Today, investors in Occidental Petroleum (NYSE:OXY) are having quite the day. Currently, OXY stock is up more than 10% as investors price in a key catalyst.
So what is this key catalyst?
Today, the company announced that it would be buying back $2.5 billion of its junk-rated bonds. This move is one that investors are taking very positively, and for good reason.
Occidental Petroleum, like many oil producers, operates in a capital-intensive industry. In order for it to see growth, it needs large, up-front capital. Accordingly, whether it’s stock or bond issuances, most large producers rely on outside capital to accelerate growth.
In previous years, Occidental has taken on a rather large debt load. When oil prices began to decline, so too did the company’s credit quality. With Occidental’s credit rating now in junk territory, additional financings become increasingly expensive.
That’s why today, this corporate decision to pay down debt is a big one gaining investor attention. Let’s dive into why this matters so much for OXY stock right now.
OXY Stock Surges on Debt Repayment Offer
Rising oil prices have certainly provided a near-term boon for oil producers such as Occidental. For the first time in a while, companies have excess cash flowing in that they can put to work.
For Occidental, the decision to pay down debt appears to be a smart one. Normally, companies like Occidental have been forced to issue long-term debt to cover near-term operating expenses, with the hope that rising oil prices over time would drive higher cash flows and improve leverage ratios. However, paying down debt directly immediately boosts the company’s earnings. Additionally, the company’s long-term earnings growth prospects improve, with bonds due as far out as 2049 being paid off.
The company notes that while oil prices remain high, the company isn’t focused on increasing production. Rather, Occidental is taking a long-term, slow-and-steady approach to producing profitable barrels of oil. This is likely music to the ears of more conservative investors.
Over-investment in good times is what can create debt burdens down the road. Today, Occidental is showing an inclination toward balance sheet improvement. Accordingly, the market has reason to cheer on OXY stock.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.