Occidental Petroleum (NYSE:OXY) has been in scramble mode this year. Cratering crude oil prices upended its plan to use free cash flow and asset sales to pay down a sizable portion of the debt it took on to acquire Anadarko Petroleum last year. That left the company exploring other options to shore up its balance sheet, especially since it has a significant amount of debt maturing next year.   

The oil company successfully tapped one alternative last week. It issued $2 billion of new bonds, which will provide it with cash to repurchase a sizable portion of those maturing in 2021 and 2022. However, because of its deteriorating credit profile, it paid a steep price for this debt.

A person handing over cash.

Image source: Getty Images.

Paying up for some breathing room

Occidental Petroleum has roughly $40 billion in debt outstanding, the bulk of which stems from last year's $55 billion purchase of Anadarko. None of that technically matures this year, though holders of $992 million of 2036 notes can force the company to repurchase them this October. Next year is a different story, as Occidental has $6.4 billion of debt coming due, with another $4.7 billion maturing in 2022. 

Given that massive maturity wall, Occidental is taking proactive steps to whittle that number down well ahead of time. It has offered holders of those notes the ability to tender up to $2 billion of them to the company (an increase from its initial $1.5 billion offer), though it will accept only $250 million of 2022's notes. It set other priority levels, offering to buy back some of its debt at a slight premium and others at a small discount. If successful, the tender offer would reduce its 2021 maturities by at least 27%, leaving it with roughly $4.65 billion to address. 

Occidental will pay for this exchange via $2 billion of newly issued debt. The company sold $500 million of five-year bonds that yield 8%, $500 million of seven-year bonds that yield 8.5%, and $1 billion of 10-year bonds that yield 8.875%. Those bond yields are well above what the company previously paid for debt before losing its investment-grade credit rating. For example, interest rates on notes due in 2021 and 2022 yield between 2.6% and 4.85% while a 2029 maturity has a 3.5% yield.

Kicking the can down the road

Because Occidental Petroleum issued new debt to repurchase existing borrowings, it won't reduce its total debt outstanding, as it's in effect refinancing some of its upcoming maturities a bit early. This move will buy the company more time to eventually address this debt, as it's pushing back these maturities from the 2021-2022 timeframe to the years 2025, 2027, and 2030, when it only had $800 million, $900 million, and $100 million of debt outstanding, respectively, before the recent high-yield bond issuances.

By pushing some of its near-term debt further into the future, Occidental will significantly reduce next year's maturity wall. That will make it easier for the company to address this debt via other means, including repayment via asset sales, debt exchanges, or additional refinancing.

However, it still has a sizable amount to address in the 2021-2022 timeframe, which is a significant hurdle given the state of the oil market and its balance sheet. Because of that, the company still has a lot of work to do as it seeks to relieve the pressure on its balance sheet.

A small step

On one hand, the fact that Occidental Petroleum was able to sell $2 billion in bonds last week to repurchase some that mature next year is a noteworthy accomplishment. While it paid a high price for this debt, that cost seems worthwhile since it could enable the company to significantly reduce next year's maturity wall.

However, the company still has a long road ahead of it, given that it has a lot of debt coming due in the 2021 to 2022 timeframe. It's not clear how it will manage these maturities, given its struggle to sell assets and generate free cash in the current environment. In short, Occidental remains a risky oil stock.