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Occidental ‘s Balance Sheet Springs a Leak

Occidental Petroleum warned it will be writing down the value of its oil and gas assets by $6 to 9 billion because it expects a “prolonged period of lower commodity prices.”

The announcement comes at a time when billion-dollar writedowns are common in the business—this is roughly half the size of BP’s recent reduction--but it is tougher on Occidental which is carrying the burden of the more than $35 billion in debt added to acquire Anadarko last year.

The valuation change that will be reported on its next quarterly earnings report does not reduce Occidental’s cash on hand to pay the bills, but it will reduce its total equity by up to 25%, worsening its already worrisome ratio of debt to equity.

A lingering period of oil prices near $40/bbl means that strong production during the current quarter—from 1.34 to 1.4 million BOE—will not generate the cash the company needs to deal with $12.1 billion worth of debts coming due by 2022.

“While OXY has made substantial progress capturing acquisition synergies, and is itself a low-cost operator with attractive Permian Basin acreage, asset sales initially projected to raise cash for debt reduction have been insufficient to meaningfully address sizable upcoming debt maturities, “ said Moody’s in a statement explaining why it had downgraded Occidental’s debt rating, pushing it a bit deeper into junk bond territory, from Ba1 to Ba2.

The price crash caused by measures to slow the spread of COVID-19 reduced Occidentals operating profits and derailed its plan to sell major assets to pay down its debt.

“The weaknesses in OXY's credit profile has left it exposed to shifts in market sentiment in these unprecedented operating conditions and OXY remains vulnerable to the outbreak continuing to spread,” Moody’s wrote.

On the plus side, the bond rating agency did say Occidental’s “near-term liquidity is adequate.”

Occidental ‘s Balance Sheet Springs a Leak

Stephen Rassenfoss, JPT Emerging Technology Editor

26 June 2020

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