The second quarter was a horrendous one for the energy sector as crude oil prices and demand cratered because of COVID-19. Those brutal market conditions had a significant impact on Occidental Petroleum's (OXY 0.82%) second-quarter results. Overall, the oil giant lost an eye-popping $8.4 billion, or $9.12 per share, fueled in part by a massive writedown. Even without those impairment charges, the company still posted a steep loss.
But on a more positive note, the oil company did make some progress on its debt and cost reduction plans, which is helping relieve some of the pressure on its balance sheet.
Drilling down into Occidental Petroleum's second-quarter results
|
Metric |
Q2 2020 |
Guidance/Expectations |
|---|---|---|
|
Total production |
1,406,000 BOE/D |
1,340,000-1,400,000 BOE/D |
|
Permian Resources production |
465,000 BOE/D |
432,000-442,000 BOE/D |
|
GAAP earnings (loss) per share |
($9.12) |
($5.31) |
|
Adjusted earnings (loss) per share |
($1.76) |
($1.70) |
Data source: Occidental Petroleum. BOE/D=barrels of oil equivalent per day.
On one hand, Occidental Petroleum delivered strong operational results during the second quarter. Output was 36,000 BOE/D above the midpoint of its guidance range, fueled by better-than-expected Permian production. Unfortunately, that came during a period when oil prices were so weak that many of its peers curtailed some of their production to preserve that value for the future. Occidental only realized $23.17 per barrel of oil during the quarter, down 51% year over year.
As a result of those prices, Occidental posted a steep quarterly loss. Overall, it wrote down $6.6 billion in assets during the quarter, with some of that attributed to its high-priced acquisition of Anadarko Petroleum. Even after adjusting for those impairment charges, the company still lost $1.6 billion. That's despite delivering domestic operating expenses per BOE below its guidance at $4.69 as it achieved its 2020 annualized run rate for operating cost savings this year at $800 million. The company also met its goal for total overhead savings at an annualized run rate of $1.5 billion, which exceeded its initial target following the Anadarko deal.
Image source: Getty Images.
A look at what's ahead for Occidental Petroleum
All the turbulence in the oil market this year has put significant pressure on Occidental Petroleum's balance sheet, due to the amount of debt it took on to acquire Anadarko. On a positive note, the company made some progress in addressing its financial issues during the quarter by raising $2 billion of new debt, which it used to refinance some bonds set to mature next year. While it paid a high price for that new debt, the company eliminated most of the debt it had coming due in the first half of 2021.
However, the company still has a lot of work to do since it has around $4 billion of debt maturing next year and even more coming due in 2022. It also might have to redeem a $922 million note this October if creditors exercise their option.
Occidental is working to address its debt maturities in a variety of ways. It's currently trying to sell assets, which could net it more than $2 billion for debt reduction. The company is also on track to generate free cash in the back half of this year at the current oil price. Meanwhile, it ended the second quarter with $1.1 billion of cash and had $5 billion of available credit. Finally, it gave its investors warrants with a $22 strike price (shares are currently below $16.50). If the stock hits that level, and investors exercise their warrants, Occidental could pull in an additional $2.5 billion in cash.
Once the company gets its debt back to a more manageable level, it aims to shift its cash flow priorities. In the medium term, the company wants to pay a sustainable dividend -- it slashed the payout twice this year -- and resume production growth. Longer-term, it would like to repurchase stock and retire the high-cost preferred shares owned by Warren Buffett's Berkshire Hathaway, which it used to help fund the Anadarko deal. But all of that is wishful thinking if the company doesn't get past its upcoming debt wall.
Still not out of the woods yet
Occidental made some progress in addressing its financial woes during the second quarter. As a result, it doesn't have too much due over the next 12 months. While that certainty helps, it still has a substantial amount maturing between the second half of next year and the end of 2022. All eyes will be on whether the company can address this debt before it runs out of time.
