Fitch Rates Occidental's Sr Unsecured Notes 'A'
OXY's ratings reflect the company's large size, strong operational track record, diverse resource base, significant exposure to liquids (approximately 75% of 2014 production and 76% of 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) business.
Credit Concerns
Credit concerns are limited and center on the impact of any additional restructuring of OXY's portfolio following recent restructuring activity. In 2014, OXY sold Hugoton E&P assets (\$1.7 billion), a 10% stake in Plains Pipeline (\$1.3 billion), the BridgeTex Pipeline (\$1.15 billion), and spun off California Resources Corporation (CRC). Other credit concerns center on the need for periodic property acquisitions as part of the company's EOR business.
KEY RATING DRIVERS
Further Restructuring Uncertain
Significant uncertainties remain as to the size and timing of any additional portfolio restructuring, including the possible sale of a stake in OXY's MENA portfolio. 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 unlikely in the near term.
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 which have since come online which have helped offset lost cash flow associated with asset sales, including the Al Hosn gas project (180MM cf/d of natural gas and 30,000 bpd liquids net to Oxy); 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 reasonable given sharply lower oil prices seen in Q1 and lost volumes associated with asset sales. As calculated by Fitch, for the period ending March 31, 2015, OXY generated EBITDA of \$8.0 billion and had total debt of \$6.84 billion, resulting in debt/EBITDA leverage of just 0.9x, EBITDA/gross interest coverage of 35.6x, and FFO-interest coverage of 30x. OXY's free cash flow for the LTM period ending March 31, 2015 was
-\$1.67 billion, comprised of cash flow from operations (including discontinued operations) of \$8.93 billion minus capex of \$8.34 billion and dividends of \$2.25 billion. The company has announced substantial capex reductions, and expects to get to a run rate of \$4.0 - \$4.5 billion capex by year end 2015. In Fitch's base case, OXY is expected to be moderately FCF negative in 2015 before turning FCF neutral in 2016 and FCF positive in 2017.
Upstream Performance
OXY's 2014 operational metrics were good. Total proven reserves fell by approximately 19% to 2.82 billion from 3.48 billion, due primarily to asset sales and the spin-off of California Resources Corporation. Net of asset sales, OXY's underlying organic reserve replacement rate was strong at 154%. The main source of gains was improved recoveries. 2014 full cycle netbacks as calculated by Fitch were also strong at \$20.24/boe, while one year F&D came in at below \$20/boe.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
--WTI oil prices of \$50/bbl in 2015, \$60/bbl in 2016, and \$70/bbl in 2017;
--Production growth averaging 6.6% for the 2015-2018 period;
Capex of \$5.8 billion in 2015 and \$4.2 billion in 2016;
--Assumed buybacks of \$2.5 billion in 2015 and \$1.0 billion in 2016;
--Sale of additional MidContinent assets, and remaining stake in Plains Pipeline (PAA).
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--Sustained lower debt levels (debt/boe 1p --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.
LIQUIDITY AND DEBT STRUCTURE
OXY's liquidity is robust. Cash on hand at March 31, 2015 (prior to the current refinancing) was \$2.15 billion, and the company's \$2 billion credit facility (maturing 2016) remained untapped. These amounts exclude restricted cash of \$3.3 billion related to the California Resources Corporation spin-off. 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 \$1.45 billion due 2016, comprised of \$750 million of 4.125% notes and \$700 million of 2.5% notes.
Other Liabilities
OXY's other obligations are manageable. The company's 2014 Asset Retirement Obligation (ARO) declined to \$1.09 billion from \$1.33 billion the year prior, with the decrease primarily due to the spin-off of California Resources Corporation. Rental expense in 2014 was \$155 million and was primarily linked to leases for transportation equipment, power plants, machinery, terminals, office space, storage facilities, and land. Environmental reserves rose to \$334 million at year-end 2014 and covered probable remediation costs at 145 sites. OXY's pension plans were underfunded by \$17 million at YE 2014, versus being overfunded by \$15 million the year prior.
FULL LIST OF RATING ACTIONS
Occidental Petroleum
--Issuer Default Rating (IDR) 'A';
--Senior Unsecured Revolver 'A';
--Senior Unsecured Notes 'A';
--Commercial paper 'F1';
--Short-term IDR 'F1'.
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