Fitch Affirms Occidental's IDR at 'A'; Outlook Remains Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Occidental Petroleum Corporation's 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 $8.3 billion in debt is affected by this rating action.

OXY's ratings reflect the company's size, diverse resource base, strong operational track record, significant exposure to liquids (approximately 75% of 2014 production and 76% of reserves), historically robust cash flow, and conservatively managed balance sheet. 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 potential effect a prolonged scenario of low oil prices might have on the company's balance sheet, 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

Asset Sales Largely Complete:

OXY's sizable asset restructuring program is now for the most part complete. Actions taken to date include the spin-off of California Resources Corporation (CRC) at the end of November (154,000 boepd net in 2013 and proved reserves of 744 MMBoe, with approximately 72% of reserves oil). Other dispositions include the 2014 sale of Hugoton basin E&P assets ($1.3 billion), sale of a $1.7 billion stake in Plains GP Holdings (PAGP), and sale of the BridgeTex Pipeline ($1.15 billion). Pending properties earmarked for potential sale are relatively small and include sale of the remaining stake in PAGP, and the potential sale of other MidContinent properties (Piceance and/or Williston assets).

While it is possible that OXY will sell off a large stake in its Middle East and North Africa (MENA) portfolio, Fitch believes that there limited buyer appetite for such properties, as well as 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.

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 March 31, 2015, OXY had debt/EBITDA leverage of just 0.9x (1.05x pro forma for the $1.5 billion issuance of new debt in June), EBITDA/gross interest coverage of 35.6x, and FFO-interest coverage of 30x. OXY's free cash flow (FCF) for the LTM period ending March 31, 2015 was -$1.67 billion, comprising cash flow from operations (including discontinued operations) of $8.93 billion minus capex of $8.34 billion and dividends of $2.25 billion. OXY expects to get to a run rate of $4 billion-$4.5 billion capex by year-end 2015. In Fitch's base case, OXY is expected to be significantly FCF negative in 2015 before turning close to FCF neutral in 2016 and 2017.

Solid Operational Performance:

OXY's 2014 operational metrics were good. As calculated by Fitch, total proven reserves fell by approximately 19% to 2.82 billion from 3.48 billion, while production fell approximately 22% to 597,000 boepd at YE 2014 due primarily to asset sales and the spin-off of California Resources. Net of these, OXY's underlying organic reserve replacement rate was strong at 154%. The main source of reserve gains was improved recoveries. Full-cycle netbacks for 2014 as calculated by Fitch were robust at $20.24/boe, while one-year finding & development costs F&D came in below $20/boe.

OXY's production volumes have rebounded sharply since the restructuring as new wells and projects have come online. In second quarter 2015, production rose to 658,000 boepd, up 78,000 boepd from year-ago levels, driven by output increases in the Permian, the Al Hosn sour gas project in the UAE, and Colombia. As a result of improvements, OXY raised the lower end of its 2015 guidance, which now stands at 660,000-670,000 boepd.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--Base case WTI oil prices of $50/bbl in 2015, $60/bbl in 2016, and $70/bbl in 2017;

--Production growth averaging approximately 7% over 2015-2018;

--Capex of $5.8 billion in 2015 and $4.6 billion in 2016;

--Assumed buybacks of $2.5 billion in 2015 and $1 billion in 2016;

--Sale of additional stake in PAGP.

RATING SENSITIVITIES

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 March 31, 2015 (prior to the recent refinancing) was $2.15 billion ($2.76 billion at June 30, 2015), and the company's $2 billion credit facility (maturing 2019) remained untapped. These amounts exclude restricted cash of $3.3 billion ($2.38 billion at June 30, 2015) associated with a distribution from California Resources Corp following its spin-off. 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.

Near-term maturities are light and include nothing due 2015, $1.45 billion due 2016 (comprising $750 million of 4.125% notes and $700 million of 2.5% notes), and $500 million due 2018. We expect the June $1.5 billion issuance will be used to pre-fund OXY's 2016 maturities. As a result, we anticipate that OXY's leverage will temporarily peak in 2015 prior to falling off as 2016 maturities are repaid.

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, 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

Fitch affirms the following:

Occidental Petroleum

--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'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

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Fitch Oil and Gas Assumptions Summary Feb 2015

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009

Full Cycle Costs Drop for North American E&Ps (Efficiency Gains Show Up in 2014 Numbers)

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High-Yield E&P Stress Test (Examining Exposure to the Downturn)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864216

Production Sharing Contracts (Countercylicality Shines in a Low Oil Price Environment)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=857828

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989333

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989333

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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