Occidental Petroleum: As Its Yield Exceeds 11.5%, I Started A Position On A Bad Day For Oil
Summary
- OXY's dividend is approaching 12% which is presenting an opportunity which we may not see again.
- Berkshire has started purchasing common stock in OXY over Q3 and Q4 2019 in addition the the preferred shares from the financing deal.
- There is blood in the water within the energy markets which could present an opportunity for people with a high tolerance for risk.
On 3/6/2020 Russia refused to sign on to the additional 1.5 mb/d of oil production cuts which were championed by Saudi Arabia. There were reports that Saudi Arabia and Russia had negotiated behind closed doors prior to the OPEC + meeting in Vienna but the desired results didn't come to fruition for Saudi Arabia. As a result of the news oil prices plunged more than 8% per barrel after the OPEC+ meeting broke and there is speculation on whether the OPEC+ alliance will survive this critical disagreement. WTI Crude and Brent Crude both fell off a cliff after the decision was released as WTI fell by $4.62 or 10.07% to $41.28 and Brent finished the day down $4.72 or 9.44% as it closed at $45.27. The news and sharp price decline in oil lead to a large sell-off within the energy sector which may have created an opportunity.
I have had my eye on Occidental Petroleum Corporation (NYSE:OXY) for some time but I wasn't too keen on adding another oil producer to my portfolio. It could get uglier for the energy sector but with shares of OXY under $27 I started a position. I allocated 50% of what I was willing to invest in case shares continue to retreat next week. If shares drop below $22.50 I will increase my position by 25% of the capital I set aside for OXY and add to my position with the remaining capital if OXY dips below $19 or if they rebound to $32 per share. There were a few factors that made me jump in including what I listened to on the Q4 2019 conference call, OXY's assets including the 3 million-plus acres in the Permian Basin, my personal thesis on energy and of course the dividend. I established a position at $26.605 per share which puts me at a forward yield of 11.88% on OXY's dividend. There was extra blood in the water today due to the combination of COVID-19 and the OPEC meeting. I see this as a value play and I believe OXY will rebound into the $40s. The real question is how long it will take which I am not sure anyone can answer. I have time on my side and I am planning on feasting on this ridiculously large dividend while I wait even if it takes years and not months.
If it's good enough for Warren Buffett it is good enough for me
In late April 2019 Berkshire Hathaway Inc. (BRK.A) committed $10 billion to OXY which was contingent on completing its takeover of Anadarko Petroleum. OXY made a rival bid against Chevron (CVX) which had bid $33 billion for a buyout of Anadarko. In return for Berkshires $10 billion they would receive 100,000 shares of cumulative perpetual preferred stock valued at $100,000 each. The preferred shares would accrue dividends at an 8% annual rate. In addition to the preferred shares Berkshire received a warrant to purchase up to 80 million shares of OXY at an exercise price of $62.50 per share of common stock. In early May 2019 Becky Quick interviewed Warren Buffett (which can be watched here) and Mr. Buffett clearly indicated that it's not about what it does in a week, month or year, your buying reserves that go well into the future and this is a play on oil over time. Mr. Buffett also stated that he and longtime partner Charlie Munger have some views on oil for the long term and they feel good about the financing in the OXY deal. In regards to the actual deal Mr. Buffett indicated that there are no conditions to the $10 Billion and it was OXY's to use so they could close with Anadarko regardless of external factors. If a catastrophic event was to occur the next day Berkshire would still hold up their end of the deal. Mr. Buffett also confirmed that Berkshire would offer up to $20 billion to Oxy if they needed it which is double the original amount they had pledged to OXY.
In addition to the $10 billion financing deal Berkshire started a new position in OXY over Q3 of 2019. Berkshire started a new position in OXY's common stock by purchasing 7,467,508 for just over $332 million. In Q4 of 2019 Berkshire increased its position in OXY by 153.54% as it purchased shares between $37.34 and $44.23. The estimated average price which was paid per share in Q4 2019 was $39.98 and the purchases increased Berkshire's holdings to 18,933,054 shares of OXY. By my calculations Berkshire has invested just north of $790 million on OXY's common stock over Q3 & Q4 of 2019 at an average price of around $41.75. I have a long-term bullish view on oil regardless of the past week or the next six months.
OXY has been on my watch list well before Berkshire got involved with the company. You should never make an investment just because someone else did but Warren Buffett is one of the most respected investors and having Berkshire invested in OXY made the idea of starting a position a bit more attractive to me. My opening position was 36.27% lower than Berkshire's average price of around $41.75 and with the dividend yield approaching 12% I felt this was an opportunity while there was blood in the water. Berkshire and Mr. Buffett have certainly been on the wrong side of trades before including its investment in Kraft Heinz (KHC) but I believe the energy sector will rebound and OXY is one of the stronger companies to be invested in. The other way I am looking at this is if it gets back to Berkshire's average price for the common stock I will have made 36.27% on my initial investment while collecting some large dividends along the way.
I like OXY's portfolio of assets as they are a multinational and multi-approach company
OXY operates in Oil and Gas exploration, Midstream and Marketing and Chemicals. Its assets are spread across the U.S, the Middle East, Latin America and Africa. One of the things that is attractive to me is OXY's diversification between its businesses. I believe it's a plus that OXY makes more than double in its foreign oil and gas operations than it does domestically and it has a significant chemical business as well.
(Source: OXY Q4 2019 Report)
When most people think about OXY they think Oil and Gas. OXY has an important Chemical business that is growing. OxyChem is one of the leading North American manufacturers of PVC resins, Chlorine and caustic soda. This are critical to our infrastructure as these are the building blocks for products which include water treatment chemicals, plastics and pharmaceuticals. OxyChem owns and operates 22 manufacturing facilities across the U.S and additional facilities in Canada and Chile. OxyChem's affiliate OxyVinyls is the largest VCM producer and the third-largest PVC supplier in the U.S. On a global scale OxyChem is the second largest marketer of chlorine and the largest marketer of caustic soda. OxyChem is also the world's largest producer of caustic potash which is a principal component in products which include fertilizers, batteries, soaps, and detergents. OxyChem is also the largest North American and only U.S producer of sodium chlorite which is used within the water treatment industry for disinfection and purification. I believe as the population continues to grow OXY will have an opportunity to grow its chemical business and increase its revenue base through what could be an undervalued gem within OXY's portfolio.
(Source: OXY Q4 2019 report)
On the international side OXY holds 2 million acres in Columbia, 1.5 million acres in U.A.E and 6 million acres in Oman. In Q4 of 2019 OXY produced 122 MBOED of oil, 34 MBBLS of NGLs and 583 MMCFD of gas through its international assets. On the domestic side OXY is the largest U.S acreage holder in the oil and gas industry with 14.4 million acres. Within its U.S acres OXY holds 7 million acres in land grants. Across these 7 million acres OXY has no lease expirations and fee ownership of oil and gas mineral and hard rock minerals. OXY also has royalty revenue from 3rd parties across this section. One of OXY's most strategic assets is within the Permian Basin as its one of the most active basins in the U.S which accounts for approximately 30% of the total U.S oil production. OXY is the #1 producer in the Permian and owns 1.7 million unconventional acres and 1.4 million conventional acres for a total of 3.1 million acres in the Permian.
Needless to say OXY has world-class business segments and assets. I believe consolidation will continue to occur within the oil and gas industry as smaller players will be forced to divest assets as their model of revenue isn't profitable in a low-cost oil environment. While OXY most likely isn't looking to add to its acreage unless a remarkable deal comes about who's to say at these levels one of the supermajors doesn't look at acquiring OXY? We know Chevron (CVX) and Exxon Mobile (XOM) have an interest in the Permian so who knows what will happen down the road. Depending on how long oil stays in a rut for it may make sense for either CVX or XOM to acquire a larger company to create synergies and expand their portfolio. OXY is more than capable of managing on its own as it has done for the past century but in times like this maybe consolidation happens with larger companies if the price is right.
(Source: OXY Q4 2019 report)
OXY's is strengthening its business which should help it fend off short term headwinds within the oil sector
Oxy is ahead of schedule to deliver on its synergy program from the Anadarko acquisition of $2 billion. OXY has completed 60% of its projected $2 billion synergies which include $799 million of overhead, $83 million of operating and $323 million of capital synergies. OXY's success in lowering costs is making them confident they will deliver the $900 million in overhead synergies it promised from this deal in 2020 which is a year ahead of schedule. OXY has reduced its capital budget by an additional $100 million and is spending less to produce more barrels. OXY repaid $7 billion of debt in the second half of 2019 which reduced the total balance sheet debt by 30% since the close of the Anadarko deal.
All of OXY's core assets are free cash flow positive and its diversified portfolio has decades of high return inventory which allows OXY to produce high margin barrels. This will allow OXY to generate a sustainable source of free cash flow to return to shareholders in the form of dividends and buybacks. OXY exceeded the midpoint of its guidance by 78,000 BOE as production hit 1.4 million BOE per day from continuing operations. This was accomplished while spending $400 million less than the full-year capital budget of $8.6 billion. OXY's pro forma production exceed guidance by 28,000 BOE/d and is expecting to grow production by 2% off 2020's total production.
OXY is also improving its drilling capabilities as they drilled its first batch of 10,000 foot wells 18% quicker than before closing the Anadarko deal in Silvertip. OXY has said that there will be additional operational improvements in the future and are already saving $1.9 million per well completion by utilizing OXY's Atlas casing design. This is allowing OXY to pump frac stages at higher rates with lower trading pressures. This improved design produces improved stimulation and quicker pump times while using significantly less water. These enhancements are allowing OXY to spend roughly 26% less in capital while increasing the amount of oil recovered from the wells by 7%.
OXY has a long history with its dividend and reaffirmed their commitment to keeping the dividend strong which is a huge plus for my investment thesis
The latest dividend which OXY announced marks the 182nd consecutive quarterly dividend for its dividend program. OXY is one of the few companies which has paid over 40 years of consecutive quarterly dividends. In addition to this unique accomplishment OXY has also increased its dividend on an annual basis for 17 consecutive years. These are two important metrics to keep in mind as OXY has a proven track record of distributing cash to its shareholders through the heights and lows of the oil cycle. On the Q4 2019 call OXY's CEO reaffirmed that returning cash to shareholders is an integral part of the philosophy at OXY and the dividend is a defining characteristic of OXY as a company. In 2020 OXY will continue to strengthen its balance sheet by paying down debt from the Anadarko acquisition and the organizational synergies will positively impact its free cash flow putting OXY in a position to maintain its large dividend. Since 2002 OXY has returned over $35 billion of capital to shareholders and has a CAGR of 12% pertaining to its dividend. One of the other key figures is that OXY has stated that the dividend is sustainable in a long-term scenario with WTI at $40. Oil could certainly crash through $40 with OPEC+ no agreeing on terms but low oil prices isn't in the best interest of any foreign country or domestic driller. If oil does drop below $40 for WTI I wouldn't get too worried as it has happened before and it has bounced back.
(Source: OXY Q4 2019 Report)
(Source: Seeking Alpha)
I have built three models where OXY's share price stays flat, increase and decreases over a 3-year period. Each of these models illustrates how an investment in OXY will perform under these scenarios. I am using 100 shares as the initial investment and an annual dividend of $3.16. The dividend will reinvest on a quarterly basis and the number of shares and the next dividend distribution will update accordingly. In scenario A I have OXY's share price flatlining, in scenario B the share price increases by $0.25 per quarter and in scenario C the share price declines by $0.25 quarterly. Even with the share price declining over time the investment is still positive due to the dividend.
In scenario A OXY's share price stays flat for 3 years. Over this time period the initial investment grows by 37.97% as the dividend is reinvested. Over three years reinvesting the dividend produces an additional 42.07 shares and your quarterly dividend also increases by 37.97% from $79 to $109. Overall your investment would grow by $1,010.22 while you continue to get paid more quarter over quarter.
(Source: Steven Fiorillo) (Data Source: OXY)
In scenario B OXY's share price increase by $0.25 every quarter for 3 years. In this scenario your initial investment would grow by 50.12% as your initial investment would increase by $1,333.33. Your number of shares in OXY would increase to 136.05 and you would generate an additional 36.05% cash from the quarterly dividends.
(Source: Steven Fiorillo) (Data Source: OXY)
In scenario C OXY's share price decreases by $0.25 per quarter for 3 years. Over this time period that becomes a 10.34% decrease in share price yet your initial investment would still be profitable due to the dividend. Your shares would increase to 140.19 and your quarterly dividend would increase by $31.75. Overall you would still make 25.70% on your investment even though the share price declined by 10.34% as your $2,660.50 investment would be worth $3,344.21.
(Source: Steven Fiorillo) (Data Source: OXY)
The power of compounding is real and dividends can provide a great vehicle for share appreciation and generating cash over the long term. Unless you're looking for trades you should be looking at the long-term thesis of a company when you invest. In the case of OXY I have a long-term view on oil and while the short-term situation looks dark I see a world which is still using oil and natural gas ten, twenty and even thirty years into the future. We could wake up next week with oil in the $30 which would be negative and if that happens I will just be acquiring more shares of OXY during that period as the dividend reinvests. With a dividend approaching 12% I can take a couple of hard quarters before the oil markets even out.
Conclusion
The energy sector as a whole has been decimated and left for dead over the past year. I have a long-term bullish view on energy because by the year 2057 the global population will exceed 10 billion people. Over the next 37 years the population is going to grow by more than 2.23 billion people. BP p.l.c. (BP) has forecasted in its 2040 Energy Outlook that the global demand for energy will continue to increase through 2040. There is no question energy is going through a dark time in the current cycle but things are bound to get better as the supply reduces over time. Renewables aren't moving quickly enough to replace oil and gas especially as we are still experiencing exponential population growth. OXY is a solid company which is making the right moves to deliver value for its shareholders. I don't make purchases based on what others do but it is a plus to me that Berkshire has the same long-term view on oil even if it is for different reasons and they have a large vested interest in OXY. Energy stocks are not for the faint of heart but the sector certainly won't disappear. OXY is a new position for me and as I stated before I will add to my position at certain price points. I am bullish on OXY as a long-term investment and plan on reinvesting the dividend along the way.
This article was written by
Analyst’s 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: Disclaimer: I am not an investment advisor or professional. This article is my own personal opinion and is not meant to be a recommendation of the purchase or sale of stock. Investors should conduct their own research before investing to see if the companies discussed in this article fits into their portfolio parameters.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (182)
Common owners and employees think about this: Management went around shareholders to guarantee the Anadarko deal. OXY had prided itself on no lay off's to employees. The dividend would not be cut. Now with the poison pill you cannot be bought out. Vicki has shown what a scuzz she is and the BOD is only driven by self interest. Buffet will take his pound of flesh every year because OXY now has no choice. Common OXY shareholders, you are screwed.
Today kind of makes you look like an idiot.
Hope you got those shares at the prices you wanted!
2021: CAPEX$ 4.5bi + Debt due $4.5 bil + int. due ~$1.5 +$0.8 (BRK) +$0.4bil Div = $11.7bi
2022: CAPEX$ 5 bi + Debt due $4.8 bil + int. due ~$1.5 +$0.8 (BRK) +$0.4bilDiv = $12.5bi
2023: CAPEX$ 5 bi + Debt due $1.4 bil + int due ~$1.5 +$0.8 (BRK) +$0.4bil Div = $ 9.1biThe company does have an untapped $5bil revolver until 2023, some ~$3 bill in cash, a ton of premium assets it can sell once oil recovers, (lets say $3 bil a year for asset sales to be conservative), and as OXY alone had a $3.5 bil in cash flow for 2016, 4.7bil in 2017, and 7.8bil in 2018. As a joined company, estimates for 2020 cash flow was close to $8.7bi before the Saudi tantrum.So rough inflows in a bad scenario:2020: CF $3.5 + Asset Sale $4bi = $7.5 2020 looks ok
2021: CF $4.7 + Asset Sale $3bi = $7.7 Use Revolver
2022: CF $7.8 + Asset Sale $3bi = $10.8 Use Revolver
2023: CF $8.7 + Asset Sale $3bi = $11.7 Repay Revolver Yet, if asset sales go better i.e. $4bi than the revolver goes unused; if OXY pays the preferred in stock and kills the dividend, things again get rosier; although not without a dilution.So will oil recover? I doubt the Sauds and Russians can keep playing chicken for years; political pressure from the US, OPECs, and internal funding demands will be extreme. Moreover, Buffett wants this afloat! 5bil of $62.5 warrants are worthless if they go bankrupt, and I doubt he prefers bankruptcy headaches to a secure annual 8% preferred and a chance to own ~9% of the company at $62.5. Given that and the fact that he already owns some ~2% common, I am sure he would provide a nice premium loan to the biggest, most efficient shale player in the Permian, which will, of course, be dilutive. I am interested to see if he loads up on common right now or waits for more bad news.Vicki Hollub, as a CEO is solid; watch the interview below. They paid more than CVX because they can squeeze more out of the rock (see quarterly slides); CVX knew it and backed down. Black Swans (Corona+Oil War+USElections) are useful for assessing competence, and OXY was hedged and cut the dividend and capex, so they know what they are doing. The fact, that they kept some of the dividend shows that they expect their asset sales to work out.www.cnbc.com/...Conclusion: I think income investors should stay away, value investors incrementally load up as income funds begin to sell their positions. Just be sure you are ready for a wild ride. High volatility, a dividend cut, and dilution are likely short term. However, in 5-10 years returns look superb, especially if Buffett gets his way with share buybacks, which will counteract the dilution over time. Its high risk put you are getting paid for the risk if it works out.
And you can kiss the legacy production and CO2 production goodby. It doesn't fit Vicki's vision for OXY.
Good luck and bless your heart on OXY.
I don't think they can do either since Saudi Arabia's Fiscal spending requires $80 oil to support. Russia requires $42 Oil. On Monday Russia already had to intervene to prop up the Rubble by selling some of its limited currency reserves.
