Occidental Petroleum (OXY 0.58%) made headlines this week by disclosing that it would pay an upcoming dividend to Warren Buffett's Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) in cash instead of stock. That shift in how it pays Berkshire's preferred stock investment suggests that the company has a lot more confidence in its balance sheet and liquidity than it did earlier in the year when it opted to dilute existing investors' stake by issuing shares to Buffett's company.
A few notable factors enabled the oil company to revert to paying this dividend in cash. While that certainly makes it seem like the company is heading in the right direction, it still has a lot of work to do before its balance sheet is back on solid ground.
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Having the confidence to pay in cash
One of the reasons Occidental Petroleum was able to pay Berkshire in cash this quarter is that the oil market has stabilized, which gives Occidental more confidence in its near-term cash flows. On the second-quarter conference call, CEO Vicki Hollub stated, "Our financial position has notably improved as we are currently free cash flow-positive and expect to generate significant free cash flow over the remainder of this year thanks to the relentless efforts of our teams as well as the moderate recovery in commodity prices." While oil prices have wobbled a bit since she made those comments, they were recently around $40 a barrel, well above Occidental's 2020 break-even level in the low $30s after it slashed capital spending and its dividend earlier this year.
Meanwhile, the company's balance sheet is on track to get a shot in the arm after it agreed to sell millions of acres of land in Wyoming, Colorado, and Utah for $1.33 billion in a transaction that should close next quarter. That sale puts the company on pace with its target to sell $2 billion in assets this year.
Finally, the company disclosed that holders of its 2036 zero-coupon senior notes only exercised their right to have the company repurchase $2 million of this debt in October instead of the full $992 million. Because of that, the company had the flexibility to use its cash to repay near-term debt maturities and Buffett's dividend.
Still a lot of debt weighing it down
Occidental Petroleum initially planned to sell between $10 billion and $15 billion of assets to help pay down the debt it took to buy Anadarko. However, oil price volatility and some other issues have it falling well short of that goal, so the company pivoted toward pushing out its debt maturities in hopes of paying them off with future asset sales and cash flow.
It made good progress on that goal earlier this year by issuing $2 billion in high-cost debt in June, which it used to redeem the bulk of the debt maturing in the first half of next year. The company made a similar move in August by concurrently offering longer-term debt to repurchase near-term maturities. These refinancing activities have helped push out a significant amount of Occidental's near-term debt maturities, which will buy it some valuable time.
However, most of the company's recent financial moves didn't reduce its overall debt load, which stood at $36 billion of long-term debt at the end of the second quarter, a monster amount for a $10 billion oil company by market cap. As a result, it still has an enormous task ahead to chip away at those borrowings. That will be tough to do since it needs oil to average at least $40 a barrel next year to maintain its current output level, meaning it won't generate too much free cash flow unless oil prices improve. Similarly, asset sales will remain a hard sell since many rivals are also struggling financially at the current pricing level, leaving few potential buyers.
Not as bad as it was, but still a long way to go
Occidental Petroleum's confidence in its financial situation has improved enough that it's now paying Buffett's dividend in cash. While that's a positive sign, the company isn't in the clear since it still needs to whittle down its massive debt load into a more manageable amount. That's not going to be easy since oil prices remain weak, which will impact its ability to generate free cash and sell assets, key components of that strategy -- so the risk remains that Occidental won't survive if oil prices crash again.
