What happened
Shares of Occidental Petroleum (OXY 0.24%) fell 15.3% in August, according to data provided by S&P Global Market Intelligence. Several factors weighed on the energy company last month, including oil prices, earnings, and its controversial acquisition of Anadarko Petroleum.
So what
Occidental Petroleum started the month positively. It reported decent second-quarter results, including $0.97 per share of adjusted earnings, which beat analysts' expectations by $0.03 per share. Fueling that better-than-expected result was the company's production, which rose 3% from the first quarter and came in above its guidance range.
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The company would go on to close its purchase of Anadarko a week later. But analysts continued to criticize the deal. Evercore ISI, for example, downgraded shares from outperform to in-line, saying that the transaction makes Occidental larger but "significantly less valuable" as the merger "destroyed value" in its view. J.P. Morgan, meanwhile, downgraded shares from neutral to underweight following the close of the merger. The bank's analyst noted that the company's projected value wasn't compelling enough, especially given the concerns about the sustainability of its high-yielding dividend.
Analysts' concerns about the deal seemed to quickly come to fruition after Occidental disclosed disappointing production guidance for the third quarter and full year. The culprit was Anadarko's legacy assets. Occidental noted that maintenance and inspection activities caused higher-than-expected downtime in the Gulf of Mexico while third-party infrastructure issues hurt its output in the DJ Basin.
On top of all these issues, oil prices slumped last month, with the U.S. oil benchmark falling 6%. Driving down crude prices are concerns that the global economy is slowing, which could weigh on oil demand. The last thing Occidental Petroleum needs is lower oil prices, since favorable market conditions can help it sell assets to pay down debt from the Anadarko deal. On top of that, it could use the cash flow from higher oil prices to support its outsized dividend.
Now what
Occidental made a huge gamble when it aggressively bid to gain control over Anadarko. Neither investors nor analysts liked that deal because it will put significant near-term pressure on the company's balance sheet. Because of that, it needs to prove its doubters wrong by quickly selling assets at attractive values so that it can reduce debt while also delivering the expected cost savings. If it doesn't, then shares will continue falling.
