DBRS Confirms Occidental Petroleum Corporation at “A” and R-1 (low)

DBRS has today confirmed the ratings on the Senior Notes, Senior Debentures, & MTNs (the long-term debt) of Occidental Petroleum Corporation (Oxy or the Company) at “A”. DBRS has also confirmed the Company’s Commercial Paper rating at R-1 (low). All trends are Stable. The ratings confirmation reflects Oxy’s strong financial profile, operating efficiency and consistent performance over the past five years.

Oxy’s financial profile remains very conservative relative to its peers and in line with its targeted debt level, largely due to high earnings retention and productive use of free cash flow (high growth capex and acquisitions in a period of high energy prices), manageable share repurchases and the benefit of significant debt reduction prior to 2008. The Company’s maintenance of strong credit metrics, including total debt-to-capital (9.1%) and total debt-to-cash flow (0.55 times) for Q1 2009, in a lower energy price environment demonstrates its conservative nature.

Oxy’s strategy to reinvest more capital in the business than in share repurchases in a high crude oil price environment was demonstrated in 2008. Oxy strengthened its presence in the Permian Basin by purchasing assets from Plains Exploration and Production (Plains): 50% for $1.5 billion in Q1 2008 and the remaining 50% for $1.2 billion in Q4 2008, at a time of declining crude oil prices. During 2008, the Company purchased a 15% stake in the Joslyn Oil Sands Project in western Canada for $500 million, and signed contracts with the Libyan National Oil Company to develop fields in Libya.

The Company has stated that its maximum debt level is $2 per boe of proved reserves, translating into roughly a $6 billion debt ceiling ($2.74 billion, or $0.92 per boe at March 31, 2009). Although the probability that the Company would assume this much debt is low, incorporating this debt level into its current financial and operating results would raise pro forma total debt-to-capital to 18% (from 9.1%) and total debt-to-cash flow to 0.65 times (from 0.29 times) for the 12 months ending March 31, 2009, both of which would remain relatively conservative. Liquidity remains very strong as cash and cash equivalents totalled approximately $1.1 billion as of March 31, 2009, with no borrowings under the Company’s $1.5 billion credit facility expiring in 2012. The Company has $691 million of debt maturities due in 2009, which DBRS expects to be refinanced with proceeds from the $750 million bond issue completed in May 2009.

During Q1 2009, the Company reduced its 2009 capex program by placing certain projects on hold until energy prices recover and costs decline. As a result, should energy prices rise significantly, DBRS believes that Oxy would direct incremental capital towards internal development first, and then to external acquisitions (which would likely be in the form of small bolt-on acquisitions). Oxy’s capital budget for 2009 is approximately $3.5 billion, a relatively low level for a company of Oxy’s size, with about 80% directed to E&P, and the remainder to Midstream and Chemicals. However, the realized capex level will be dependent on energy prices, with higher prices supporting a greater capex level. The Company expects a 20% to 25% cost reduction (from 2008 peak levels) to be realized through 2010 across all regions. DBRS believes the Company can fund its 2009 capex program internally.

Production growth of 37% between 2004 and 2008 (6.5% per year) compares very well relative with its peers’ performance. Oxy expects production to grow by between 3% and 10% in 2009, with the wide range attributable to volatile energy prices. Higher energy prices would likely result in Oxy achieving the upper end of this range, as many of its projects were put on hold in late 2008 in response to lower energy prices. The Company has a suite of growth projects in its core U.S. asset base (Permian Basin, California, Piceance Basin, Utah), with over 4.5 million net acres available to drill, continuing to apply enhanced recovery techniques to boost production.

International diversity and growth come mainly from the lower-cost Middle East and North Africa regions. DBRS expects the Company’s international operations to be a moderate driver of production growth going forward. This will result in a modest increase in political and operational risk compared to its U.S. assets, which are mostly long-life, low-decline operations that provide a solid base of production and reserves and support Oxy’s above-average operating statistics. However, the U.S. assets (60% of production and 57% of E&P earnings in 2008) are expected to continue to generate the majority of Oxy’s earnings over the medium- to long-term.

Oxy has had a good reserve replacement record in recent years, typically replacing its annual production through a combination of the drill-bit and acquisitions. Oxy replaced 151% of production in 2008 (although only 57% excluding purchases and sales), despite negative reserve revisions due to the drop in energy prices at year-end 2008. This was the third consecutive year in which acquisitions were required in order to grow reserves, illustrating the increasing difficulty of growing reserves internally. Reserve measures in the Middle East and North Africa generally reflect long-lived projects where reserve additions are lumpy and often several years after initial capital expenditures are made.

The Company’s production was 77% weighed towards liquids in 2008 resulting in greater cash flow volatility compared to companies with more balanced production profiles due to its high exposure to crude oil prices. Additionally, Oxy generally does not hedge its production volumes. Partially offsetting this volatility is the Company’s chemicals business (6% of 2008 segment EBIT), which has been a consistent free cash flow generator.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil & Gas Companies, which can be found on our website under Methodologies.

This is a Corporate rating.