Speculators betting on higher oil prices in 2021 recently drove a spectacular run in the stock of Occidental Petroleum (NYSE:OXY). Shares of OXY stock are up more than 66% since Nov. 12, when TV analyst Jim Cramer told investors to sell the stock. He was repeating a call made earlier by JPMorgan Chase (NYSE:JPM).
In the long run, it’s not a bad call. Rising oil prices are only going to encourage alternative supply from solar and wind. Once a solar panel or windmill goes into production, that demand goes away permanently.
The short run is something different. Occidental is telling investors it can go back to paying dividends with oil at $40/barrel, and at $46/barrel it’s cash flow positive. The company says it has won back access to the credit markets.
What’s the real story, and why should investors remain suspicious?
The Oxy Stock Story
Occidental’s near-death experience began with what now looks like the dumbest deal of the Trump era, the $55 billion purchase of Anadarko Petroleum in 2019. About 80% of that was in cash, most of which Occidental CEO Vicki Hollub borrowed.
Chevron (NYSE:CVX), which lost the Anadarko bidding war, came up lucky as oil prices plunged with the novel coronavirus pandemic. Occidental opened for trade Dec. 16 at about $20/share. That’s a market cap of just $18.5 billion, less than 40% of what it paid for Anadarko.
Occidental fell to $10 in March and was still trading at $9 at the end of October. The “doubling” has come off those October lows, spurred by good news about vaccines and hope for sharply higher demand. Occidental also signed a new deal to explore for oil in Abu Dhabi.
Hollub spun-out Occidental’s midstream pipelines as Western Midstream in January and hoped to sell up to $15 billion of assets in 2020. She tried to sell Oxy’s African assets to Total (NYSE:TOT), but deals in Ghana and Algeria were blocked by local authorities.
Hollub did manage to sell roughly $2 billion in assets this year. Some Utah and Colorado leases, originally owned by Anadarko, went for $1.33 billion, and $825 million came in from Carlyle Group (NASDAQ:CG). for assets in Columbia.
That still left a huge debt mountain to climb, so Hollub pushed out maturities. Occidental is buying back some short-term paper with a coupon rate of 2.36%. To do that it’s using proceeds of long-term debt that cost 8% and more.
Occidental still had long-term debt of $36.7 billion at the end of September, but just $10 billion comes due before the end of 2025. What the bulls hope is that oil prices rise enough so that Occidental can sustain production and service the debt, then get acquired.
But the market no longer believes in oil. Tesla (NASDAQ:TSLA) is kicking Oxy out of the S&P 100 index, effective on Dec. 21. UBS (NYSE:UBS) joined the bear parade, saying Oxy stock rose too far, too fast.
Hollub now says Occidental will build a new business of capturing and re-using carbon dioxide. She claims Oxy will become net carbon neutral by 2050 and have a new, sustainable business model. Hollub, by the way, is one of two Houstonians on Forbes’ list of the 400 most powerful women for 2020. The other is Beyonce.
The Bottom Line
Speculators are betting on Hollub. She’s a creative executive, who has done all she can in 2020 to keep Oxy alive. But she’s the same lady who bought Anadarko in the first place.
That’s why Occidental isn’t a game for investors. There’s still a lot of risk. Speculators believe Hollub created potential for great reward, but there’s a difference between speculating and investing.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.