It turns out that oil really is a rising tide that lifts all boats. That’s literally about the only reason I can see for Occidental Petroleum (NYSE:OXY) to post a nearly 100% gain since mid-March. OXY stock jumped up over $24 per share before settling a little bit above $23.
The company delivered better-than-expected earnings and revenue. Now I admit that pulling out a revenue beat was impressive. But who is buying all this oil? And where are they going to store it? By the company’s own admission, it can’t just drill its way out of the current situation.
And I also look at earnings per share (EPS) with a jaundiced eye. The company posted negative 52 cents adjusted EPS. This was better than the negative 63 cents that analysts expected. However, it was the worst number the company posted in nearly four years.
Job Number One Is to Lower Debt
My fundamental problem against buying OXY stock is simply the amount of debt they are currently carrying. In particular, the $40 billion it paid for Anadarko Petroleum.
On the conference call that followed the release of its earnings report, president and CEO Vicki Hollub was pressed about the company’s near-term priority. Her response was telling:
Yes. Our highest priority will be to lower the debt. So rather than generate or have a growth target, our target is more to take free cash flow to lower debt. And we’ll structure our capital programs around ensuring that we can do that. We believe that with the assets that we have, we can get to a scenario where our sustainability price is such that we can generate free cash flow in a lower price environment. That free cash flow would then be used to lower debt. So debt will be the highest priority in the near term. And when I say near term, I’m talking over the next couple of years.
Occidental Cut Its Dividend as Well
Occidental still has a dividend, but barely. On June 1, the company issued a quarterly dividend of 1 cent per share (it was previously 79 cents per share). This broke a string of 17 consecutive years of dividend growth.
One of the reasons you’re willing to put up with the volatility of oil stocks is because of a reliable dividend. That’s not happening for Occidental shareholders any time soon. It will be getting debt off its books.
The Oil Industry Is Still Contracting
The United States had a blowout jobs report that suggests that the recovery is underway. But there’s a different reality being played out in corporations across the country.
Layoffs are on the rise, particularly in the oil industry. Chevron (NYSE:CVX) announced it was cutting up to 15% of its workforce at the end of May. BP (NYSE:BP) and Halliburton (NYSE:HAL) also announced layoffs. Other companies such as Whiting Petroleum (NYSE:WLL) have already declared bankruptcy.
Corporations are taking stock of the demand that has been lost. Many companies were able to get by either not issuing full-year guidance or removing full-year guidance. That is not going to fly in future quarters. And that means companies are taking steps now to take care of their bottom lines.
The Long-Term Outlook Is Not Favorable for OXY Stock
Some investors are making a bullish case for OXY stock based on billionaire Carl Icahn increasing his share in the company. But that would be misreading Icahn’s intention. Icahn wants to have more of a voice in Occidental’s operation. One of his main complaints is the company’s appetite for debt. Icahn was not a fan of the Anadarko deal.
And he’s not the only billionaire who is having reservations about OXY stock. As I wrote back in March, Warren Buffett got a sweetheart deal in Occidental’s purchase of Anadarko. But even Buffett acknowledged that the long-term outlook on oil was not in the company’s favor.
Traders have made money by taking a risk on a beleaguered stock. Bravo. But when the company’s upper management is saying that growth is not a priority for the next couple of years, investors would be wise to listen. Muted capital growth and a dividend that is likely to remain depressed for some time make OXY stock a no for me.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
