Occidental Petroleum (NYSE: OXY), one of the most troubled large capitalization oil companies. The company has watched its market capitalization drop by 85% over the past 2 years, removing more than $60 billion in market capitalization. The company made the, in retrospect, poorly timed Anadarko Petroleum acquisition, that devastated shareholder value.
Occidental Petroleum 3Q 2020 Results
Occidental Petroleum has been focused on achieving strong 3Q 2020 results, which will help support the company’s business.
Occidental Petroleum’s production of 1.24 million barrels / day exceeded the company’s guidance. The company continued to have strong operational and record well results. At the same time, the company’s drastic cut in capital spending along with improving operational efficiencies and flexibility resulted in $1.4 billion in FCF.
At the same time, the company has continued significant divestitures. The company has seen $2.3 billion in announced divestitures, with land grant, Colombia onshore, and WES exchange assets. A recent article on Seeking Alpha discussed how the company was selling gems for pennies, which is completely correct.
However, at the present time, Occidental Petroleum is valued more by a potential bankruptcy than its assets, and anything it can do to switch that around is important.
Occidental Petroleum Divestitures
Occidental Petroleum has done a respectable job with its divestitures and in this regard, it’s continuing to perform well.
Occidental Petroleum Divestitures – Occidental Petroleum Investor Presentation
Occidental Petroleum has had $7.9 billion of divestitures since closing the Anadarko acquisition, the most significant of which has been the $3.3 billion Mozambique acquisition. Part of the company’s massive Africa divestitures to Total were stopped originally on the basis of concerns over colonial powers owning energy assets.
The company seems to be mostly on target for divestitures, and is considering billions in divestitures to go into 2021. The divestitures in 2021 are expected to be ~$2.5 billion, significant for the company, and strong for its overall cash flow performance.
Occidental Petroleum Permian Basin Performance
It’s also worth noting that in the company’s key location of focus, in the Permian Basin, the company has continued to perform well.
Occidental Petroleum Permian Basin – Occidental Petroleum Investor Presentation
Occidental Petroleum has seen new peak performance across its portfolio of assets, with fully recognized 2021 synergy targets. The company’s three well pad and pumping time, along with drilling rates, shows new rates of efficiency. The company is starting to ramp up production from its downturn, doubling its rig count during 4Q 2020 going into 2021.
That increase will help support stronger and recovering production going into next year.
Occidental Petroleum Outlook
Occidental Petroleum has a strong outlook worth paying close attention to.
Occidental Petroleum Outlook – Occidental Petroleum Investor Presentation
Occidental Petroleum is expecting 4Q total company production of ~1.13 million barrels / day, roughly 100 thousand barrels / day before the most recent quarter’s production. The company’s production costs are expected to be incredibly low at $6.7 / barrel. The company’s midstream and OxyChem businesses are expected to remain expectable.
The overall corporate business is expected to see manageable results. The company will see slightly higher capital expenditures at roughly $600 million with minimal exploration expenditures. The company’s DD&A will be minimal, and the company’s continued cash flow will be significant. We expect the company to stay FCF positive going forward.
Occidental Petroleum Capital Spending
Occidental Petroleum drastically cut capital spending, which will remain lower going forward. This is a substantial part of the company’s path towards being FCF positive.
Occidental Petroleum Capital Budget – Occidental Petroleum Investor Presentation
Occidental Petroleum has cut its capital spending by more than 50%, a massive decline to handle COVID-19. The company’s capital budget comes with a base decline of 25%, although the company expects to recover that in the coming years. Again the company’s poor positioning forced it to drastically cut its spending, putting it in a tough spot.
The company’s ability to reward investors revolves around continuing to keep capital spending low and paydown debt.
Occidental Petroleum Debt and Financials
Overall, Occidental Petroleum has drastically improved its debt and financial picture and we expect it to continue doing so.
Occidental Petroleum Debt and Financials – Occidental Petroleum Investor Presentation
Occidental Petroleum managed to extend $5 billion of near-term maturities to 2025+, a massive extension of near-term merges. The company also retired more than $1.5 billion of debt through WES units exchange, and the company’s asset sales. The company expects FCF generation going forward, and has a $1.9 billion unrestricted cash balance.
Going forward the company has a required $5.0 billion credit facility, it expects $2.5 billion in additional asset divestitures, and organic cash generation with access to credit markets.
Occidental Petroleum Debt Maturities – Occidental Petroleum Investor Presentation
The above graph highlights Occidental Petroleum’s debt maturity schedule and how much it’s improved it. The company continues to have an incredibly low 4.6% weighted average interest rate and its completed debt tender offers to retire $4.1 billion. The company is retiring debt with new issuance proceeds and has repaid $1.3 billion debt.
The company’s concerning debt pile combines with the fact that the company now has sufficient liquidity to address near-term maturities. The company has $1.9 billion in unrestricted balance sheet cash with its credit facility. Over the next 5 years (until YE 2024) the company has $9 billion in remaining debt due.
Several billion can be covered from asset sales alone, and the company’s liquidity should help. Going forward, we expect the company to continue doing what it has been, paying down and rolling over maturities. The debt markets are open to this, shown by the company’s weighted average interest rate. The company can cover debt and continue shareholder returns.
We expect Occidental Petroleum to be able to continue this for the long run. Given that debt is the majority of the company’s enterprise value, paying down debt, albeit slowly, will continue to decrease overall shareholder value.
Occidental Petroleum Risk
Occidental Petroleum’s risk is the continued threat faced by lower oil prices. Oil prices have indicated a short-term stability, however, whether or not this continues remains to be seen. Occidental Petroleum would obviously do significantly better with oil prices recovering to where they were prior to COVID-19.
Whether or not this happens remains to be seen, however, it’s worth investors paying close attention to.
Long-term, Occidental Petroleum has the ability to generate substantial rewards for investors. We expect the company to continue comfortably doing so. It’s shown the ability to manage and improve its financial positioning during what has been one of the worst price related collapses, and we expect it to continue doing so going forward.
Occidental Petroleum continues to focus on its market leading shale assets, while improving its efficiency, and setting new records for its operations. The company continues to comfortably meet its debt obligations and its $9 billion in debt due over 5 years, with no rollovers, is very manageable. We expect the company to steadily recover through the 2020s.
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Disclosure: I am/we are long OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.