Occidental Petroleum Traveling on Down Junk Bond Road
Oil & gas producer Occidental Petroleum Inc. (NYSE: OXY) announced Thursday that it plans to repurchase up to $1.5 billion in senior notes due in 2021 and 2022. At the same time, the company has filed a prospectus with the U.S. Securities and Exchange Commission (SEC) to offer three tranches of senior unsecured debt valued at $1.475 billion in net proceeds.
Oxy got some bad news from rating agency Moody’s Investors Service soon after the announcement. Moody’s concluded a review begun on March 18 and has lowered the company’s corporate family rating from Ba1 to Ba2 on approximately $38 billion of Oxy’s debt.
The proposed new issuance of senior unsecured debt is also rated at Ba2 and the rating firm’s outlook was left at negative.
In its SEC filing, Oxy said it expects to recognize an impairment charge of $6 to $9 billion in the second quarter related to its proved and unproved oil & gas reserves. March’s sudden drop of crude oil prices related to the slowdown in the global economy due to the COVID-19 pandemic has left oil prices about a third lower than they were at the beginning of the year and, Oxy said, if prices don’t improve further impairment charges are possible.
Among other risk factors, the company noted that a downgrade of its credit rating “could negatively impact our cost of and ability to access capital.” The prospective notes offering is Oxy’s first go at the credit market since its debt was downgraded to junk in March.
The company is particularly eager to repurchase $1.25 billion in 4.10% floating rate notes due next year according to a Bloomberg report. The report also cited unnamed sources who said the five-, seven, and ten-year unsecured notes could be very costly. The five-year notes may carry a coupon of around 7% or more, while the seven-year notes would add 50 basis points and the ten-year notes would add another 50 basis points.
Oxy has little choice but to seek more credit. Asset sales, which were expected to help pay for the acquisition of Anadarko, have found no takers and likely won’t until the economy begins a permanent recovery from the coronavirus outbreak.
With crude oil prices up about 2.3% in the early afternoon at $38.87 a barrel, Oxy’s shares traded up about 1.6% at $18.30 in a 52-week range of $9.00 to $54.05. The company pays a dividend of $0.01 per quarter and has a consensus 12-month price target of $14.55. Oxy’s market cap of around $16.8 billion is less than half the $38 billion it paid in cash and stock for Anadarko last year.