Occidental Petroleum Corp. (NYSE: OXY). While OXY’s dividend cut and capital spending reductions will help it to conserve cash, we do not believe this low spending is sustainable given the associated production declines.
In addition, the company has substantially increased its debt as a result of the Anadarko acquisition, and we believe that meaningful deleveraging will be difficult with oil prices at or even modestly above current levels. We also believe that OXY faces substantial integration risks from the Anadarko acquisition and that Anadarko’s liquefied natural gas and offshore assets are not a strong strategic fit for Occidental. In our view, it will take more time and healthier energy markets for the acquisition to provide significant benefits.
Total 3Q revenue came to $2.989 billion, down 25% from 3Q19 but up 47% from 2Q20. The consensus estimate was $4.266 billion.
The Oil and Gas division reported a 3Q20 pretax net loss of $1.072 billion, down from a net profit of $268 million in 3Q19.
In the Chemicals division (OxyChem), third-quarter pretax earnings came to $178 million, down from $207 million a year earlier. Additionally, the company reduced spending on some noncritical maintenance items.
The Midstream and Marketing segment reported a 3Q pretax loss of $2.791 billion. Excluding this write-down, the 3Q results were largely comparable to the prior year.
EARNINGS & GROWTH ANALYSIS
Occidental reaffirmed its 2020 outlook on its 3Q20 conference call. Management anticipates capital spending of $2.40-$2.60 billion. It has also identified $1.2 billion in operating and overhead cost reductions to be realized this year, in addition to $1.1 billion in cost synergies from the Anadarko acquisition. Occidental did not provide updated production guidance for the remainder of 2020.
FINANCIAL STRENGTH & DIVIDEND
The higher-than-average debt balance is mostly due to the Anadarko acquisition. The company had short-term borrowings of $3.017 billion at the end of 3Q20.
On March 10, 2020, Occidental cut its annualized dividend by 86% to $0.44 per share, which we estimated would save the company about $2.4 billion per year. On May 29, it further reduced its annualized dividend to $0.04 per share, for a yield of about 0.3%.
MANAGEMENT & RISKS
Vicki Hollub has succeeded Steve Chazen as the company’s CEO. Ms. Hollub has nearly 35 years of experience. We view the CEO succession favorably given Ms. Hollub’s long tenure at Occidental and direct experience managing its fast-growing Permian business.
OXY’s resource development has traditionally focused on returns rather than on total production. Its process includes exploration to establish a commercial resource presence, testing and gathering data to optimize well completion, pilot programs to assess the variability of well performance, and the transition to manufacturing for field development. We think this process helps Occidental to develop its acreage in a way that maximizes returns and cash flow.
As a result of recent asset sales, OXY is focusing development efforts on high-return core areas of the Permian basin, as well as on parts of the Middle East.
OXY’s performance, like that of peers, is tied closely to oil prices, which can cause dramatic swings in stock prices, earnings and cash flow. The company does not have any meaningful production hedges in place. OXY investors are also exposed to trends in global economic growth and interest rates.
Occidental is one of the largest U.S. oil and gas companies, based on equity market capitalization. Is based in Houston. It acquired Anadarko Petroleum in August 2019.
The stock has risen strongly since the third-quarter earnings report on November 9.
Valuation based on P/E is meaningless given our operating loss forecasts for both 2020 and 2021. However, we believe that these relatively low multiples are justified and that they reflect the challenging macroeconomic energy environment as well as the company’s high leverage and ongoing asset divestitures.
On November 19 at midday, HOLD-rated OXY traded at $13.02, up $0.15.