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Occidental Petroleum Continues to Walk a Tightrope

By Matthew DiLallo - Mar 1, 2020 at 11:22AM

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The oil giant is working quickly to manage its hefty debt load amid crashing crude prices.

Occidental Petroleum (OXY 2.65%) made a bold bet on the future of the oil market last year, when it wrestled Anadarko Petroleum away from Chevron's grasp. The company believed it could extract more value from Anadarko's assets, which is why it fought hard to complete the deal.

However, it took on a lot of debt in the process, which, when adding in this year's slump in oil prices, has weighed heavily on its stock price. As a result of those two issues, Occidental has had to work extra hard to navigate through its challenges. While it took several steps forward during the fourth quarter, an uphill battle remains.

Drilling down into Occidental Petroleum's fourth-quarter earnings

Metric

Q4 2019

Difference at the Midpoint of Guidance/Expectations

Total production

1,402,000 BOE/D

78,000 BOE/D

Permian Resources production

476,000 BOE/D

22,000 BOE/D

Adjusted earnings (loss) per share

($0.30)

($0.16)

Data source: Occidental Petroleum. BOE/D=barrels of oil equivalent per day. 

Occidental reported mixed results during the fourth quarter. On a positive note, its production came in well above the midpoint of its guidance range. However, the company's adjusted loss was nearly double the level that analysts anticipated. That was due in large part to its marketing and midstream segment, which delivered lower results because of a narrowing in the difference between oil prices in the Permian Basin and Gulf Coast.

One of the highlights on the quarter was that the company made significant progress toward integrating Anadarko as well as paying off the debt it took on to complete that transaction. It set a target to capture $2 billion of annual operational and capital cost savings. It's ahead of schedule on that goal, as it has already shaved $882 million of overhead and operating costs, as well as $323 million in capital expenses. The company believes it's on track to meet or exceed its $2 billion target.

The energy company also continued to make progress on improving its balance sheet. It has now signed contracts to sell $10.2 billion of assets, which puts it within striking distance of its $15 billion goal. It has closed several of those transactions, which, when combined with the free cash flow it has produced after covering its capital expenses and dividend, have allowed it to reduce debt by $7 billion.

An oil pump and storage tanks with the sun rising in the background.

Image source: Getty Images.

What's ahead for Occidental Petroleum

Given the recent volatility in the oil market, and Occidental's focus on shoring up its balance sheet, it put together a conservative capital plan for 2020. It currently expects to invest $5.2 billion-$5.4 billion on capital projects this year, though it could cut that number if oil continues to weaken. That projected capital budget is a significant reduction from the $9 billion that Occidental and Anadarko spent last year and slightly lower than its initial $5.3 billion-$5.5 billion capital spending projection. 

Even with that significant spending reduction, Occidental still expects to grow its output by about 2% this year. The Permian Resources segment will be the main driver at a 6% increase, which will offset flat to low growth elsewhere.

By keeping a tighter lid on capital spending, Occidental Petroleum will be in a better position to match cash flow with its projected outflows. It outspent its $2.2 billion in cash flow from operations during the fourth quarter as it funded $2 billion in capital projects and paid about $700 million in dividends. That's a concern since operating cash flow will probably decline in early 2020 because of this year's plunge in the price of crude oil.

With oil prices weakening, Occidental will need to continue making progress on its cost savings initiatives and its asset sales target to help reduce the pressure on its balance sheet. It still has several transactions left to close and others in the works, including a plan to sell some of its stake in master limited partnership Western Midstream (WES 0.86%), which it acquired when it bought Anadarko. It recently worked out a deal with Western Midstream that set the MLP up to operate as an independent company. The next step will be to reduce its stake in that entity below 50% so that Occidental can remove Western's debt from its balance sheet.

It needs to continue delivering

Occidental Petroleum is working to quickly integrate Anadarko and pay off the debt it took on to acquire that company. While it made progress during the fourth quarter, it has much more work to do. That won't be an easy task, given that crude prices have tumbled this year, which will cut into the company's cash flow while also making it harder to sell assets. Because of those challenges, investors might want to steer clear of this oil stock until it gets its balance sheet back on solid ground.

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Stocks Mentioned

Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
OXY
$60.44 (2.65%) $1.56
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$146.51 (1.20%) $1.73
Western Midstream Partners, LP Stock Quote
Western Midstream Partners, LP
WES
$24.52 (0.86%) $0.21

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