This report does not constitute a rating action.
Occidental Petroleum Corp. (OXY) closed its $12.4 billion primarily debt-funded acquisition of CrownRock L.P. on Aug. 1, 2024. Here, we answer questions regarding the transaction and OXY's credit profile.
Frequently Asked Questions
S&P Global Ratings upgraded OXY to 'BB+' with a stable outlook in January 2022. Is a further upgrade likely in the near term?
The recently closed acquisition of CrownRock raised the company's pro forma book debt balance (as of June 30, 2024) to $29 billion, increased OXY's leverage again, and has delayed the prospects of OXY achieving an investment-grade rating.
Since 2020, we have upgraded OXY's rating twice to 'BB+' with a stable outlook. Although OXY has improved its balance sheet, benefitting from recent healthy oil prices and production growth, it is still burdened by high debt levels associated with its $58 billion debt-funded acquisition of Anadarko Petroleum in 2019 and the subsequent period of low oil prices.
What are the target ratios OXY needs to achieve an investment-grade rating?
An upgrade would most likely stem from improvement in OXY's financial metrics, as we already consider its business risk at the stronger end of the satisfactory category. OXY is one of the largest oil producers in the U.S., its geographic footprint spans multiple onshore and offshore basins globally, and it has historically been an efficient operator. Furthermore, its midstream and chemicals businesses (as well as its noncontrolling stake in Western Midstream Partners L.P.) provide diverse sources of cash flow, making it less reliant on historically volatile oil and gas prices.
To cross the threshold to investment grade, OXY would need to increase and sustain its funds from operations (FFO) to debt above 45% and debt to EBITDA below 2x, even under our midcycle oil and gas price assumptions ($50 per barrel [bbl] for West Texas Intermediate oil and $2.75 per million [mm] Btu for Henry Hub natural gas). We would also expect management to maintain financial policies in line with those of its investment grade peers. We currently estimate FFO to debt of 35%-40% for 2025 and 45%-50% in 2026, and at around 30% under our midcycle price assumptions, which we test in 2027.
What is OXY's gross debt target, and when will the company reach it?
OXY has a publicly stated a gross debt target of $15 billion. Pro forma for the CrownRock acquisition, OXY's book debt as of June 30, 2024, stood at approximately $29 billion. This includes $17.9 billion of term debt, $9.7 billion of term loans and notes issued in July, and $1.2 billion of debt assumed from CrownRock on August 1. It does not include $743 million of finance leases.
By the end of the third quarter, the company will have repaid $3.8 billion of debt, which will bring gross debt to around $25 billion. This incorporates proceeds from divestitures that have closed or been announced year-to-date, including the sale of $818 million of Permian assets to Permian Resources Corp. and $700 million of Western Gas Midstream Partners L.P. units. Assuming the company hits the low-end of its $4.5 billion to $6.0 billion asset sale target and uses the incremental proceeds ($2.8 billion) to reduce debt, that would bring gross debt to about $22 billion.
We believe OXY can reach its asset sale target given its broad portfolio, but have not incorporated any potential proceeds (or reduced production or EBITDA) into our estimates beyond what has been announced to date. Based on our current estimates and assuming no share repurchases or additional asset sales, we estimate OXY could repay the remaining $7 billion to reach its $15 billion debt target by the end of 2026 or early 2027 with free cash flow.
Is OXY's gross debt target sufficient to achieve investment grade?
In short, no. Under our current assumptions, OXY's gross debt target of $15 billion is insufficient to maintain FFO to debt above 45% under our midcycle price assumptions. This is largely due to the $12 billion of adjustments we add back to OXY's reported debt.
What are the adjustments S&P Global Ratings makes to OXY's debt?
Consistent with our hybrid criteria, we treat the entirety of OXY's preferred stock ($8.3 billion as of June 30, 2024) as a debt-like instrument. This assessment is based on key features of the preferred, including the disincentives for deferring dividend payments (unpaid dividends accrue at 9% per annum, and OXY may not pay dividends on common stock during deferral), and ownership by one party.
In addition to the preferred stock (which is the biggest adjustment), other adjustments to OXY's debt include $3.2 billion of asset retirement obligations (AROs), $1.8 billion of lease liabilities, and $0.7 billion of pension liabilities. However, we subtract accessible cash in our adjusted debt figures, which amounted to $1.8 billion as of June 30, 2024.
What is the reported debt level OXY would need for investment grade given S&P Global Ratings' adjustments?
In our view, the company would need to bring its reported debt to $5 billion-$10 billion (excluding all S&P Global Ratings debt adjustments) by 2027 to maintain FFO to debt above 45% under our midcycle commodity price assumptions. This estimate incorporates our current operating assumptions for the remainder of 2024, 2025, and 2026, as well as midcycle pricing in 2027.
Can OXY redeem the preferred stock?
OXY management has indicated that the redemption of its preferred stock is a longer-term priority. However, in the near term, its ability to redeem preferred stock is limited. The $8.3 billion of preferred shares held by Berkshire Hathaway Inc. are only redeemable in two scenarios:
- If aggregate distributions on common stock for a trailing 12-month period exceed $4.00 per share (via dividends or share repurchases), OXY must use cash equal to such excess to redeem a portion of the outstanding preferred shares at $110,000 per share (a 10% premium), plus accrued and unpaid dividends, if any.
- OXY can voluntarily redeem the preferred stock after August 2029 at a premium of 5%, plus any accrued and unpaid dividends.
What are the implications of Warren Buffett and Berkshire Hathaway's equity stake in OXY?
Although Berkshire Hathaway Inc. (AA/Stable/A-1+) owns about 29% of OXY's common shares (and could own up to 34% with the exercise of its warrants), as well as 100% of the preferred stock, there is currently no direct effect on our rating on OXY. Berkshire has no seats on OXY's board, and Berkshire's CEO Warren Buffett has indicated that he is satisfied with OXY management and is not planning to take control of the company.
Berkshire does, however, have approval from the Federal Energy Regulatory Commission to acquire up to 50% of OXY's common stock.
If we believe Berkshire has assumed control of OXY, we could reassess our view of OXY as a subsidiary of Berkshire Hathaway under our Group Rating Methodology criteria, which could lead to an upgrade given Berkshire's significantly stronger issuer credit rating.
Related Research
- S&P Global Ratings Makes Modest Change To AECO Natural Gas Price Assumption; Other Prices Unchanged, June 11, 2024
- Occidental Petroleum Corp. Ratings Affirmed On Announced Leveraging Acquisition Of CrownRock L.P., Outlook Stable, Dec. 12, 2023
- How S&P Global Ratings Formulates, Uses, And Reviews Commodity Price Assumptions, April 20, 2023
| Primary Credit Analyst: | Carin Dehne-Kiley, CFA, New York + 1 (212) 438 1092; carin.dehne-kiley@spglobal.com |
| Secondary Contacts: | Paul J O'Donnell, CFA, New York + 1 (212) 438 1068; paul.odonnell@spglobal.com |
| Thomas A Watters, New York + 1 (212) 438 7818; thomas.watters@spglobal.com |
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