Brace for More Declines by Occidental Petroleum

When Occidental Petroleum (NYSE:OXY) declared a paltry dividend of just 1 cent per share on Sept. 3, the news reminded investors about how bad Occidental’s acquisition of Anadarko was. Meanwhile, Occidental’s top executives get paid millions as its shareholders suffer. The steady decline of OXY stock that resumed after the June peak will not change course anytime soon.

A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

Source: Pavel Kapysh /

Occidental needs a few positive catalysts to reverse the decline and potentially get its shares back to the high of around $24 they reached in June.

OXY Stock’s Extended Underperformance

Occidental completed its acquisition of Anadarko Petroleum for $55 billion on Aug. 8, 2019. At the time, its CEO, Vicki Hollub, said, “We expect to deliver at least $3.5 billion annually in cost and capital spending synergies and the focus of our Board and management team is on execution to achieve the promise of this exciting combination.”

Normally, companies operating in a weak industry may merge and cut their costs, increasing their profit margins. Yet the timing of the Anadarko deal was Occidental’s fatal flaw.

The novel coronavirus damaged the global economy earlier this year, reducing demand for oil,  and  the Organization of Petroleum Exporting Countries (OPEC) increased its forecast for non-OPEC oil supply in 2020.

Due to these trends, Occidental will likely post a loss for the third quarter. Analysts’ average earnings per share forecast is a 65 cent loss, according to Tipranks. Analysts’ average rating on the stock is “underperform,” the website reported.

Asset Divestiture

Asset sales will help the heavily indebted firm improve its balance sheet. Occidental sold its Wyoming Lands and Mineral rights for $1.33 billion on Aug. 19, 2020. Its CEO said in the press release accompanying the deal that the sale would help Occidental meet its goal of selling over $2 billion of its assets.

Unfortunately, selling assets when the oil market is in a protracted decline is a disservice to the company’s shareholders. Still, the company has no choice but to slim down as energy prices stagnate.

The company’s debt-to-equity ratio of 2.83 times is higher than that of Exxon Mobil’s (NYSE:XOM), 0.39 times, and Chevron Corporation’s (NYSE:CVX) 0.25 times. Investors could buy the shares of these companies instead, given their better balance sheets.

Ultimately, however, OXY stock has a better chance of rebounding than its peers if energy markets improve. That’s because the firm has a higher debt load than they do and would therefore post a better return on capital.

Near-Term Tasks

Occidental has prioritized reducing its debt in the near-term. It is watching its cash flow from operations, too.

But the deteriorating energy sector has put the company at risk of a liquidity crunch. To prevent that, it is selling assets. That should enable it to meet its debt-payment obligations with its cash flow from operations.

Currently, Occidental is in no position to raise its dividend.  The company’s debt levels are high and will only drop meaningfully when it sells off more assets.

On the company’s Q2 earnings conference call, Occidental CFO Robert Lee Paterson discussed the company’s sustaining capital guidance. Sustaining capital refers to the amount of capital spending that the company needs to meet its production goals.

“We provided sustaining guidance as a stand-alone company prior to the acquisition, it was $2.5 billion to hold 715,000 to 730,000 barrels a day of production. That means our 2021 sustaining {capital guidance} results in roughly 60% higher production for 2021 with only 15% more CapEx,” Paterson said.

Based on that statement, I believe that if Occidental’s midstream and chemical business perform well, it will still be able to pay a token dividend.

The Bottom Line on OXY Stock

Occidental is suffering just like all the other oil companies. But as long as its cash flow covers its upcoming debt due, the stock should not fall much further.

Buying OXY stock at these levels, however,  comes with risks connected to oil prices. And since prices are not predictable, investors cannot determine the right time to buy the shares. Keep watching the stock for now.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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