve and production profile will be following the company's restructuring. Assets sold to date include Hugoton E&P assets ($1.4 billion) and a 10% stake in Plains Pipeline ($1.3 billion). The company also expects to receive a large dividend from the pending spin-off of California Resources Corporation (CRC), as well as proceeds from the sale of a stake in its Middle East and North Africa (MENA) portfolio. Other credit concerns center on the need for periodic property acquisitions as part of the company's EOR model, and transparency issues associated with commodities trader Phibro.
Size and Timing of MENA Stake Uncertain:
Significant uncertainties remain as to the size and timing of the sale of a stake in OXY's MENA portfolio. OXY's MENA assets are split across seven countries - Iraq, Libya, Bahrain, Qatar, UAE, Oman and Yemen. Fitch believes that the complexity of selling a multi-country portfolio of assets, including the need to coordinate among multiple host governments, makes the sale of a large stake in MENA less likely in the near term. The most recent comparable asset sale in the region, Apache Corporation's sale of a stake in its Egypt business in 2013 to Sinopec, was limited to a 33% stake.
Fitch ran a number of scenarios to capture what OXY might look like post-restructuring. These cases included the sale of MidContinent assets, sale of additional stakes in Plains Pipeline (PAA), the spin-off of CRC, and the sale of a minority stake in MENA portfolio ranging from 0%-49%. Under our most likely (base case) scenario, which assumed a 20% MENA sale, OXY's credit metrics look reasonable for the 'A' category - debt/EBITDA never climbs above 0.8x, debt/1p never rises above $2.65/1p, and debt/flowing barrel does not exceed $13,000/barrel. As a result, Fitch's Outlook for OXY remains Stable. Most other cases also looked reasonable, although metrics do appear somewhat stretched for the rating category as the MENA sale approached the upper end of the range, indicating the possibility of rating pressure at that point.
The Stable Outlook is also supported by the significant amount of headroom OXY had at the 'A' level prior to the restructuring, and by projects coming online which should help make up for lost cash flow associated with asset sales, including the Al Hosn gas project (200MM cf/d of natural gas and 20,000 bpd liquids net to Oxy); the BridgeTex pipeline (300,000 bpd, including 2.6 million barrels of storage); and a new 182,500 tons per year chlor alki plant at OxyChem.
Recent Financial Performance:
OXY's latest 12 months (LTM) financial performance was strong, prompted by high oil prices. As calculated by Fitch, for the period ending March 31, 2014, OXY generated EBITDA of $14.5 billion and had total debt of $6.88 billion, resulting in debt/EBITDA leverage of just 0.5 times (x), EBITDA/gross interest coverage of 55.1x, and FFO-interest coverage of 50.6x. OXY's free cash flow improved as well, at $1.61 billion, comprised of cash flow from operations of $12.97 billion minus capex of $9.24 billion and dividends of $2.7 billion. In Fitch's base case, OXY's FCF is expected to be muted in 2014 and 2015, driven by the loss of earnings power from asset sales and spun off California assets. Fitch then expects FCF to improve as production steps up.
OXY's 2013 operational metrics were good. Total proven reserves rose by approximately 5.7% from 3.296 billion boe to 3.48 billion boe. As calculated by Fitch, Oxy's 2013 organic and all-in reserve replacement ratios (RRR) were a solid 155% and 166%. The main source of gains was operating additions, with a small amount of purchased reserves. 2013 full cycle netbacks as calculated by Fitch were respectable at $21.38/boe, while one year FD&A came in at an economical $16.43/boe
OXY's liquidity is robust. Cash on hand at March 31, 2014 was $2.33 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 nothing due in 2014 or 2015, and $1.45 billion due 2016, comprised of $750 million of 4.125% notes and $700 million of 2.5% notes.
OXY's other obligations are manageable. The company's 2013 Asset Retirement Obligation (ARO) increased to $1.332 billion from $1.266 billion the year prior. Approximately $415 million of this is expected to migrate to CRC following the spin-off.
Total rental expense in 2013 was $204 million and was primarily linked to leases for transportation equipment, power plants, machinery, terminals, office space, storage facilities, and land. Environmental reserves declined to $330 million at year-end 2013 and covered probable remediation costs at 157 sites. OXY's pension plans were overfunded by 15 million at YE 2013, versus being underfunded by $116 million the year prior. OXY expects to contribute $6 million to its defined pension plans in 2014.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Sustained lower debt levels (debt/boe 1p < $2.00- $2.50), increased size and scale, and evidence the company will maintain a more conservative financial policy after the restructuring. Fitch does not anticipate any positive rating actions in the near term given the uncertainties surrounding the company's restructuring.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Larger than expected asset sales program without offsetting adjustments (e.g. selling more than a minority stake in MENA);
--Debt/boe 1p> $3.00-$3.25/boe, and debt/flowing barrel>$14,000;
--A sustained collapse in crude prices without offsetting adjustments to the capital program.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Full Cycle Costs for North American E&P (Production Costs Moderate in 2013)' (July 30, 2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16, 2014);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Global Impact of US Shale Oil - Rising Production Tempers World Prices' (Feb. 10, 2014);
--'Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an Impact' (Feb. 4, 2014);
--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan. 27, 2014).