Occidental Petroleum: Entering Slowly The Event Horizon
Summary
- Occidental Petroleum filed an 8K filing in which the company changes its control severance plan for executives.
- This action has fueled speculation about a possible takeover down the road.
- Which company could be solid enough to attempt a takeover and digest such a large debt load? Maybe Chevron will eventually make an offer, but at what price.
- Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »
Source: LA Times
Note: An event horizon is a notional region around a black hole beyond which no light or other radiation can escape anymore. It is considered a point of no return. By extension, a financial event horizon could spell an economic collapse that has been set in motion.
Quick Introduction
The Houston-based Occidental Petroleum (NYSE:OXY) found itself again at the center of a new round of speculation about a possible controversial acquisition. However, this time the market is not expecting Occidental to acquire another company, but rather to be the target of a takeover itself.
Occidental Petroleum has been dropping slowly down the food chain and now is regarded as mere food for bigger fish. From a vicious predator ready to gobble the entire US Shale, the company is now downgraded to a wild game prepared to be hunted.
The past six months have been extremely difficult for the company and, above all, its shareholders.
The market has collapsed, and oil prices have sunk to unsustainable lows. Yes, we have witnessed an excellent rebound recently, but we are still in the danger zone, and we know that fierce headwinds are just around the corner.
The stock collapsed since January and if we compare OXY with EOG Resources (EOG) or Chevron corp. (CVX) it is not a bright picture.
Data by YCharts
One thing for sure is that a large part of the adverse effects that have crippled Occidental can be traced back to one single faulty management decision to takeover Anadarko Petroleum. I believe we can all agree with that. It has been done at the worst time ever in history and at an inflated price that required debilitating financing deals that are still haunting the company as I am writing.
As a reminder, Occidental's CEO Vicki Hollub secured the Anadarko deal with a $10 billion preferred stock investment with Warren Buffett and a "not-so-binding agreement" to sell Anadarko's African assets to Total (NYSE: TOT) for $8.8 billion. This deal is now gone after Total backed out:
Total on Monday backed out of its agreement with Oxy to buy offshore assets in Ghana, citing low oil prices driven by the coronavirus pandemic. The deal was a key part of Oxy's plans to sell $15 billion of assets by the end of next year to repay investors who funded its $38 billion takeover of Anadarko last year.
The huge issue is the debt and the ability to pay it down the road.
Occidental Petroleum is showing a net debt of $36.5 billion as of March 31, 2020.
The company has no debt maturing this year, but it is not the end of the story. Occidental may be forced to redeem some notes in October for about $992 million.
The real issue coming is that the company has about $11.1 billion of notes maturing between 2021 and 2022 (please see the graph below).
With total cash at $2.02 billion at the end of March, the company needs to address the financing seriously and raise some money immediately or cut spending.
From the 1Q'20 Presentation.
It is what the company started to implement.
First, Occidental elected to pay the dividend on the preferred shares owned by Warren Buffett's Berkshire Hathaway in stock instead of cash, which is another $800 million. The issue is that while the company is saving cash, it is diluting common shareholders, but who cares about the commons?
Second, the company cut twice the dividend to now a symbolic $0.01 per share. Yes, the dividend to be paid in July will be almost zero. Another blow to common shareholders while management is securing a "golden parachute" in the case of a takeover.
Third, the company also announced it was reducing 2020 CapEx by about 30% along with additional cost reductions. This action will have a long term effect knowing how important is sustaining CapEx for a Shale producer. Already the Shale sector has witnessed some drastic layoffs.
While workers in just about every industry are threatened by the economic slowdown, few are more at risk than those in the oilpatch. The Midland-Odessa region of West Texas, where Occidental Petroleum Corp. and Parsley Energy Inc. have dominated, could be decimated, according to a report from the Brookings Institutions.
What next?
You do not have to be a modern Nostradamus to understand that without a massive reversal in oil prices very soon, which is unlikely, the company has entered a financial event horizon that will slowly reap apart its balance sheet.
The recent speculation arose from a recent 8K filing in which the company changes its control severance plan for executives that could revive speculation on a potential sale of the company.
[E]nhanced severance benefits to the Company's executive officers upon qualifying terminations of employment within two years following a Change in Control
Furthermore, the company justified its decision:
The purpose of adopting the CIC Severance Plan is to allow the Company's executives to continue to exercise their judgment and perform their responsibilities without the potential for distraction that can arise from concerns regarding their personal circumstances in the event of a Change in Control.
The issue is another slap in the ordinary shareholders' faces. The stock has collapsed, and the dividend is now history because of the nonsensical decision made by the company's executives. Yet, while shareholders are paying the price, the company's executives are getting rewarded handsomely if the company is forced to be acquired. Here what they will get if a change in control is implemented.
1 - Cash Severance.
The executive would receive a cash severance amount equal to 2.00 times (or, in the case of the company's chief executive officer, 2.99 times) the sum of the executive's base salary [...] and the executive's target annual bonus...
2 - Pro Rata Bonus.
The executive would receive a pro-rata portion of the executive's annual bonus...
3 - Welfare Benefits.
For two years following the termination date, the executive would receive continued participation of the executive (and eligible dependents) in the basic life, medical and dental plans in which the executive participated immediately before the termination date at the same rates and levels in accordance with the terms of such plans...
4 - Accelerated Vesting of Long-Term Incentive Awards.
The executive would receive vesting of all outstanding long-term incentive awards. Any performance-based awards would vest at the greater of target performance and actual performance...
5 - Outplacement.
The executive would receive outplacement services for up to nine months following the termination date.
Conclusion and technical analysis
It is not my first rodeo, and I have seen this exact scenario playing many times before.
The writing is on the wall, and there is nothing that common shareholders can do to change that fact. Yes, it is revolting and unsettling to witness such financial injustice playing over again in front of our eyes.
The question remaining is which company can eventually profit from such demise and attempt to acquire Occidental Petroleum?
The immediate answer is, of course, Chevron. But, will it be wise to acquire such a debt-laden company? Chevron's shareholders will look at it with some mixed feelings, and the stock will certainly get punished severely, at least for a while.
However, with this new wave of euphoria building around oil prices, this idea may stay asleep for a few months until reality retakes the center stage. Meanwhile, let's trade.
Technical analysis
OXY is showing a descending broadening triangle pattern, which is generally considered bullish. The support is now around $12.25, and resistance is about $16. The short term strategy is to sell less than 20% of your position at $16, assuming a resistance breakout with a retest of $18.20. A possible approach is to wait until $18+ is reached to take 40% off the table.
Conversely, if OXY retraces, I see intermediate support at $14 (50 MA) and more substantial support at $12.30, at which point it will be time to buy back and accumulate again.
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This article was written by
I am a former test & measurement doctor engineer (geodetic metrology). I was interested in quantum metrology for a while.
I live mostly in Sweden with my loving wife.
I have also managed an old and broad private family Portfolio successfully -- now officially retired but still active -- and trade personally a medium-size portfolio for over 40 years.
“Logic will get you from A to B. Imagination will take you everywhere.” Einstein.
Note: I am not a financial advisor. All articles are my honest opinion. It is your responsibility to conduct your own due diligence before investing or trading.
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 short tern OXY quite regularly but do not have a long term position.
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