Please ensure Javascript is enabled for purposes of website accessibility

Can Occidental Petroleum Avoid Cutting Its 4.2% Dividend?

By Ryan Vanzo – Feb 29, 2016 at 1:35PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The dividend looks safe as long as shareholders are willing to trade the high yield for increased debt.


After repeated promises of safety, dividends are being cut all across the energy sector. Anadarko PetroleumChesapeake EnergyConocoPhillipsEncana CorporationMarathon Oil, and Noble Energy have all cut their dividends in the past 12 months.

Still, Barclays estimates that dividends will continue to consume roughly 26% of 2016's estimated cash flows for the large-cap energy producers it covers. In a recent research note, it stated that "most of the companies with a dividend yield of more than 1.5% should consider cutting the dividend."

Is Occidental Petroleum's (OXY 4.75%) 4.2% dividend the next domino to fall?

Cash flows support the dividend ... for now
This week, Occidental reaffirmed its $0.75 quarterly dividend. While it still has one of the stronger balance sheets in the industry, the company could face significant financial headwinds in the quarters to come if oil prices don't rebound.  

For example, the company frequently points to its $4.4 billion cash hoard, as well as an industry leading long-term debt-to-capital ratio of just 22%. There's no doubt that the company is better positioned than its peers (hence the affirmation of its S&P rating at single-A with a stable outlook), but if you break down 2015's cash burn, things may not stay rosy for long. Cash flow from operations was only $4.8 billion last year, despite average realized prices of greater than $40 a barrel. Capital expenditures alone wiped out any possibility of generating positive free cash flow.

Including its $2.3 billion dividend obligation, cash levels fell a massive $3.4 billion last year, even after taking on an additional $1.5 billion in debt. Management estimates that for every $1 change in oil, operating cash flow swings by about $100 million. If prices remain at $30 a barrel, the company could lose an additional $1 billion in cash flow generation this year.  



To preserve cash, most oil and gas companies have turned to gutting its capital expenditure budget. Occidental's plans for 2016 call for reducing its oil and gas capital budget by roughly $2.2 billion. This plan provides some breathing room, but two major concerns remain.

First, based on prevailing oil prices and the current dividend, the company would still probably end the year with negative free cash flow. Second, reducing the capital budget to $2.0 billion is about as far as the company can go before cutting into existing projects. If low oil prices persist until next year, Occidental will probably have already used up the easiest way to free up large chunks of cash flow.


Growing debt will increase the riskiness of its dividend
Breaking it down, unless oil prices improve rapidly, it's pretty difficult to argue that Occidental won't feel significant pressure on its liquidity this year. To plug the gap, as it did in 2015, the company will probably turn to the debt markets. With debt equal to only 34% of its equity, there's still plenty of room to take on more leverage without endangering the business (BP, for example, is at 54%).  

As the company adds to its debt, however, its 4.2% dividend, costing $2.3 billion a year, becomes increasingly untenable. If you believe that oil prices will rebound over the next 12 to 18 months, Occidental's under-leveraged balance sheet should give it plenty of room to maintain its payout, even if that means taking on more debt. Beyond that time frame, however, the company may have no choice but to lower the payment.

Ryan Vanzo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$64.37 (4.75%) $2.92
Ovintiv Inc. Stock Quote
Ovintiv Inc.
$50.23 (9.20%) $4.23
Anadarko Petroleum Corporation Stock Quote
Anadarko Petroleum Corporation
ConocoPhillips Stock Quote
$109.55 (7.04%) $7.21
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
$24.78 (9.74%) $2.20
Noble Energy, Inc. Stock Quote
Noble Energy, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.