What happened
Shares of Occidental Petroleum (OXY 0.57%) rocketed over 10% higher as of midday on Monday, as concerns over Russian sanctions pushed global oil prices higher. The company would benefit from higher prices, and Occidental also stands to benefit versus oil majors that have properties and exposure to Russia.
The strong day comes on the heels of last week's earnings report that handily beat expectations, and one in which Occidental increased its dividend by 1,200%.
So what
As many know, oil prices have been rising on increased demand, along with supply that has been slow to return from the pandemic. But oil prices jumped over 4% Monday, as traders began to consider the possibility of Western sanctions cutting off Russian oil supplies from the world market.
Over the weekend, Western nations banded together to cut off some major Russian banks from the SWIFT payments system, which could disrupt oil and gas transactions, even though oil and gas transactions were initially exempt from sanctions. Russia provides about 10% of oil supply globally. Also on Monday, OPEC+ revised its forecast for the supply demand balance for 2022, showing less oversupply than previously forecast. Several oil majors also announced they would be divesting their Russian assets, which could further limit supply.
Last week, Occidental delivered an earnings report that handily beat analyst expectations for both revenue and earnings. In conjunction with the earnings release, management also detailed a new capital return program that increased its quarterly dividend from $0.01 to $0.13, as well as a new $3 billion share repurchase program. The ex-dividend date from the upcoming dividend is March 9.
Occidental is generating so much cash flow at these prices that it can also afford to pay down its large debt load, which currently stands at nearly $30 billion. Management wants to get that down to $20 billion this year and increase its debt rating to "investment grade." Currently, Occidental's notes are rated "junk" by major credit ratings agencies.
On Monday, management made a tender offer for up to $2.5 billion of its notes maturing between 2023 and 2049.
Image source: Getty Images.
Now what
Shale oil companies look attractive these days, as these companies have consolidated and lowered drilling costs over the past few years amid low oil prices. Now, with prices surging and Russian oil potentially going off the market, they are all benefiting handsomely.
Despite geopolitical tensions, most shale CEOs have vowed to limit their production growth to 5%. Occidental CEO Vicki Hollub reiterated that strategy on last week's earnings call. However, given the spike in oil prices, we'll have to see if that discipline holds if oil shoots north of $100 per barrel.
In the long term, oil companies may be challenged as the world switches to more renewable fuels. However, the near-term certainly looks attractive for U.S. oil companies with no exposure to Russia.
