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

DBRS has today confirmed the Issuer Rating of Occidental Petroleum Corporation (Oxy or the Company) at “A” and the ratings of Oxy’s Senior Notes, Senior Debentures & MTNs and Commercial Paper at “A” and R-1 (low), respectively. All trends are Stable.

Oxy’s ratings are based on its (1) strong financial profile and historical track record of prudent financial management; (2) strong reserves, production and growth in the U.S.; and (3) good, consistent reserve replacement record.

Oxy’s financial profile remained strong in 2012, despite a modest cash flow deficit as a result of an increased capex program, coupled with lower pricing for both natural gas and natural gas liquids (NGL). Despite a modest increase in debt to fund its cash flow shortfall, the Company maintains significant financial flexibility, enabling it to withstand significant economic shocks with minimal impact on credit metrics. Oxy’s debt-to-capital remains one of the lowest among its peers (below 20% for more than five years) and is expected to remain at the current level, allowing the Company to maintain its financial resiliency.

The Company’s free cash flow generating capabilities are also among the strongest in the sector, which supports its liquidity and production growth (targeted at 5% to 8% per year). The Company’s operating cash flow benefits from a high proportion of production linked to oil-indexed pricing during near top-of-cycle conditions. This strong cash flow has typically allowed Oxy to fund dividends and capex internally, with minimal reliance on external funding sources. DBRS expects the Company to continue funding its long-term capital plans and dividends with operating cash flow, and maintain relatively low debt levels. Although DBRS anticipates no rating action in the near term, should this strategy change, with leverage increasing significantly, negative rating action would be likely.

This rating is limited 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, which 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:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.