Occidental Petroleum's (NYSE:OXY) first-quarter results weren't too impressive against the backdrop of low oil prices. The Houston-based oil exploration and production company reported a net loss of $218 million, versus a net profit of $1.4 billion a year ago. However, the company booked a $31 million profit, or $0.04 per diluted share, on its core operations.
While overall costs and operating expenses remained at somewhat similar levels (barring an additional asset impairment of $324 million this time), revenues took a big hit, dropping as much as 38% from the year-ago quarter. Net sales came in at $3 billion this time, versus almost $5 billion a year ago.
On the earnings call, management stressed that its primary target for this year is to remain cash flow-neutral, wherein operating cash flow generated will cover dividend outlays and capital expenditures. Here are four things management said that investors of Occidental Petroleum should find insightful.
Management's primary goal: Remain cash flow-neutral for 2015
From Stephen Chazen, President & CEO:
Our principal goal for the year is to achieve cash flow neutrality, where our operating cash flow covers our capital spending and dividend outlays by the fourth quarter of this year at around $60-per-barrel oil prices.
Occidental's management has taken a prudent decision to not go after growth recklessly. The good news is that even $60 per barrel is good enough for the company to sustain flat production as well as return cash to shareholders through dividends and stock buybacks for 2015. Management plans to achieve this goal by deploying capital and operating cost savings into further production and cash-flow growth of the company's cost-efficient Permian properties and the Al-Hosn gas project in Abu Dhabi.
While the international crude oil benchmark, Brent, has been trading in the early sixties for the last six weeks, the domestic crude benchmark, WTI, trades below the $60 per barrel mark. Except for a few days days in May WTI prices have never crossed the $60 mark this year. Roughly half of Occidental's oil production is from North America which is tied to WTI prices, while the other half is from the Middle East which tracks the international Brent benchmark. So it remains to be seen whether Occidental will remain cash flow neutral by the end of the year.
The good news is that growth need not be a huge concern for Occidental. With a debt-to-equity of 20% and with $2.15 billion in cash reserves, the company is wisely protecting its solid balance sheet in the down cycle, rather than make hasty growth related decisions.
Dividends are safe, and share buybacks to continue
Again from Chazen:
We also announced a dividend increase of just over 4%. This is our 13th consecutive year that we've raised our dividend. We carefully considered our future capital needs and likely cash flows. Our current estimates are that we should be able to continue to grow our dividend for many years into the future. The new ethylene cracker, which comes on in 2017, provides a substantial boost in distributable cash from our already-important chemical business. Our base oil business in Abu Dhabi, Oman, and the Permian EOR will all support our cash flow and grow modestly over time.
The company's dividend track record says it all, and management doesn't want to drop the ball now. Not only does it want to safeguard the company's current dividend-paying capabilities, but it also wants to ensure consistent growth. Occidental has invested in certain defensive assets such as a new ethylene cracker, which comes online in 2017, as well as some cash-generating operations in the Middle East, which has modest growth but high reliability -- all solely for the purpose of boosting distributable cash flow.
Management also hinted that the company will continue its share-buyback program, "subject to stock price and market conditions," and expects to eventually buy back the entire 69 million shares authorized under the current program.
Oxy's Permian resources should add value organically
More from Chazen:
The Permian Resources segment has made considerable progress over the last six months, improving our capital efficiency. ... [W]e have at least 16 years of inventory with returns that exceed our cost of capital at oil prices less than $60 [per barrel].
Thanks to its outstanding asset base in the Permian, even WTI prices below $60 per barrel are enough to generate returns in excess of capital deployed for the next 16 years. Obviously, that time range will go up if oil prices increase.
Management has deployed the minimum number of rigs in the Permian (around 25), with the current focus on getting as cost efficient as possible. Additionally, the number of days for drilling a new well has fallen drastically, from an average 43 days in 2014 to 26 days in March, with a target to ultimately shorten the spud-to-rig-release to 16 days.
Permian EOR business remains profitable
Vicki Hollub, Senior EVP and President, Oxy Oil & Gas:
[O]ur Permian EOR business remains profitable in the current downturn, and we are continuing to make investments in these projects that significantly increase oil production from our portfolio of large conventional reservoirs. The EOR business is expected to generate free cash flow this year even in the current oil price environment.
The Permian enhanced oil-recovery business have been pretty cost efficient, which allows Occidental to generate positive free cash flow here in spite of low oil prices. This ability allows the company to make further expansions in these long-life, low-decline projects. Cost improvement targets include a $65 million reduction in well maintenance.
Occidental's management has clearly been cutting costs and increasing efficiencies. This approach bodes well for the company and investors in a low oil price environment. Once oil prices go up, these efficiencies should reflect in higher net cash inflows.