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 several years.

Oxy’s financial profile remains very conservative relative to its peers, largely due to high earnings retention and productive use of cash flow (combined dividends, capex and acquisitions are well within cash flow), virtually no share repurchases in 2009-2010 and the benefit of significant debt reduction prior to 2008. Oxy’s strong credit metrics in a lower energy price environment in 2009, including total debt-to-capital ratio of 8.7% and total debt-to-cash flow of 0.4 times, only slightly weaker than September 30, 2010 levels of 7.3% and 0.3 times, respectively, demonstrates its conservative nature. Oxy has indicated that common share repurchases are fifth on its cash flow priority list after base/maintenance capex, dividends, growth capex and acquisitions.

Oxy expects annual production growth of at least 5% to 8% through 2014 (reaching a range of 965,000 barrels of oil equivalent per day (boe/d) to 1,118,000 boe/d in that year compared with the 2010 outlook for 751,000 boe/d) from existing properties where Oxy is currently engaged, heavily weighted towards the United States (U.S., especially California), supported by significant growth in the Middle East/North Africa region (especially Iraq and Bahrain).

In order to accomplish its goals, Oxy expects total capex of $27.5 billion between 2010 and 2014, with 55% planned for U.S. projects and 45% for international projects. Oxy expects to maintain low financial risk and continuing dividend growth in the process.

Oxy’s capital budget for 2010 is approximately $4.4 billion ($2.8 billion spent in the nine months ending September 30, 2010 (9M 2010)), with the vast majority directed to exploration and production (E&P) and the remainder to Midstream and Chemical operations. Based on these assumptions, DBRS estimates planned annual capex for 2011 to 2014 at about $5.8 billion. This amount, plus the current annual dividend of approximately $1.2 billion (although subject to increase), is manageable within the context of recent cash flow levels ($8.7 billion in the last 12 months ending September 30, 2010 (LTM September 30, 2010) and the expectation of rising production.

Given Oxy’s large cash balances ($2.1 billion at September 30, 2010), strong cash flow generation and capex flexibility with respect to its wholly-owned projects, the Company could withstand a large drop in energy prices from 9M 2010 levels before requiring additional borrowing in the near- to medium-term. Based on 9M 2010 production and prices, Oxy estimates that a $1 per barrel and $0.50 per MMBtu rise (fall) in WTI crude oil and NYMEX natural gas prices, respectively, would result in a $156 million and $108 million rise (fall) in annual pre-tax income, respectively. The Company has a committed $1.5 billion five-year credit facility (fully available at September 30, 2010), of which $0.1 billion expires in September 2011 and $1.4 billion expires in September 2012. DBRS believes that, overall, Oxy has the financial flexibility to fund its long-term capital plans, plus potential opportunistic acquisitions, while maintaining its credit metrics at levels consistent with the current ratings.

On December 10, 2010, Oxy announced several transactions that are expected to close no later than the end of Q1 2011: (1) The sale of its Argentina E&P assets (44,000 boe/d current production) for approximately $2.5 billion of after-tax proceeds and an expected gain upon closing; (2) The purchase of North Dakota E&P assets (5,500 boe/d current production) for approximately $1.4 billion; (3) The purchase of South Texas gas-weighted E&P assets (200 million cubic feet per day of current gas equivalent production) for approximately $1.8 billion; (4) The purchase of an incremental 13% General Partner ownership interest in Plains All American Pipeline, L.P., raising Oxy’s interest to 35%; and (5) The purchase of the remaining 50% joint venture interest in the Elk Hills Power Plant. The Company will finance the acquisitions from both existing balance sheet cash and debt financing. In addition, Oxy announced a 21% increase in its dividend rate (approximately $250 million annually based on current common shares outstanding) effective with the April 15, 2011 payment. DBRS considers the net cash outflow related to these transactions to be very manageable and the effective replacement of the Argentina E&P production with North Dakota and South Texas production to be an upgrade of Oxy’s asset base from a profitability and business risk standpoint.

Oxy has a strong reserve and production base with good growth potential in its core U.S. E&P operations, which accounted for 64% of its reserves at year-end 2009 and 52% of its production in 9M 2010. U.S. production, which is virtually all onshore, has moderate decline rates, with a proved reserve life index (RLI) and proved developed RLI of 15.1 and 11.7 years, respectively, in 2009. Oxy expects the U.S. (especially California) to be the largest contributor to its production growth through 2014.

The Company has a well-established presence that provides high returns and growth in the Middle East/North Africa region (Qatar, Oman, Yemen, Bahrain and Libya), which accounted for 29% of Oxy’s reserves at year-end 2009 and 38% of its production in 9M 2010. Operations are generally conducted under long-term production-sharing contracts (PSCs) that generate less volatile earnings. Middle East/North Africa production has generated much higher netbacks than Oxy’s other regions and is expected to be a significant contributor to the Company’s planned production growth through 2014 (especially Iraq and Bahrain).

Oxy has an established track record of operating in regions with a variety of political and business risks, including production disruptions and uncertainty regarding the stability of regulatory, legal, currency and taxation systems. In January 2010, Oxy and its consortium partners signed a technical service contract with Iraq’s state-owned oil company to redevelop the Zubair field, near Basra in southern Iraq. The agreement allows Oxy (23.44% interest) to produce crude oil, receive payments in kind and book reserves. The consortium plans to increase production from the Zubair field to 1.2 million b/d, representing an increase of more than 1 million b/d. The consortium recently announced that it had achieved a 10% increase in initial production growth, resulting in commencement of its contract cost recovery mechanism, with the group additionally earning $2 per barrel on the incremental oil production. The target production level is expected to be progressively reached within the next six years and maintained for seven years thereafter. The contract allows for relatively rapid cost recovery, limiting Oxy’s at-risk investment in the country.

Oxy has had a good consistent reserve replacement record in recent years, typically replacing its annual production through a combination of the drill-bit and acquisitions. Oxy replaced 206% of production in 2009 (138% excluding purchases and sales), mainly due to strong performance in the Middle East/North Africa region (511% and 311%, respectively), largely due to positive revisions (partly PSC-related), improved recovery and acquisitions (the latter partly related to the Bahrain Field redevelopment project). Reserve measures in the Middle East and North Africa generally reflect long-lived projects where reserve additions occur infrequently and often several years after initial capital expenditures are made.

Similar to its peers, Oxy has experienced rapidly rising costs in its E&P operations. Between 2005 and 2008, the Company’s per unit production and operating costs rose by 20% to $14.70 per boe and its three-year average reserve replacement costs more than doubled to $19.39/boe, reflecting a heated industry environment and rising energy and service costs, particularly related to Oxy’s enhanced oil recovery operations in the U.S. Although these measures declined by 8% to $13.49/boe, and by 22% to $15.09/boe, respectively in 2009, DBRS expects the upward trends to resume in a stabilized to rising crude oil price environment.

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

The applicable methodology is Rating Oil and Gas Companies, which can be found on the DBRS website under Methodologies.