CHICAGO–(BUSINESS WIRE)–Fitch Ratings expects to rate Occidental Petroleum’s Corp’s (NYSE: OXY) senior unsecured notes ‘A’. Proceeds from the notes, which are anticipated to mature in 2022, 2026, and 2046, will be used to refinance the $750 million 4.125% senior notes due June 2016 and $1.25 billion 1.75% senior notes due February 2017, and for general corporate purposes.
OXY’s ratings reflect the company’s large size, diverse resource base, conservatively managed balance sheet, strong bridge liquidity, favorable operational track record, and significant exposure to liquids (approximately 76% of 2015 production and 74% of reserves). The company also enjoys modest integration benefits from its chemicals and midstream segment, and low geological risk, stemming from its enhanced oil recovery (EOR) business.
Credit concerns are limited and center on the potential effect prolonged low oil prices might have on the company’s balance sheet and free cash flow (FCF) profile; and the risk of additional asset restructurings beyond what OXY has sold or spun off recently. Other credit concerns center on the need for periodic property acquisitions associated with the company’s EOR business model.
KEY RATING DRIVERS
Recent Financial Performance:
OXY’s latest 12 months (LTM) financial performance was reasonable given sharply lower oil prices and lost volumes associated with asset sales. As calculated by Fitch, for the period ending Dec. 31, 2015, OXY’s debt/EBITDA leverage rose to 1.58x versus 0.65x the year prior. EBITDA/gross interest coverage declined to 35.9x versus 47.7x the year prior, while FFO-interest declined from 32.6x to 27.1x.
OXY’s FCF for the LTM period was -$4.19 billion, comprising cash flow from operations (including discontinued operations) of $3.35 billion minus capex of $5.27 billion and dividends of $2.26 billion. OXY continues to lower its capex, and has guided to 2016 capex below the $3 billion level. Fitch anticipates the company could reduce capex further in a lower for longer price scenario. In Fitch’s base case, OXY is expected to be moderately FCF negative in 2016 and 2017 before turning FCF positive in 2018. We would note that current and expected cash balances are more than enough to fund any FCF deficits across our forecast.
Solid Operational Metrics:
OXY’s 2015 operational metrics were good, but like other E&Ps, were unfavorably impacted by negative price revisions associated with lower oil and gas prices. As calculated by Fitch, total proven reserves fell by approximately 22% to 2.2 billion barrels of oil equivalent (boe) from 2.82 billion. While the company had positive organic extensions and discoveries (+150 million boe), these were overwhelmed by negative price-based revisions (-316 million boe), as well as asset sales (-208 million boe), resulting in an all-in reserve replacement ratio of -37%.
Cash netbacks declined to $15.58/boe in 2015. Full-cycle netbacks were -$12.84/boe in 2015 given the low realized prices and the distortions in finding, development and acquisition (FD&A) created by negative reserve revisions, but remain strongly positive over the cycle ($17.21 on average since 2010). OXY’s production volumes have rebounded sharply in 2015 since the restructuring, as new wells and projects have come online. For FY 2015, production stood at 652,000 boepd, up 81,000 boepd from year-ago levels, driven by output increases in the Permian, the Al Hosn sour gas project in the UAE, and Colombia. Looking forward, we expect production is likely to decline in 2016 from those levels due to the impact of asset sales, and run-offs of different MENA contracts.
Fitch’s key assumptions within our rating case for the issuer include:
–Base case WTI oil prices of $35/bbl in 2016, $45/bbl in 2017, and $55/bbl in 2018;
–Base case Henry Hub natural gas prices of $2.25/mcf in 2016, $2.50/mcf in 2017, and $2.75/mcf in 2018;
–Cumulative production growth of -3.2% from 2015 to 2018, including impacts of asset sales and contract run-offs in the MENA region;
–Capex of $3 billion in 2016 and $2.9 billion in 2017;
–Flat dividends across the forecast period.
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.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
–Sustained debt/boe 1p >$3.00-$3.25/boe, and debt/flowing barrel >$14,000;
–A large leveraging buyback program or acquisition.
LIQUIDITY AND DEBT STRUCTURE
OXY’s liquidity is robust. Cash on hand at YE 2015 was $4.4 billion. On a pro forma (PF) basis, including an expected $900 million settlement from Ecuador and $300 million from asset sale proceeds (but prior to proceeds from this issuance), total cash was $5.6 billion. At YE 2015, the company’s $2 billion credit facility (maturing 2019) remained untapped, resulting in total PF liquidity of $7.6 billion. At YE 2015, OXY had $1.2 billion in restricted cash associated with a distribution from the California Resources Corporation spin-off on its balance sheet, but used those funds to repay $700 million in 2.5% 2016 notes, as well as fund its dividend, in the first quarter.
Covenant restrictions on OXY’s 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.
OXY’s near-term maturities include $750 million of 4.125% notes due 2016, $1.25 billion in 1.75% notes due 2017, and $500 million in 1.5% notes due 2018. The company’s current issuance will be largely used to prefund the remaining 2016 and 2017 maturities. As a result, we anticipate that OXY’s leverage is likely to peak over the next quarter or two prior to falling off by year-end as these maturities are repaid.
OXY’s other obligations are manageable. The company’s 2015 asset retirement obligation (ARO) rose to $1.124 billion from $1.09 billion the year prior. Rental expense in 2015 was $197 million and was primarily linked to leases for transportation equipment, power plants, machinery, terminals, office space, storage facilities, and land. Environmental reserves rose to $386 million from $334 million the year prior, and covered probable remediation costs at 149 sites. OXY’s pension plans were underfunded by $27 million at YE 2015, a level which is not a material liability for the credit.
OXY’s current ratings are as follows:
–Issuer Default Rating (IDR) ‘A’;
–Senior Unsecured Revolver ‘A’;
–Senior Unsecured Notes ‘A’;
–Commercial paper ‘F1’;
–Short-term IDR ‘F1’.
Fitch expects to rate:
–Senior Unsecured Notes ‘A’.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: August 10, 2015
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Mark C. Sadeghian, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Alyssa Castelli, +1-212-908-0540