The oil and gas sector has had a dramatic fall from grace over the past year. And perhaps no major oil company has fared worse than Occidental Petroleum (NYSE:OXY) stock. Just a year ago, the company triumphantly outbid Chevron (NYSE:CVX) for Anadarko, paying a staggering $38 billion to buy that oil firm.
A year later, that deal is in tatters as Occidental’s share price has collapsed. The combined Occidental and Anadarko company has a market capitalization of $16 billion – far less than Anadarko as a standalone firm was worth a year ago.
Sure, the overall energy industry troubles play a role in this downfall. However, Occidental has had a uniquely awful run over the past year. To give a sense of scale, Chevron could now theoretically acquire both Occidental and Anadarko for less than it offered for Anadarko by itself a year ago.
With that merger, Occidental mortgaged its assets at the worst possible time. Lacking balance sheet flexibility, the company has found itself crushed as energy prices subsequently plummeted. Now it is trying to right its course.
But is it too little to late? Let’s take a closer look.
Berkshire Hathaway Won’t Save the Day
Last year, many investors gravitated to Occidental Petroleum for two primary reasons. The first of these was its large dividend. That’s gone now. The second was that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) had invested heavily in the company. Berkshire funded a large portion of Occidental’s Anadarko acquisition.
Not only did Berkshire directly fund the deal with loans and preferred stock, it doubled down on the position by accepting OXY common stock in lieu of interest payments as well. All this support caused investors to think that Warren Buffett might effectively backstop Occidental in the future.
Unfortunately, that didn’t actually end up happening.
As the stock market crashed in March and the oil market came totally unglued, Berkshire Hathaway stood pat. It didn’t add to its stake in Occidental or much of anything at all, for that matter. Investors had hoped that Buffett might put far more money into Occidental given its collapsing share price this year. However, without Berkshire’s further assistance, Occidental has had to turn to desperate measures to muddle through.
Dividend Cuts: Painful But Necessary
As energy prices declined, Occidental’s cash flow projections headed south, forcing it to reduce its cost base. First on the chopping block was the work force. Occidental started firing employees in January, even before the oil market totally crashed in March.
The dividend soon followed. OXY stock had stood out from other oil majors with its unusually high dividend yield, which topped 8% at one point. However, Occidental slashed the dividend from 79 cents to 11 cents per quarter in March. It soon followed that with another massive reduction in March, leaving behind a mere 1 cent per quarter dividend.
It’s not just the dividend that’s going away either. Occidental is now trying to sell off various assets around the world to pay down its debt.
For example, its Rocky Mountain holdings were on the auction block. Occidental was, up until now, the largest private land owner in the state of Wyoming. Now it will be dumping that prime Powder River acreage in hopes of raising as much as $700 million. Still, that’s just a drop in the bucket compared to the company’s gargantuan $40 billion debt.
Verdict on OXY Stock
Occidental is starting to make the right moves to get back on track. However, it will be a long road to recovery. And, for many investors, there will be no confidence in the company until the company gets a new CEO. Occidental’s current leader, Vicki Hollub, managed the Anadarko merger so poorly that many investors, including Carl Icahn, have demanded that a complete overhaul of the company’s board of directors.
Occidental still has some great assets. In fact, it significantly improved its holdings with the Anadarko deal. Unfortunately, it paid such a steep price that it has put itself in existential risk. The company needs to sell assets or come up with some other solution to improve its ailing balance sheet.
Investors had been banking on Warren Buffett to help the company in its time of need. Without that, Occidental’s future looks rather murky. That’s not to say that Occidental is necessarily doomed. In fact, for long-term holders, things could still work out. However, there are much more compelling opportunities in the oil and gas space.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned BRK.B stock.