Please ensure Javascript is enabled for purposes of website accessibility

Crashing Crude Prices Cause Occidental Petroleum's Earnings to Plunge Into the Red

By Matthew DiLallo - Updated May 6, 2020 at 7:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The oil giant continues to adjust its plan as it tries to navigate the challenging oil market.

The oil market downturn hit Occidental Petroleum (OXY -1.29%) hard during the first quarter. The oil giant posted a steep loss, even after adjusting for several non-cash writedowns. The weak pricing also forced it to make additional changes to its operating plan and take other steps to navigate through this challenging period. 

A look at Occidental Petroleum's first-quarter earnings

Occidental Petroleum reported a net loss of $2.2 billion, or $2.49 a share, for the quarter, in large part because of several non-cash writedowns. The biggest was a $1.4 billion impairment charge of its investment in master limited partnership Western Midstream Partners (WES 2.28%), which it acquired as part of its $55 billion deal for Anadarko Petroleum. Occidental also wrote down the value of its oil and gas properties by $580 million, took a $670 million loss on some interest rate agreements, and recorded $150 million in acquisition-related charges from the Anadarko Petroleum transaction. On a more positive note, the company did book a $1 billion gain on its oil hedges, which helped offset some of those writedowns.

Oil field worker with a laptop at sunset.

Image source: Getty Images.

Even after adjusting for these non-cash charges, Occidental Petroleum reported an adjusted loss of $467 million, or $0.52 per share, largely because of the impact of lower oil prices. On the bright side, that did beat the analysts' consensus estimate by $0.10 per share.  

The company's oil and gas operations delivered $179 million of pre-tax income, boosted by its oil hedges. Those contracts enabled Occidental to capture an average price of $46.17 per barrel in the U.S. and $50.95 per barrel internationally. Meanwhile, total production averaged 1.416 million barrels of oil equivalent per day (BOE/D) during the quarter, which came in about 31,000 BOE/d above the midpoint of its guidance range.

The company's OxyChem business was one of the few bright spots. It generated $186 million of pre-tax income during the quarter, which exceeded the company's guidance by $36 million.

The midstream and marketing business, meanwhile, delivered a pre-tax loss of $1.3 billion. That was entirely due to the $1.4 billion writedown of the company's stake in Western Midstream. It's marketing business helped offset some of this by recording gains on the value of some of its crude oil contracts.

A look at what's ahead for Occidental Petroleum

Occidental Petroleum is trimming its capital spending range for the third time this year. The company now expects to invest between $2.4 billion and $2.6 billion on capital projects, which is a 50% reduction from its initial budget. It has also identified an additional $1.2 billion of operating and overhead cost savings that it expects to realize this year. That's in addition to achieving its initial $1.1 billion cost savings target from the Anadarko merger one year ahead of schedule.

That transaction, however, continues to weigh on the company's balance sheet. Occidental had planned to sell assets to help pay off the debt associated with the deal but has run into several snags, made worse by low oil prices. The company, for example, had planned to sell Anadarko's African assets to French oil giant Total (TTE 1.52%) for $8.8 billion. While it closed one of those sales, Total said that it wouldn't be able to acquire Occidental's assets in Algeria because the government objects to the deal. Meanwhile, Occidental tried to monetize some of its stake in Western Midstream, but the MLP's value has plummeted over the past year, effectively taking this option off the table. 

With its sales processes stalling, Occidental has reportedly hired investment bank Moelis to help find ways to reduce its $40 billion debt burden. The Wall Street Journal reported that Occidental could try to buy some of its bonds at a discount or launch an exchange offer to help push out some of its maturities. It had also considered selling its chemicals business but won't until prices recover. One thing the Journal report made clear is that Occidental's hiring of Moelis isn't because it intends to restructure via bankruptcy, which is a future some see as a possibility for the deeply indebted oil company.

A long road ahead

As Occidental Petroleum's first-quarter results show, the oil market downturn is having a significant impact on its operations. The company entered this period in a less-than-ideal position because it had just completed its debt-funded purchase of Anadarko. With that deal already pressuring its balance sheet, the company has had to slash spending so that it didn't make matters even worse. Unfortunately, reducing spending won't solve all its problems, as it needs to start taking strides to reduce debt so that it doesn't end up going bankrupt.

 

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
OXY
$63.51 (-1.29%) $0.83
TotalEnergies Stock Quote
TotalEnergies
TTE
$52.65 (1.52%) $0.79
Western Midstream Partners, LP Stock Quote
Western Midstream Partners, LP
WES
$28.30 (2.28%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.