Occidental Petroleum: An 'Accidental' High Dividend

Summary

• OXY is down over 80% from their 52-week high of $68.83, now trading at $12.51.
• OPEC deal fell through, causing a 24% decline in oil, with the price per barrel of oil below $35.00, the lowest price in almost 20 years.
• OXY had recently acquired Anadarko for over $55 billion, adding a barrage of debt to their balance sheet, in hopes to be a giant oil player.

Occidental Petroleum - 2020 Background

It's safe to say, on this day of March 9th, that many investors and prospective investors are looking at Occidental Petroleum (NYSE:OXY) as having one too many "accidental" problems to work through. What once was a steadily growing and high cash-flowing oil and gas company, is now a highly contaminated company that investors are fleeing from (no pun intended, as it relates to the Coronavirus/COVID-19).

However, with the stock plunging from $68 per share down to $12.51 per share, could this actually be an investment that you can buy and hold, while they continue to clean up their balance sheet and persevere through the downturn in oil prices? As an alternative, this could very well be a stock that investors should stay away from. Therefore, I want to review the story from the acquisition of Anadarko, the impact of the Coronavirus/COVID-19 and the oil-price war, to make a conclusion on what a current and prospective dividend investor could do with owning their stock.

Occidental Petroleum Buys Anadarko

The accidental problems began with the, first proposed, acquisition of Anadarko. The bidding war for Anadarko, believe it or not, began at $33 billion from one, big-oil, giant Chevron (CVX). However, that was only just the beginning. Occidental came swooping in with a whopping $38 billion offer, up $5 billion from Chevron's. It didn't end there. Occidental proceeded to increase the cash portion of their offer, Warren Buffett chipped in a $10 billion investment and Occidental planned to sell almost $9 billion of assets to help finance the deal. In total, the cost swelled to approximately $57 billion for Occidental to, what we may or may not end up saying, "accidental"-ly acquire Anadarko.

OPEC Fails To Strike A Deal

Now, Anadarko, in and of itself, was not an entirely poor acquisition. Anadarko had ~600,000 acres of shale-oil holdings located in, none other than, the Permian Basin, which is located in the southwestern part of Texas. This isn't too far from where OXY is located. Further, the Basin stands to produce as much, if not more, than Saudi Arabia. This is worth noting now, since OPEC failed to strike a production deal and Saudi decided to up their production to over 10 billion barrels, pushing the price down to below $35 per barrel for the first time in almost 20 years. This was a powerful punch to the value of the acquisition, as the operating cash flow at a lower price per barrel, not to mention hedged transactions at higher rates, stands to significantly impact earnings.

*Picture from CNBC article*

OXY has noted this and wants to protect the dividend. The dividend that, as of close today, currently shows a yield of over 25%! There were comments that they would further curb spending if markets do not improve. However, even as a dividend investor, I am significantly wary of their dividend, no doubt there. 15 analysts on Yahoo! Finance currently anticipate no-to-negative earnings this year and the expectations of 2021, does not look much better at this point in time. Therefore, as a dividend investor, one has to question the stability of that specific cash flow back to the investor.

Occidental Is Not Too Big To Be Hurt

First, Occidental earned over $21 billion in total revenue in 2019. In addition, Asset impairments and acquisition costs took $3 billion from that revenue, which significantly impacted earnings in 2019. This is while the price per barrel of oil was in the $50-$60 range during the 2nd half of 2019. If the price per barrel stayed even remotely similar to that range, Occidental would actually stand to have a productive first quarter of 2020. However, that is NOT the price per barrel of oil and they do take a decrease to revenue, earnings and cash flow because of it. Pending any asset sales, I would estimate approximately $3-4 billion in revenue for Q1 2020, which is taking the $21 billion in total revenue, discounting that by 35% from the decrease in the price per barrel. Therefore, I agree with the analyst estimates above on net income at zero or negative for the year.

Second, Occidental paid back over $7 billion of debt used to acquire Anadarko during Q4 of 2019. Luckily, they do not have any long-term debt obligations in 2020 (per their filed 10-K), but do have a required $7 billion in 2021. Sadly, the train that looked to move well to tackle down debt early, is going to have to stop, per the above. Therefore, Occidental will not have additional free cash flow to pay extra on their debt for 2020.

Third, if the other two items above didn't throw a wrench in plans, the Coronavirus has caused systemic shockwaves throughout all industries involved. The high-level impact - less travel, less air flights, overall, as well as less production due to workers taking time away from work; production that needs oil. Production would include plastics, chemicals, heating of a home, aluminum, glass, the list really goes on. Therefore, with less production to be had, the less oil/gas that is needed from the overall industry.

Therefore, Occidental, just as you've seen with Exxon Mobil (XOM) and Chevron, are not too big to hurt during the Oil Price War, on top of the close-to-Pandemic Coronavirus/COVID-19.

Time Can Heal Occidental as A Dividend Investment

Occidental is showing similar signs as Kinder Morgan (KMI) had in the past. KMI cut their dividend significantly to clean up operations, their balance sheet and reposition themselves. Since that dividend cut, KMI has increased the dividend steadily over the last 3 years, almost at the same levels pre-dividend cut.

Occidental is currently paying a $3.16 dividend per year and yields 25.26%. This statement alone has to push me to say, "this is not sustainable." The payout ratio cannot be calculated, simply due to the projected earnings not being there. The dividend was going to be sustained through operating cash flows, while funding new projects and paying down the long-term debt. Since the Coronavirus/COVID-19 and the price war on Oil, game plans shift and I would side with Occidental if their game plan shifted from their dividend, simply because it must take care of the foundation, first.

Though Occidental has increased their dividend for 17 years, 2020 may be the year that not only that streak ends, but that the dividend is cut. If Occidental cuts their dividend by 80% to $0.15 per share or $0.60 per year, this could save approximately $2 billion in cash flow per year. This would allow Occidental fund other operations, still pay shareholders a portion (at current prices, a $0.60 dividend yields 5%) and can set the stage for better, future years.

In conclusion, for current investors, I would wait and see what management ultimately decides to do. This is a long-term game and Occidental has valuable assets, especially with Anadarko. Valuable assets, that if they weather the storm, they would be a force to reckon with. If you do not own shares, yet, I would wait on the sidelines on this one. There are far too many macro and micro-environment events occurring that can continue to change and shift Occidental's operations, causing consistent volatility that we have seen.

Please share your thoughts and feedback on the analysis and conclusion above. I would love to hear from everyone and look forward to the comments. As always, good luck and happy investing!

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.