Occidental Petroleum (NYSE:OXY) had ambitious growth plans when it launched its bidding war for Anadarko Petroleum last year. When it finally sealed that deal, the company expected to grow its combined output by 5% per year, which would have been an impressive pace given the size of its operations. It also reaffirmed its commitment to pay a growing dividend, which it had increased for 17 straight years at the time of the deal.
However, crashing crude prices have forced the oil company to shift from growth to treading water. Instead of expanding production and the dividend, the company has had to trim them down to pay back the debt used to acquire Anadarko. With a significant amount still to address, it might not grow either for quite some time, if ever again, which was one of the takeaways on its second-quarter conference call.
A long road ahead
Occidental CEO Vicki Hollub gave investors a glimpse at what lies ahead during the second-quarter call, including a tentative plan for 2021. She noted that the company would need to spend about $2.9 billion next year to "sustain production from our 2020 fourth-quarter rate." She further stated that "at this capital spending level, we could keep production flat at approximately $40 WTI [West Texas Intermediate]." That's slightly below the current price point of about $42.50 a barrel, implying it could generate some free cash next year.
Looking further ahead, Hollub said, "We do not intend to grow production until we have significantly reduced debt, and we view the long-term price of WTI to be sustainable at higher levels than where the current curve indicates." Thus, the company will, at best, likely aim to keep its production flat for the foreseeable future so that it can generate free cash to help pay down debt.
It also plans to sell assets to help chip away at its debt. It aims to close about $2 billion in asset sales by the end of this year and between $2 billion and $3 billion during the first half of next year. Those asset sale proceeds would combine with whatever free cash the company produces under its maintenance plan to help pay off the roughly $4.5 billion debt it has coming due next year, chipping away at its $36 billion total. It has a similar amount maturing in 2022, suggesting it could stay in maintenance mode through at least that year.
A long way to get back to even
Occidental Petroleum would eventually like to start growing its production in the future. However, Hollub warned that "in any eventual growth scenario, we expect that annual production growth will be less than the 5% per year that we had previously stated." That's because the company would also like to use some of its free cash to start growing its dividend again. It cut the payout twice this year, slashing it by 98.7% in total.
While Occidental Petroleum eventually wants to start increasing its production and payout, it's worth noting that it would be off of a much lower base. After producing 1.406 million barrels of oil equivalent per day (BOE/D) during the second quarter, Occidental expects a significant slide in its production during the second half of the year because of how deeply it cut its capital budget, as well as the impact of asset sales. In the third quarter, it sees output slumping to 1.225 million BOE/D, down 13% from the second quarter. Meanwhile, it expects its fourth-quarter production to decline by another 5% to 1.16 million BOE/D.
As Hollub previously stated, Occidental hopes to maintain its 2020 fourth-quarter exit rate in 2021, assuming oil prices cooperate. This outlook suggests that the company's production would need to grow more than 20% to get back up to where it was earlier this year. With an eventual return to growth coming in at less than 5% per year in even the most optimistic scenario, Occidental might never truly grow its production, since it would merely be making up lost ground. Also hampering its growth prospects is the fact that the global economy is pivoting from fossil fuels toward renewable energy, lessening the demand for oil in the future and reducing the need for Occidental to grow its output.
Likewise, even if Occidental Petroleum starts growing its dividend again, the payout probably won't return to its former height. For starters, it has a long way to go. On top of that, Occidental will have lots of other uses for its free cash, including additional debt reduction and redeeming its high-cost preferred stock.
Goodbye to growth
Occidental Petroleum had grown its production and dividend for many years. However, this year's oil market downturn caused both to head in reverse, primarily because it bet too boldly on growth by paying a high price to acquire Anadarko Petroleum. It will likely be years before the company has paid off enough debt to start growing either again, and even when it does, it might never bring back either to their previous peaks. Because of that, it seems like the oil company's best days are in the past.