The Houston-based Occidental Petroleum (OXY) released its third quarter 2020 results on November 10, 2020. It was another quarter with a large income loss due to weak oil prices.
The company is also enhancing its monthly cash flow by about $106 million when Brent is below $45 per barrel (three-way collars).
The investment thesis is slowly changing for OXY, and it is perhaps time to think long term now, but cautiously. The debt issue is a massive negative for shareholders, even if the economy rebounds in 2021.
Hence, the best answer is to trade short term the stock and take advantage of the oil-related volatility while building a small long-term position.
CEO Vicky Hollub said in the conference call:
All our businesses delivered strong operational performance in the third quarter. We exceeded our production guidance with lower-than-expected operating and capital costs for the quarter.
Our operational outperformance was primarily driven by strong well performance and continued improvements in operability in Permian Resources.
Occidental Petroleum – 3Q ’20 Quarterly Financial Table: The Raw Numbers
|Occidental Petroleum||3Q ’19||4Q ’19||1Q ’20||2Q ’20||3Q’20|
|Total Revenues and others in $ Billion||5.87||6.80||6.45||2.98||3.28|
|Net Income in $ Million||-912||-1,339||-2,232||-8,353||-3,778|
|EBITDA $ Million||1,466||1,715||499||-5,688||-1,890|
|EPS diluted in $/share||-1.08||-1.50||-2.49||-9.12||-4.07|
|Operating cash flow in $ Million||2,405||2,009||1,339||360||815|
|Capital Expenditure in $ Million||1,766||2,293||1,728||689||246|
|Free Cash Flow in $ Million||639||-284||-389||-329||569|
|Cash and cash equivalent $ Billion||4.84||3.03||2,021||1,011||1,896|
|Long-term debt in $ Billion||47.61||38.24||38.52||38.49||38.46|
|Dividend per share in $||0.79||0.79||0.79||0.01||0.01|
|Shares outstanding (diluted) in Million||847.7||894.7||896.7||915.5||929.3|
|Oil Production||3Q ’19||4Q ’19||1Q ’20||2Q ’20||3Q’20|
|Oil Equivalent Production in K Boe/d||1,155||1,402||1,416||1,406||1,237|
|Global liquid price (world) ($/b)||56.26||56.21||47.08||23.17||38.67|
|Global Natural gas price (world) ($/Mbtu)||1.38||1.63||1.18||1.10||1.31|
Source: Occidental Petroleum and Fun Trading
Analysis: Revenues, Free Cash Flow, Net Debt, and Oil & Gas Production
1 – Quarterly revenues and others were $3.283 billion in 3Q ’20
The company’s loss was $3,778 million, or $4.07 per share, in 3Q ’20, compared to $912 million, or $1.08 per share, a year earlier.
Net sales revenues were $4,108 million in Q3 ’20. The adjusted loss attributable to common stockholders is $0.84 per diluted share.
- The third quarter’s oil and gas revenues were $2,989 million, down 25.1% compared to the same quarter a year ago.
- Chemical revenues for the quarter were $937 million, down 12.5% from last year.
- Midstream & Marketing revenues for the quarter were $364 million, down 68.7% from last year.
The results were slightly below analysts’ expectations this quarter as well.
2 – Free cash flow was estimated at $569 million in 3Q ’20
Free cash flow was estimated at $569 million in 3Q ’20, compared to a $639 million profit in 3Q ’19. The yearly free cash flow (“TTM”) is a loss of $433 million.
The free cash flow is calculated by subtracting CapEx to cash from operating activities. Occidental Petroleum managed to get back to positive free cash flow this quarter by reducing CapEx significantly to $246 million this quarter.
3 – Quarterly Production was 1,237K Boep/d in 3Q ’20 (not including discontinued operations), exceeding the mid-point guidance.
The total output was 1,237K Boep/d in 3Q ’20. The US operations accounted for about 77.6% of the company’s total production. OXY’s output was down sequentially or 12%.
The strong production volumes were associated with higher volumes from the Permian Resources segment.
Below are presented the production details:
|Gulf of Mexico||91||8||10|
|US Onshore||Permian Resources||222||99||99|
|TOTAL in K Boep/d||661||248||328|
From Presentation data
Realized oil prices in 3Q ’20 were $38.67 per barrel than $56.26 per barrel in 3Q ’19. Natural gas was $1.31 per Mcf, up sequentially from $1.10 per Mcf.
Oil and Gas price history:
Total production in the Permian Basin includes the Permian Resources and the Permian EOR.
Note: The total production in the USA is 960k Boep/d. It includes South Texas and now the Gulf of Mexico, the DJ Basin in Colorado, and others (please see table).
1 – Permian Resources output increased to 420k Boep/d.
2 – Permian EOR output was stable at 134K Boep/d.
Details for the domestic production segment below:
Guidance 4Q 2020 and Full-year 2020
Occidental expects fourth quarter production in the range of 1,105K -1,155k boep/d and Permian Resource production between 360K and 380K boep/d. The company expects exploration expenses for the fourth quarter to be $30 million. Occidental elected to have a CapEx range of $0.7-$0.8 billion in second half 2020 and $2.4-$2.6 billion in 2020.
4 – Net debt is $36.56 billion at the end of September 2020
The debt is the main issue for Occidental Petroleum, especially with lower oil prices that considerably reduced its asset sales values.
Below are the near-term debt maturities and the financial strategy to address the short-term maturities.
Conclusion and Technical Analysis (Short Term)
An abrupt decline in oil prices continues to impact Occidental Petroleum unfavorably this quarter. While crude oil hedges have produced some assistance, it has been quite brutal looking at the recent results.
Occidental Petroleum is acting on the only segment it can control, and it is managing cost, finding ways to lower CapEx, and selling non-core assets to lower the debt load.
For instance, the third quarter’s domestic operating expenses were $5.38 per Boe compared with $8.45 the same quarter a year ago. It is a huge improvement.
The company topped the $2 billion non-core asset divestiture target for 2020, which helped reduce the debt by $1.3 billion.
On October 5, 2020, the company announced its Colombian assets’ sale for $825 million with an upfront payment of $700 million.
Source: Presentation extract.
A sign of improvement Warren Buffett received the dividend in cash this quarter, but the outstanding share count is still climbing. The shares outstanding diluted are up 9.9% from the same quarter a year ago.
In short, Occidental Petroleum needs higher oil prices to be able to survive the next two to three years.
With a vaccine ready and soon on its way to being distributed, we can expect a rebound of the economy by H2 2021 with a strong oil demand recovery.
We are not out of the woods yet, but I suggest accumulating OXY on any weakness now. 2021 is not so far…
Technical Analysis (short term)
OXY was forming a descending wedge pattern with resistance around $9.25 and support around $10.50. However, with the recent news about a vaccine, the stock experienced a breakout yesterday. One technical element that changed is that the resistance is now line support, which means that it is quite safe to accumulate if OXY retraces at or below $10.50.
The new pattern is not clear, and we need a few more trading days to get a clearer picture. However, the RSI is now close to 70, which means that OXY is overbought and will have a hard time climbing and retest the 200MA that I see as resistance at around $16.80-$17.
If oil prices turn bullish, OXY will eventually go higher, but I recommend selling about 25% of your position between $14 and $16. Conversely, I think it is a great idea to accumulate below $10.50.
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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.
Additional disclosure: I own a small long-term position below $10, and I frequently trade short-term stock.