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 reflect 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 (dividends, capex and net acquisitions well within cash flow) and minimal share repurchases since year-end 2008. Oxy’s strong credit metrics, including a total debt-to-capital ratio of 14% and a total debt-to-cash flow of 0.5 times at September 30, 2011, demonstrate 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% over the long term from existing properties where Oxy is currently engaged, heavily weighted toward the United States (U.S., especially in the Permian Basin and in California), supported by significant growth in the Middle East/North Africa region (especially Oman and Iraq). The majority of its production is expected to continue to come from the U.S.

Based on Oxy’s May 2010 multi-year capex guidance, recent disclosures with respect to development of the Shah Field in the United Arab Emirates (UAE) and recent higher levels of quarterly capex in the U.S., DBRS expects Oxy’s total capex to exceed $31.5 billion between 2010 and 2014. This includes Oxy’s share of the Shah Field capex of $3 billion from 2012 to 2014 and $1 billion in 2011.

Oxy’s capital budget for 2011 is $7.0 billion ($5.0 billion spent in the nine months ending September 30, 2011 (9M 2011)), with the vast majority directed to exploration and production (E&P) and the remainder to Midstream and Chemical operations, following 2010 capex of $3.9 billion. Relative to its May 2010 multi-year capex guidance, U.S. oil drilling activity has increased, U.S. natural gas drilling has slowed and some Middle East/North Africa growth projects have slowed (e.g., Iraq, Bahrain and Libya) while others have increased (e.g., Oman). Therefore, DBRS expects planned capex for 2012 to 2014 to exceed $7 billion per year. This amount, plus the current annual dividend of $1.5 billion (although subject to increase), is manageable within the context of recent cash flow levels ($11.1 billion in the 12 months ending (LTM) September 30, 2011) and the expectation of rising production.

Given Oxy’s large cash balances ($4 billion at September 30, 2011), 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 2011 levels before requiring additional borrowing. Based on 9M 2011 production and prices, Oxy estimates that a $1 per barrel and $0.50 per million British thermal units (MMBtu) rise (fall) in global crude oil and New York Mercantile Exchange (NYMEX) natural gas prices, respectively, would result in a $152 million and $136 million rise (fall) in annual pre-tax income, respectively. Oxy has a committed $2 billion five-year credit facility (fully available in October 2011) maturing in October 2016. Oxy has the financial flexibility to fund its long-term capital plans, plus potential periodic acquisitions, while maintaining its credit metrics at levels consistent with the current ratings.

Oxy has a strong reserve and production base with good growth potential in its core U.S. E&P operations, which accounted for 66% of its reserves at year-end 2010 and 58% of its production in 9M 2011. U.S. production, which is virtually all onshore, has moderate decline rates, with a proved reserve life index (RLI) and proved developed RLI of 15.7 and 11.6 years, respectively, in 2010. 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 (e.g., Oman, Qatar, Yemen, Bahrain and Iraq), which accounted for 26% of Oxy’s reserves at year-end 2010 and 38% of its production in 9M 2011. Operations are generally conducted under long-term production-sharing contracts (PSCs) that generate less volatile earnings. Middle East/North Africa production has generated higher netbacks than Oxy’s other regions and is expected to be a significant contributor to medium-term production growth.

A significant component of Oxy’s medium-term production growth is expected to come from the Middle East/North Africa region that has experienced significant political upheaval over the past year. The Company has an established track record of operating in these regions and navigating a variety of political and business risks, including production disruptions and uncertainty regarding the stability of regulatory, legal, currency and taxation systems. In Iraq, Oxy and its consortium partners plan 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 contract allows for relatively rapid cost recovery, limiting Oxy’s at-risk investment in the country. Oxy’s significant regional production growth plans also include development of the Bahrain Field in Bahrain (48% net to Oxy) and the Shah Field in the UAE (40% net to Oxy). DBRS notes that Oxy ceased its exploration activity in Libya (2% of Oxy’s proved reserves at year-end 2010 and less than 2% of production in 2010) in February 2011. While Oxy is uncertain when it will report production from Libya, recent press reports indicate that operations could resume over the course of the next year.

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 148% of production in 2010 (97% excluding purchases and sales), mainly due to strong performance in the U.S. (193% and 112%, respectively). Reserve measures in the U.S. generally reflect long-lived projects where reserve additions occur on an ongoing basis as projects are developed.

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

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