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Occidental Petroleum to cut capital spending to pay down debt

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Via Financial Times

Occidental Petroleum plans to slash capital spending — including by half in the US shale heartland of the Permian Basin — as it pays down debt amassed in its blockbuster acquisition of Anadarko Petroleum.

The company on Monday set out a budget for no more than $5.5bn in capital expenditure in 2020, down from $9bn this year. Occidental forecast oil and gas production would grow by 2 per cent in 2020, well below the 5 per cent growth envisaged when it agreed the $55bn Anadarko takeover six months ago.

Energy producers across the US shale patch are squeezed between static oil and gas prices and investors seeking better returns. Sceptical capital markets have forced many independent producers to curtail drilling, leading to decelerating rises in output in the world’s largest oil-producing country.

Occidental faces additional pressure to repay borrowings used to finance an Anadarko deal that doubled its size when it closed in August. Net debt of $43.9bn as of September 30 was almost six times higher than a year before, according to data from S&P Capital IQ.

“While the much lower budget will obviously slow growth in 2020, it points to the company’s discipline amid the backdrop of muted oil prices. And I think it will also alleviate any lingering concerns about the sustainability of the dividend,” said Pavel Molchanov, analyst at Raymond James.

Vicki Hollub, Occidental chief executive, engineered the Anadarko purchase after outbidding Chevron. After agreeing the deal she said it would provide “the ability to deliver production growth of 5 per cent” and build on earnings in the first year of ownership.

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Investors concerned about the value of the deal have sent Occidental’s shares down by more than a quarter since May. Activist investor Carl Icahn sued the company, claiming the deal was “little more than an enormous bet on the price of oil”. The parties are waiting for a court ruling after a trial in September.

Houston-based Occidental reported a net loss of $912m, or $1.08 a share, in the third quarter, compared to net profit of $1.9bn, or $2.44 a share, one year earlier. The loss included $969m in costs and debt financing fees from the Anadarko takeover and a $285m write-off of unproved oil leases.

Adjusted for items, Occidental earned $93m, or 11 cents a share, well below analyst expectations of 45 cents a share. Occidental’s stock was 0.4 per cent lower at $44.06 post-market trading late Monday.

The company noted it had repaid $4.9bn in debt in the third quarter, completed the agreed sale of liquefied natural gas assets in Mozambique for proceeds of $3.9bn and divested stakes in US pipeline company Plains All American for $650m.

“We remain committed to the strategy we laid out to our investors, which focuses on deleveraging and returning excess free cash flow to shareholders,” Ms Hollub said.

In the Permian Basin, the booming oil region where Occidental is the biggest producer, capital spending was budgeted to fall from $4.4bn in 2019 to $2.2bn in 2020, according to an investor presentation.

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