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Fitch: Phibro Acquisition May Create Additional Risk for OXY's Credit Quality
Fitch Ratings anticipates no change to Occidental Petroleum's (OXY) credit ratings (IDR 'A'; Outlook Stable) following the company's announced acquisition of energy trading unit Phibro LLC from Citigroup. The trading unit will be purchased for a net investment of $250 million, with the transaction expected to close by year-end. The unit is expected to retain its existing management team, including Andrew Hall, and will be housed in OXY's midstream segment.
The acquisition is not expected to materially change leverage metrics for OXY; however, it does appear to be somewhat of a departure from the company's past acquisition practices. While trading operations are likely to generate significant income, they also have the potential to weaken the company's future credit quality. From a credit perspective, Fitch will be focused on the amount of credit support that OXY lends to the trading unit, the position limits that management places on the unit to allow it to achieve its goals, and the level of oversight the unit is placed under. Fitch would note that while trading operations can be highly profitable on average, the underlying volatility of trading also has the potential to periodically produce individual quarters with significant losses.
Historically, OXY has maintained a limited hedging book, consistent with its goal of maintaining full exposure to commodity markets. At June 30, 2009, total hedges accounted for approximately 3% of total oil production and a slightly higher percentage of natural gas production. The company also executes hedges to lock in margins in its midstream segment. At the end of the second quarter, related to its hedging program, OXY recorded a net derivative liability of $238 million on its balance sheet.
OXY's current credit quality is high given its low debt levels, track record of strong free cash flow (FCF) generation, high leverage to oil, and solid operational performance. The combination of low debt and sizable reserve additions has resulted in credit metrics that are strong for the 'A' rating and are comparable to levels seen among higher-rated supermajors. Exploration and production (E&P) debt/barrel of oil equivalent (boe) proven reserves was just $1.03/boe at June 30, 2009.
Fitch currently rates OXY as follows:
--Issuer Default Rating (IDR) 'A';
--Senior Unsecured Bank Facility 'A';
--Senior Unsecured Debt 'A';
--Commercial paper 'F1';
--Short-term IDR 'F1'.
The Rating Outlook is Stable.
Occidental Petroleum Corporation is an international oil and gas exploration and production company whose upstream strategy is to focus on mature, low geological risk properties and raise production through various Enhanced Oil Recovery (EOR) techniques, including steam flood, carbon flood and water flood. Producing regions include the United States, Middle East/North Africa and Latin America regions. The company's core U.S. properties are located in the Permian Basin, Elk Hills and other California locations, as well as the Hugoton Basin. Production Sharing Contracts (PSCs) comprised approximately 28% of 2008 reserves. Reserves that have PSCs or PSC-like contract structures include Qatar, Yemen, Oman, Libya, Dolphin, and THUMS Oxy's wholly owned subsidiary, OxyChem, manufactures and markets basic chemicals, vinyls, and performance chemicals across 24 manufacturing sites. Occidental also reports a separate midstream segment. Total employee count as of Dec. 31, 2008 was 10,400, including 6,900 in the U.S.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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