Occidental Petroleum: Troubles Ahead

Summary

• Occidental Petroleum's 4Q'19 total revenues and others were $6.80 billion, up 41.7% from a year ago, and up 15.8% sequentially.
• The total output was 1,402K Boe/d in 4Q'19. The US operations accounted for about 72.3% of the company's total production. OXY's output was up sequentially or 21.4%.
• I believe the company is not a long-term investment anymore. Hence, I recommend reducing your long-term position slowly and allocate about 60% of the capital invested in trading.
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Source: Occidental Petroleum Corp.

Investment Thesis

The Houston-based Occidental Petroleum (NYSE:OXY) is an energy-integrated company specializing mainly in crude oil, natural gas exploration, and production.

Occidental Petroleum was viewed as an ideal long-term domestic oil play and, in theory, should be accumulated when the price is weakening. However, this whole thought process was trashed when the company changed its business profile drastically with the controversial acquisition/merger of Anadarko Petroleum that was finalized on August 8, 2019.

Not only was this acquisition extremely overpriced, but the timing was the worst ever. As soon as the purchase was completed, the price of oil and gas began to drop and just collapsed recently with the coronavirus outbreak and the damaging impact on the world economy.

My investment thesis has changed based on this new development and the fact that the dividend is not covered by free cash flow, which means that the company will probably be forced to "adjust" the dividend to a more suitable level.

I believe the company is not a long-term investment anymore. Hence, what I recommend is to reduce your long-term position slowly and allocate about 60% of the capital invested in the stock to trading short term the volatility of the sector.

As you all know, the company has a strong presence in the Permian Basin, and it was the primary reason why Occidental Petroleum outbid Chevron (CVX) and acquired Anadarko.

OXY is still the largest operator in the Permian Basin with total combined production (Permian Resources and Permian EOR) of 629K Boep/d in 4Q'19. I will show you the details later in this article.

From presentation

Occidental Petroleum - 4Q'19 Quarterly Financial Table: The Raw Numbers

Occidental Petroleum	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19
Total Revenues in $ Billion	4.13	6.18	4.80	4.09	4.48	5.87	6.80
Net Income in $ Million	843	1,861	706	628	632	-912	-1,339
EBITDA $ Million	2,118	2,899	1,788	1,854	2,028	1,466	1,715
EPS diluted in $/share	1.10	2.44	0.93	0.84	0.84	-1.08	-1.50
Operating cash flow in $ Million	1,756	2,404	2,500	948	2,013	2,405	2,009
Capital Expenditure in $ Million	1,248	1,306	1,304	1,310	1,268	1,766	2,293
Free Cash Flow in $ Million	508	1,098	1,196	-362	745	639	-284
Cash and cash equivalent $ Billion	1.36	2.95	3.03	1.75	1.75	4.84	3.03
Long-term Debt in $ Billion	10.31	10.31	10.32	10.32	10.27	47.61	38.24
Dividend per share in $	0.78	0.78	0.78	0.78	0.78	0.78	0.78
Shares outstanding (diluted) in Million	767.4	763.3	755.4	750.5	749.5	847.7	894.7
Oil Production	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19
Oil Equivalent Production in K Boe/d	639	681	700	719	741	1,155	1,402
Global liquid price ($/b)	63.12	62.67	56.11	52.62	58.91	56.26	56.21
Global Natural gas price ($/Mbtu)	1.49	1.58	1.33	1.36	0.23	1.25	1.63

Click to enlarge

Source: Occidental Petroleum 10K and Morningstar

Trends, Charts, and Commentary: Revenues, Free Cash Flow, Net debt and Oil & Gas Production

1 - Quarterly revenues and others were $6.80 billion in 4Q'19 (including Interest, dividends, and other income/gains on the sale of assets and equity investments, net.)

Occidental Petroleum's 4Q'19 total revenues and others were $6.80 billion, up 41.7% from a year ago, and up 15.8% sequentially.

Warning: Occidental Petroleum completed the acquisition of Anadarko on August 8, 2019.

The company's loss was $1,332 million or $1.50 per share in 4Q'19, compared to a gain of $705 million, or $0.93 per share, a year earlier. The quarterly loss was due to impairment and other charges. The adjusted net loss per share came in at $0.30 per share.

For full fiscal 2019, Occidental's revenue was $21.23 billion compared to $18.93 billion in 2018, while the loss per share was $1.20 compared to earnings per share of $5.40 in the prior-year quarter.

Note: Net sales revenues were $6,282 million in Q4'19.

2 - Free cash flow was a loss of $284 million in 4Q'19

Free cash flow was a loss of $284 million in 4Q'19, compared to a profit of $1,195 million in 4Q'18. The 2019 free cash flow is $738 million.

Analyzing the free cash flow of $738 million yearly with the dividend payout of $2.68 billion annually and shares buyback forces me to conclude that OXY is paying more dividends than it can afford. It is a dangerous game that the company is now playing to keep alive some credibility, but at what cost?

3 - Quarterly Production was 1,402K Boe/d in 4Q'19

The total output was 1,402K Boe/d in 4Q'19. The US operations accounted for about 72.3% of the company's total production. OXY's production was up sequentially or 21.4%. Below are presented the details:

		Oil	NGL	NG
Gulf of Mexico		118	10	14
US Onshore	Permian Resources	273	106	97
	Permian EOR	117	29	7
	DJ Basin	120	73	121
	Other domestic	15	9	37
Latin America		34	0	2
Middle East	Al Hosh	14	26	43
	Dolphin	7	8	28
	Oman	67	0	26
TOTAL in K Boep/d		765	261	375

Click to enlarge

From Presentation data Realized oil prices in 4Q'19 were $56.21 per barrel compared to $56.11 per barrel in 4Q'18. Natural gas was $1.63 per Mcf, up sequentially from $1.25 per Mcf.

Oil and Gas price history:

Total production in the Permian Basin includes two separate outputs for Occidental Petroleum.

1. Permian Resources (includes Anadarko Permian assets in part this quarter).
2. Permian EOR. The EOR process "harnesses the carbon dioxide produced during the extraction of oil, from power plants or natural sources, and forces it back into aging oil fields. That boosts the pressure underground and drives more oil to the surface."

Note: The total production in the USA is 1145k 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 476k Boep/d

2 - Permian EOR output was stable at 153K Boep/d.

Note: OXY is the first producer in the Permian basin, with a total of about 629K Boep/d in 4Q'19, which represents 44.8% of the total output for the fourth quarter of 2019.

Below is the total production in the Permian Basin (including Resources and EOR), including also oil, NGLs, and NG.

Ms. Vicki Hollub said in the conference call:

As the assets we acquired are developed, we will utilize our subsurface and operating expertise to improve productivity and reduce full-cycle cost. Our diversified portfolio with decades of high-return inventory and our ability to produce high-margin barrels, enables us to generate sustainable free cash flow to return to our shareholders.

Guidance 2020

Source: Presentation

Occidental Petroleum expects spending of $5.2 billion to $5.4 billion in 2020, well below the $6.36 billion it spent in 2019. However, Vicki Hollub said that she is willing to cut spending further if necessary, due to the collapse of the oil prices.

4 - Net debt is $35.56 billion at the end of December 2019.

Note: The debt indicated in the graph above includes the WES midstream debt of $7.6 billion. Debt for OXY on a standalone basis is $39.9 billion.

WES Assets are indicated in the chart below:

Source: Previous Presentation

Conclusion and Technical Analysis (short term)

Occidental Petroleum is not doing well, and it seems that this bad Anadarko acquisition at an extravagant tag price will haunt Ms. Vicki Hollub, the CEO, for a long, long time.

What bad timing! It saved Chevron (CVX) at the last minute with a $1 billion gift as a thank you. How can the company justify paying $57 billion for Anadarko Petroleum?

Now, the company is faced with a weak oil demand, exacerbated by the coronavirus outbreak, which may force a new round of cost-cutting at U.S. shale companies wanting to refinance the debt or raise cash from oil and gas reserves. I do not talk about the oil price collapse. I think we all get the picture. The issue is that Occidental Petroleum has approximately $14 billion in debt maturing through 2024.

I believe this whole scary situation should be flashing red in your investor's brain and help you understand that things may get worse before they stabilize.

Technical Analysis (short term)

OXY is likely to cross the resistance of the descending wedge pattern indicated above. It happens I see new lower support at $27.50. In general, I recommend accumulating at this level, but I am reluctant to do so here.

The reason is that it may not be safe enough, assuming that the company could eventually cut the dividend as much as 50%, which is what will be a reasonable move looking at the free cash flow.

One recommendation is to take profit on an uptick at or above $33.

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Analyst’s 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.

I trade OXY short term only.