IHS CERAWeek: Occidental CEO warns of looming midstream debt issues

2/23/2016

By Anna Driver

HOUSTON, Feb 22 (Reuters) -- Oil and gas pipeline and processing companies that borrowed vast amounts to grow when crude oil prices were much higher and US output was surging now face major issues over that leverage, the CEO of Occidental Petroleum warned on Monday.

During the plunge in crude oil prices, investors have punished exploration and production companies that had freely tapped capital markets for funds to drill new wells.

Now, those same markets are penalizing pipeline companies formed as master limited partnerships (MLPs), which rely on growth to pay out rich dividends to investors in exchange for favorable tax treatment.

"If you think debt is bad in the production business, the midstream has a lot more relatively," Stephen Chazen, Occidental's CEO, told the IHS CERAWeek conference in Houston on Monday.

Occidental does not have an MLP, a vehicle that soared in popularity when crude oil prices were much higher than those currently around $30/bbl.

"They were counting on growth in production that for now is not there. So that's really a major issue for the midstream - trying to deal with way too much debt given the (dividend) promises made to limited holders."

He added that money would be tougher to come by.

"They're going to have to do something," he said, mentioning selling assets or raising equity. "The debt is just not going to be there to roll over at a reasonable price."

Chazen said he believes the crude oil downturn has a lifespan of about three years, and the industry is about halfway through that cycle.

(Reporting by Anna Driver and Terry Wade; Editing by David Gregorio)