Long-Term Occidental Petroleum Investors Must Remain Patient

| About: Occidental Petroleum (OXY)

Summary

Occidental Petroleum is showing a strong operational and production performance.

Lower commodity prices are limiting its financial performance and could damage it even further as the year progresses.

The company's dividends are under threat, and its shares are likely to remain under pressure due to the current oil glut.

This could prove to be another tough year for OXY and its shareholders.

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Occidental Petroleum (NYSE:OXY) has been making strong progress in enhancing its asset portfolio over the past year. The company has been looking to enhance its production while lowering its cost structure. Its production growth is enormous in the Permian basin, and Al Hosn has now reached its full production capacity. In addition, the construction of the OxyChem ethylene cracker joint venture is on schedule and on budget, primed for an early 2017 startup.

The company is also selling its non-core assets to enhance its focus on core plays. It sold its Williston Basin properties and is exiting the non-core areas of Yemen and Iraq while reducing its exposure in Bahrain. OXY also reached a settlement with the Republic of Ecuador for about $1 billion. These steps will reduce the company's excessive burden of non-core assets while enhancing its cash flows and boosting its balance sheet.

Moving forward this year, Occidental's strategy is to invest in areas that have the potential to generate long-term value while producing returns well over their capital costs. In 2016, the company will continue to focus on investing in its Colombian assets, Block 9 in Oman, Permian EOR, ISND in Qatar, Dolphin, and OxyChem. These projects have the potential to generate healthy cash flows in a low-priced environment.

The company's strategy is working well; its recent results also demonstrate this trend. Recently, OXY announced its fourth-quarter and fiscal 2015 results, marking a significant growth in production. Its Permian Resources production growth target of 120,000 BOE per day exceeded expectations with production surging well ahead of its original plan. In fiscal 2015, the Permian Resources generated production growth of 47%, relative to the previous year. The company's Al Hosn project also began producing at full capacity. Al Hosn generated production volumes of 35,000 BOE per day in 2015.

Overall, Occidental Petroleum's production grew by 14% compared to 2014, generating up to 81,000 BOE per day. Along with this growth in production, the company reduced its cash operating costs by 14%, lowered SG&A by 16%, and reduced its average Permian Resources drilling and completion costs by 33%. This is a very strong operational and production performance by any company, especially in the current volatile environment.

On the negative side, the company's financial performance is not as strong as its operational and production performance. Regardless of a notable growth in production and significant cost cutting, the company was unable to generate positive earnings, due to low commodity prices. In Q4, it generated a loss of $6.78 per diluted share, which includes $5.4 billion of impairment charges. Excluding these impairment charges, the company's loss stood at around $0.17 per diluted share, representing both a quarterly decrease and a drop from the same quarter in 2014.

With the fall in earnings, its cash generation potential is also declining. In fiscal 2015, the company generated operating cash flows of $3.2B, a huge decline of $11B from the previous year. Its operating cash flows are far from covering its capital investments of $5.6B and dividend payments of $2.2B. This indicates that the company is funding investments and dividends through external sources such as borrowing and selling assets, which is not a good strategy for the overall health of the company nor for its balance sheet.

In Conclusion

In the past 12 months, OXY's share price dropped by almost 20% amid great volatility in commodity prices. Oil prices are showing no signs of stabilization; they are currently hovering around $30 per barrel. Given the current prices, the company is likely to post even worse results in the first quarter of this year. Oil prices are unlikely to improve in the first half of the year due to massive production from both OPEC and non-OPEC members. The EIA has predicted oil prices will not rise above $38 per barrel for this year.

This means that 2016 will be another year of losses for Occidental Petroleum despite its strong operational and production performances. Short-term investors can gain profit on market speculations and on movement in the commodity prices. However, long-term investors will need a lot of patience, as this year looks tough for Occidental's share price and its dividend stability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.