Occidental Petroleum (OXY -0.15%) reported a massive $3.8 billion loss for the third quarter. While the continued weakness in oil prices played a role, the primary culprit was its high priced and ill-timed acquisition of Anadarko Petroleum. Overall, the company wrote down $3.1 billion in assets during the quarter, including another $2.4 billion of equity in Anadarko's former MLP Western Midstream Partners (WES -0.03%).
On a more positive note, the company performed well operationally during the quarter and progressed with its strategic plan. Here's a closer look at the quarter.
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Occidental Petroleum's third-quarter results
The challenging conditions in the oil market continued to hurt Occidental Petroleum in the third quarter. Asset writedowns played the biggest role during the period, but even after adjusting for that impact, the company still lost $783 million, or $0.84 per share -- $0.12 per share worse than analysts expected. Lower oil prices were to blame as its worldwide realized price fell from $56.43 in last year's third quarter to $38.67 in 2020.
The company sustained that deeper-than-expected loss even though its production exceeded the midpoint of its guidance range by 12,000 barrels of oil equivalent per day (BOE/D). The company was able to offset the impact of an active storm season in the Gulf of Mexico by producing more oil from its Permian Basin assets.
On a more positive note, Occidental Petroleum produced $1.4 billion of free cash flow during the period, the most since 2011. That's mainly due to its cost-cutting initiatives.
Meanwhile, the company made excellent progress in shoring up its balance sheet during the quarter. Overall, it announced $2.3 billion of asset sales, including its land grant acreage in the west, its onshore assets in Colombia, and a debt-for-equity exchange with Western Midstream. Unfortunately, those sales were $3.1 billion below its carrying value for these assets, necessitating the writedown.
The company used some of its free cash flow and a portion of those cash proceeds to reduce debt by a net $1.3 billion during the quarter. Meanwhile, it extended another $5 billion of near-term debt maturities until 2025 or later through a series of refinancing transactions. While it paid a high cost for this new debt, these moves bought it some valuable time.
What's ahead for Occidental Petroleum
Occidental's near-term focus will be on shoring up its financial profile. While the company has addressed a significant portion of its upcoming debt maturities, it still has about $1 billion coming due next year and roughly $4 billion maturing in 2022. Debt reduction remains a major focus for the company.
It aims to continue chipping away at its debt by selling $2 billion to $3 billion of assets next year. Meanwhile, it only intends to invest enough capital to keep its production flat in 2021, which will enable it to generate more free cash flow for debt reduction as long as oil prices are above $40 a barrel. However, with oil currently below that level, it might not produce much free cash next year.
Once its balance sheet is back on firmer ground, Occidental Petroleum intends to pay a higher dividend, reversing some of this year's 98.7% reduction. It also plans to grow its production. However, even when it returns to growth mode, Occidental only expects output to increase by 5% per year in the most optimistic scenarios. The global economy likely won't need too much more crude oil in the future since it's slowly pivoting toward cleaner sources like renewables. Given that gradual shift, the company expects to use any excess cash after funding that limited growth to repurchase stock or the preferred shares currently owned by Berkshire Hathaway.
Progress, but still a long way to go
Occidental Petroleum took steps toward repairing its balance sheet after its pricey and poorly timed bet on Anadarko Petroleum, but the company has a long way to go. It still has a significant amount of debt to address, which will remain more challenging if oil prices don't improve. The length of the company's road to recovery is also discouraging given the oil market's dimming long-term outlook against renewables.
