Occidental’s Bonds Plunge After Moody’s Cuts Rating to Junk

(Bloomberg) -- Occidental Petroleum Corp. bonds plunged after being downgraded to junk by Moody’s Investors Service as the Permian Basin shale producer struggles to deal with a high debt load in the face of oil’s crash.

Borrowing incurred by the $37 billion acquisition of Anadarko Petroleum Corp. last year is a “burden” that compromises Occidental’s “financial flexibility to confront the collapse in oil prices,” Moody’s said in a statement Wednesday. It cut the company’s rating to Ba1, one step below investment grade, from Baa3.

The yield on some of Occidental’s long-term bonds due to mature in 2049 jumped to 7.9%. The bonds are currently priced at 60.29 cents on the dollar, down from 93.53 at the beginning of the month.

The company’s stock plunged as much as 11%, near the lowest in two decades, before paring losses to trade little changed. U.S. crude futures were up 12% at $22.81 a barrel by 10:23 a.m. in New York, a day after plunging 24% to the weakest level since 2002.

Occidental Chief Executive Officer Vicki Hollub has mounted a rearguard action to save the company from a spiraling debt load by slashing its dividend for the first time in 30 years and cutting capital expenditure by one third. This week, she pledged to take action to “preserve the health of our company” in an email sent to staff that was seen by Bloomberg, foreshadowing tough times ahead.

The measures undertaken so far by Houston-based Occidental haven’t been enough for Moody’s, which called the 86% cut in the dividend “long overdue.” Without a “significant and immediate” reduction of more than $7 billion of debt, Occidental’s cash flow metrics will be further stressed, it said. That’s even more likely to be the case after crude’s latest tumble to the lowest in almost two decades on Wednesday. Occidental’s plan to sell assets to fund the deficit faces “increasingly difficult headwinds,” due to the low price environment, the ratings agency said.

Hollub warned employees in her email that the company will be taking “aggressive steps” to combat the fallout from crude’s crash, without mentioning job cuts by name.

“In the coming days, we plan to provide you with more specifics,” Hollub said. “Some of the measures we take will be temporary through this crisis and others may be permanent.”

Occidental’s stock has been hit especially hard in the wake of crude’s historic meltdown as the coronavirus outbreak crushes demand and Saudi Arabia engages in a market-share battle with Russia by pumping more oil.

Hollub specifically has faced criticism over her decision last year to take on debt in order to beat Chevron Corp. in a bidding war for Anadarko. Billionaire investor Carl Icahn is escalating his campaign to fire Occidental’s board.

The enlarged Occidental had gone through a recent round of layoffs as part of efforts to achieve the “synergy goals” of that deal. Across the shale patch, oilfield employees are nervous about the threat of further job cuts as crude prices continue to fall well beyond levels needed for drilling to generate cash.

“Many oil and gas companies will not make it through this crisis,” Hollub said. “In my 39-year career, I’ve gone through many downturns and know from personal experience how difficult they are.”

©2020 Bloomberg L.P.