Tucked into its Sep. 21 regulatory filing, Occidental Petroleum (NYSE:OXY) announced that the $2,000 per share quarterly dividend on its Cumulative Perpetual Preferred Stock, Series A, would be paid on Oct. 15 in cash, rather than OXY stock.
In the previous quarter, Occidental paid the $200 million in quarterly dividend payments it owed Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) in stock. Warren Buffett promptly sold those shares, suggesting to investors that Buffett wasn’t convinced the oil company would rebound anytime soon.
As a result, I suggested that investors stay away from its shares, which were likely trading around $11 when he sold them.
That said, OXY stock did sell as high as $25 in early June, so it’s possible Berkshire was able to unload its common shares at a reasonable price. It received his April dividend payment when the shares were valued at $14.87 a share, and its July payment, where they were valued at $16.26 a share. They’ve been downhill ever since.
I expect when Berkshire reports its third-quarter equity holdings in mid-November that it will have sold the ones it received in July as well.
Why Is OXY Stock a Speculative Buy?
The only way Occidental would pay its $200 million in quarterly preferred dividends in cash is if it knew that its cash flow situation was strong enough to enable it to dole out cash rather than common shares. At current prices, Berkshire would get approximately 19.3 million shares on Oct. 15 or 66% more than the payout in July.
CEO Vicki Hollub stated as much in Occidental’s August conference call with analysts.
“Our financial position has notably improved as we are currently free cash flow-positive and expect to generate significant free cash flow over the remainder of this year,” she said.
One of the reasons Occidental can pay the preferred dividend in cash, other than the fact it expects to generate positive free cash flow in 2020, is that it only had to pay $2 million of the $992 million due for its 2036 zero-coupon senior notes.
The next date for repayment is October 2021. The holders of the zero coupons can request full repayment at that time. In the meantime, it has access to $990 million in cash flow it wouldn’t have had were the entire amount due put to the company.
The price of a barrel of West Texas Intermediate at the time of Occidental’s second-quarter announcement was around $40. Its breakeven in 2020 is in the low $30s. Further, planned asset sales should allow it to lower its long-term debt by a couple of billion dollars by the end of 2020.
At the end of the second quarter, Occidental had $36.0 billion in long-term debt and finance lease liabilities. That was down $2.5 billion from the end of December. Including cash and cash equivalents, its net debt dropped by $500 million over the first six months of 2020.
It might not be a massive reduction, but at least it’s heading in the right direction.
My InvestorPlace colleague, Chris Markoch, recently argued that a gamble on OXY stock is the right gamble at the wrong time, suggesting that the company’s impressive array of assets are meaningless if oil continues to hover around $40.
“For Occidental to be anything more than just a quick trade, oil prices have to rise above $40 and stay there. The company has an impressive collection of assets that have value. But for those assets to pay off, the company needs rising oil prices,” Markoch wrote on Sept. 25.
“Otherwise, they’re just kicking the debt can down the road. And while that’s better than going bankrupt, eventually, the debt will come due.”
In my August article, I argued that as long as Warren Buffett was selling the OXY stock received instead of cash dividends, it wasn’t a buy for most shareholders.
However, if you’re a speculative investor, given its cash flow is improving, I’d say that buying its shares under $11 isn’t the worst move in the world. That said, you won’t catch me buying its shares.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.