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

DBRS has today confirmed the ratings of Occidental Petroleum Corporation (Oxy or the Company) at “A” and R-1 (low), based on operating performance and corporate developments for the six months ended June 30, 2012 (H1 2012).

The confirmations are supported by Oxy’s strong financial profile, and historical track record of prudent financial management. This financial flexibility enables the Company to withstand significant economic shocks with limited negative impact on credit metrics (as seen in 2009, when leverage increased only modestly despite a significant decrease in market fundamentals). Oxy’s debt-to-capital remains one of the lowest among its peers (below 20% for more than five years), and is anticipated to remain at the current level, allowing the Company to maintain its financial resiliency.

The Company also maintains one of the strongest free cash flow generating capabilities in the sector, supporting liquidity and production growth (targeted at 5% to 8% per year). The Company’s strong operating cash flow is largely due to a high proportion of production linked to oil-indexed pricing during near top-of-cycle conditions. Oxy strives to fund dividends and capital expenditures (capex) with internally generated cash flow, while placing a lower priority on making material acquisitions and share repurchases. DBRS expects the Company will continue to fund its long-term capital plans and dividends with operating cash flow. Although DBRS anticipates no rating action in the near term, should this strategy change, and leverage increase significantly, negative rating action would be likely.

The rating is limited, however, by the following: (1) while Oxy’s costs structure is currently favourable among peers, costs for production and reserve replacement are increasing, which is likely to put negative pressure on earnings going forward, particularly during periods of lower energy pricing; (2) the Company traditionally has difficulties in replacing reserves internally (particularly in the United States), and as such, relies largely on bolt-on domestic acquisitions. This has led to increased replacement costs over the last three years; and (3) maintaining growth becomes more difficult and costly to achieve as production levels increase.

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