Occidental Petroleum (OXY 0.02%) expected its acquisition of CrownRock to move the needle for investors. So far, so good for the oil giant. It delivered robust free cash flow during the third quarter, which allowed it to continue strengthening its balance sheet.
Here's a closer look at the quarter and what's ahead for the oil company.
NYSE: OXY
Key Data Points
Drilling down into Occidental Petroleum's third-quarter results
Occidental Petroleum produced $977 million, or $1 per share, of adjusted net income during the third quarter. That was well ahead of analysts' expectations. The consensus estimate was that it would produce $0.74 per share of adjusted net income.
The company delivered a stronger-than-expected profit, despite lower commodity prices during the period. Occidental's oil and gas segment's pre-tax net income was $1.2 billion, down from $1.6 billion in the second quarter. That was due to lower commodity prices (crude was 6% lower, NGLs were down 4%, and natural gas declined 26%).
Occidental partially offset lower pricing through higher volumes. Its production averaged 1.4 million barrels of oil equivalent (BOE/d) during the period, which exceeded the midpoint of its production guidance by 22,000 BOE/d. The company delivered strong output in the Permian Basin (30,000 BOE/d higher than the midpoint), thanks partly to its recent acquisition of CrownRock.
That deal helped fuel strong cash flow. Occidental produced $3.1 billion in operating cash flow, covering its roughly $1.7 billion of capital spending with about $1.5 billion to spare. The company's recently closed CrownRock acquisition helped fuel that strong free cash flow.
Occidental expected the deal would add $1 billion to its annual free cash flow at $70 oil. The deal was even more accretive in the third quarter when crude averaged $75 per barrel.
The oil company also delivered stronger earnings in its chemicals (OxyChem) and midstream and marketing segments. OxyChem's pre-tax earnings were $304 million (modestly above its guidance), while midstream and marketing exceeded the guidance midpoint by $145 million.
Firming up the financial foundation
Occidental Petroleum used its gushing free cash flow to strengthen its balance sheet and repaid a total of $4 billion in debt during the period. That included $1.1 billion of debt maturities, all of CrownRock's $1.2 billion of debt that it assumed, and $1.7 billion of the term loans it took out to help finance the CrownRock deal.
In addition to its free cash flow, Occidental used asset sales proceeds to help repay debt during the quarter. The company sold $1.7 billion of assets during the period, including a portion of its stake in MLP Western Midstream Partners and some non-core assets in the Permian Basin.
Following its debt-reduction progress during the third quarter, Occidental Petroleum has now achieved 90% of its $4.5 billion debt-reduction target within two months of closing the CrownRock deal. That leaves only about $500 million remaining on its near-term debt-reduction target, which it initially hoped to achieve within 12 months of closing the acquisition.
While the company has plenty of time to accomplish the remainder of its goal, its current focus is on reducing debt. Because of that, it will likely allocate any excess free cash flow after paying its quarterly dividend to repay additional debt. Of note, it has about $300 million remaining on its 364-day term loan, due next year.
Occidental will also likely continue to monetize non-core assets as opportunities arise. The company set a target of selling $4.5 billion-$6 billion of assets after acquiring CrownRock. With $1.7 billion sold last quarter, it's still quite a ways off from this target.
One potential option is to continue selling down its stake in Western Midstream. It still owns a 2.3% interest in the MLP's general partner and 43.5% of its limited partner units that it could monetize in the future.
Off to a strong start
Occidental Petroleum expected its acquisition of CrownRock to move the needle. It certainly did during the third quarter, enabling the company to produce a gusher of free cash flow. Its strong cash flow has allowed it to repay debt quickly following the deal.
While the company's already 90% of the way to achieving its initial target, it will likely continue to repay debt in the coming quarters to further strengthen its financial position. That's making it an attractive oil stock to own for the long term.
