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Occidental: Dividend Decision Coming

Bill Maurer profile picture
Bill Maurer


  • Rising oil prices will really help free cash flow.
  • Near-term debt maturities are not a problem.
  • Increased payout would boost investor sentiment.

While the overall market has been a bit uneasy thanks to rising interest rates, one area doing quite well recently has been the energy sector. Between a winter storm hurting production in Texas and OPEC+'s decision to keep output unchanged, certain key commodity prices are on the rise. One stock that has certainly rallied in recent months has been Occidental Petroleum (NYSE:OXY), and the current scenario means that an update on the company's dividend may come sooner rather than later.

(WTI Oil - Source: cnbc.com)

Before the Covid pandemic sent oil prices to an unthinkable negative figure, Occidental was paying a quarterly dividend of $0.79 per share. In an effort to preserve capital amidst serious cash burn, that payout was all but eliminated during 2020. A penny per share per quarter right now is basically nothing, but the annual yield did almost hit one half of one percent when the stock hit its 52-week low of $8.52. With shares back near $30 now, the yield is virtually nothing again.

Occidental has worked to improve its capital spending program over the past year. The current target is $2.9 billion based on a $40 WTI price environment, but obviously right now we are well above that level. The company produced almost $2.2 billion in free cash flow during the second half of last year, although part of that was based on a 40% lower spending run rate. In the graphic below, you can see how the change in oil and natural gas prices impacts the company's cash flow. As the company's Q4 earnings release detailed, average worldwide realized crude oil prices were $40.77 in the period, but that number should be much higher for Q1.

(Source: Occidental Q4 earnings slides, seen here)

After the Anadarko acquisition, the company had over $47.6 billion of debt

This article was written by

Bill Maurer profile picture
I am a market enthusiast and part-time trader. I started writing for Seeking Alpha in 2011, and it has been a tremendous opportunity and learning experience. I have been interested in the markets since elementary school, and hope to pursue a career in the investment management industry. I have been active in the markets for several years, and am primarily focused on long/short equities. I hold a Bachelor of Science Degree from Lehigh University, where I double majored in Finance and Accounting, with a minor in History. My major track focused on Investments and Financial Analysis. While at Lehigh, I was the Head Portfolio Manager of the Investment Management Group, a student group that manages three portfolios, one long/short and two long only. I have had two internships, one a summer internship at a large bank, and another helping to manage the Lehigh University Endowment for nearly a year. Disclaimer: Bill reminds investors to always do their own due diligence on any investment, and to consult their own financial adviser or representative when necessary. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.

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.

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Comments (103)

My issue with this article and recent ones on OXY have to do with a stunning lack of detail - just general comments that the company is making lots of $ with WTI at these levels and the company should buy back shares or increase the divvy.
So, let's get specific. The company appears to be on pace to make approx $3.2B in FCF at $40 WTI in 2021. With LT debt north of $34B, it appears the debt to FCF ratio was near 10x at the beginning of the year. With WTI near $65, it appears the company, with no increase in production, will generate near $8.5B in FCF. If the author had hinted that FCF would be north of $8B, perhaps there is some room to pay-down debt by $6B-$7B, and use perhaps $1B for buy-backs or a divvy. After all, with WTI at $65, paying down $6B in debt in 2021 and 2022 would reduce LT debt to approx $21B and result in a debt to FCF ratio below 3 entering 2023.
IMO, the bigger issue to me is that the author here believes a small divvy will be a catalyst for the stock price - a somewhat dubious claim to me.
I am a big "pay down the debt" advocate. However, at these FCF levels, I could be persuaded to set aside $1B a year to buy back shares. I would want some specific targets annually in place to buyback shares such as the following:
- all debt due in the following two years is paid off - provides a runway in case price of oil falls dramatically.
- at least $5+B or $6+B in annual FCF is set aside to pay down debt for at least the next three years - this would take LT debt to approx $15B and generate interested expense savings over $700M.
- WTI over $55
For those invested in warrants, as long as debt was being paid down, buying back shares 2-3% of shares outstanding annually would be a nice catalyst for the stock before 2027.
jodihn profile picture
@hoosiers99 - WTI at 65 is a recent phenomena. In fact, I expect the average for Q1 WTI is only around $56 to date when I looked at closing prices I found. Perhaps once $65 WTI is realized for a year we can use $65 WTI as a case for FCF or buybacks/distributions. Too early to discuss the benefit of $65 WTI in my opinion.
@jodihn Maybe, but it's nit picking a bit. Assuming oil doesn't go up even more and averages $65 for the rest of the year, a Q1 average price of $56 still gives a 1 year average of $62.75.

There is going to be a lot of pent up demand for travel thru the rest of the year. I'm seeing it beginning already with my friends. Not to pre-pandemic levels, but up considerably. Unless I'm missing something, I don't see a scenario where enough global production can resume to push prices lower.

In addition, you know how oil is. Only takes one geopolitical situation to bump the price $5-10. IMO at this point there's way more upside price potential than downside.

But I think we're all in agreement that at this point upping the dividend at this time is poorest of the available long term decisions.
jodihn profile picture
@usedcarguy Yep - I don't see any investor asking for a dividend increase so agreed on that.

My personal belief is that oil does not average mid 60s but mid - upper 50s for the year. I think the 65 is a fluke and won't last for the year. Now, caveat that with actual war in the mideast and all bets are off but sans elevated conflict I am investing on oil average with a 50 handle for 2021 - closer to 5 year average. I am not sure what an infrastructure package does to oil but assume it goes up. I guess that is another wild card - ha - too many caveats. Best just to buy your favorite undervalued oil co and enjoy the ride.

Cheers to the longs
OXY needs to quickly pay down debt due to rising rates. When debt is well in hand, then raise the divvy, not before.
OXY and 5% rise on Monday?
Brent broke $70!
OXY is a major part of my portfolio. And I abhor the idea of reinstating a dividend. Stockholders will have much better returns if they focus on debt repayments instead of shareholder distrubutions. AS AN OXY SHAREHOLDER I AM BEGGING YALL DO NOT REINSTATE A DIVIDEND. Once the dividend is reinstated it will lose momentum. A dividend is the last thing OXY shareholders need
lsuavecito profile picture

Me thinx that decision will be up to big daddy Buffet.
jodihn profile picture
@AndreP Big Daddy B already earns 8% - hoping that satisfies him. I can't remember timing but I think he was distributed CS as his first quarterly payment so I bet he received a bunch of warrants. I bet that was why he was paid in CS that first time and cash after.
Moats and Income profile picture
Nope...OXY will remain a growth stock as aggressively paying off debt and eliminating preferred dividends is top priority....and they will achieve such with massive FCF....

After that - the stock pps will be approaching its former levels and dividends will be restored..

A great LT Hold stock...few like it for the next two years...
@jmerlo Yes, aggressively paying off debt will continue to be their top priority. But, as far as eliminating the preferred dividends, according to the CFO on the most recent earnings call, because of the preferred share agreement the company cannot retire any of the preferred shares until the company is paying a $4 yearly dividend to the common stock holders. That's why if you look at their short and medium term goals on the third quarter conference call slides it shows their plan is to use fcf to reduce debt in the short term, then starting paying a sustainable dividend and lastly retiring preferred shares.
I wonder why they go to the bother and expense of paying a penny. It must be costing the company money to distribute this token (and, to me, meaningless) dividend to shareholders. I'd prefer they avoid that expense. A penny a share does nothing for me.
@NeedMoreCoffee Some funds are required to remove the stock if the dividend goes to zero. OXY is not the only stock to reduce to a penny during Covid. It allows certain funds to keep the stock in yheir portfolios
@NeedMoreCoffee I would add, certain guidelines have to be readdressed if one wishes to reinstitute a dividend. By keeping a minimum then you don’t have to go through all the hoops.
@NeedMoreCoffee Thanks to you both for educating me on this. Makes sense now.
I would be happy with .11c per share per quarter which is what they cut it to the first time, before cutting again, before they even paid one quarterly dividend @ .11c
@Jack Lance At .11c per quarter, it would cost OXY about $410MM annually. At these oil price levels (if they hold), they could easily afford to do this, but like others on this board, I'd rather they use this year to completely bring down the hammer on debt levels. Return an affordable dividend next year.
@MolsonMan I get it, the negativity that would be unleashed by a divvy bump probably would not be worth it, but most of the deleveraging that OXY needs to manage will be done by asset sales not saving pennies from a miniscule dividend payout.
jodihn profile picture
Wonder what Icahn is pushing for given his holdings - 11% of the company:

Kept Steady:
Occidental Petroleum and wts: OXY is a top three 7.65% of the portfolio position established in Q2 2019 at ~$52 per share. Q3 2019 saw a ~23% selling at prices between $42 and $53 and that was followed with a ~15% reduction last quarter at prices between $37.25 and $44.50. The pattern reversed in Q2 2020: ~300% stake increase at an average cost of ~$14.60. Last quarter saw the position increased further through the purchase of 19.3M warrants (strike 22, 8/3/2027 expiry) for ~$2.75 per warrant. The stock is now at $29.90. Their overall cost basis is ~$20.50 per share and their beneficial ownership stake is ~11% of the business.
@jodihn get your specifics right on Icahn and after yday announcement of selling 30 mil shares he will go back to 7.7% ownership... as for the warrants, he didn't buy all of those warrants he received a chunk in the issuance like I did... yeah he bought a bunch but not as many as you're saying..maybe you meant to say he owns rather than bought
jodihn profile picture
@bluemarlinbruce Thanks for your reply. I should have put " " and a link to the source. Here is the source which I copy/pasted my comment from.

The author used Icahn's 13F from Q42020. "This article is part of a series that provides an ongoing analysis of the changes made to Carl Icahn's 13F portfolio on a quarterly basis. It is based on Icahn's regulatory 13F Form filed on 2/12/2021."

I would prioritize debt well ahead of dividends. They have an insane gearing ratio.

I would actually drill/complete aggressively. They have very nice land, very much in danger from Biden anti-fracking efforts. To the extent they can get work done now, they should. Will get worse later. Also prices are high and strip backward.

But dividends are silly talk. They ain't sleepy semi-major OXY any more. They are another shale shitco. Embrace it.
@21793061 I wouldn’t worry about any fall out from government policy at the moment. There is a reason there was a massive run on securing permits for drilling before the inauguration. One should be confident that OXY has enough runway to keep them in growth mode for an administration or two.
1. Mandates can be hard to reverse. A lot of the value is in the stacked pay of the Permian. If you are restricted to permits on hand only, that severely devalues the land.

2. They have other ways to mess with operations. For instance cutting off right of way grants for gathering lines.

Apple Dan profile picture
See page 9 here: www.oxy.com/...
(I am quoting Bad Andy)
Small Cap And Special Situations profile picture
Why waste a bunch of money on a dividend when they could acquire another company? /s
Hedges may impact negatively. All cash flow may not be accrued with higher prices of oil and gas.
@aksh21k no impact until brent's at $74. also they only hedged 1/4 of their total production.
jodihn profile picture
@CMUboy Brent is only about 7% away from $74 right now. Does that mean OXY stops the gigantic gains at that price and stays flat or does the market look to 2022 where there are no call options on their oil?

I suppose only 1/4 hedged so there is some calculus there on the impact of each barrel selling above 74. Price could keep raising.
@jodihn i don't believe brent will stay above $74 for long this year. after this year, no more caps.
ckarabin profile picture
Dud company! Management is not at all shareholder friendly and never has been, even dating back to the old Armand Hammer days
@ckarabin If your average price was $10 share I wonder if you would be saying that
ckarabin profile picture
@fypg699 No argument there. Terrific trading stock! But lousy long term company. I don't own it anymore as they proved again that you can totally destroy shareholder value with their self serving ways. There was no rational justification for the Anadarko acquisition, especially to take such a massive "bet-the-company" move to acquire oil at such an inflated price. And shareholders paid dearly for it. But traders like yourself should love it. Just don;t think it will ever go back to the 70's again!
PS1789 profile picture
@ckarabin I’d be ticked too if I sold out ;)

All in jest - best of luck to you.
Bad_Andy profile picture
OXY just went over the dividend during the last call. See page 9 here: www.oxy.com/...
NoFace profile picture
Actually we got our warrants. Thats also some kind of nice "Extra Cash". Should be mentioned.

I would take advantage of the fact, that the dividend is already eliminated. Pay down the debt.

The problem with oxy is that they need to reinstate a high dividend to pay out Buffet's preferred stock. Please correct me if I am wrong.
jodihn profile picture
@NoFace that is correct. $4 per common for 12 consecutive months per the call.
@jodihn Thanks for that update. I agree. Pay the debt and Mr. B and then maybe I will be in the money.
jodihn profile picture
@AndreP you bet. I think you will get there...not sure where it is for you but we are generally moving in the right direction.
I do not think OXY should or will increase the dividend in 2021 even beyond, OXY has made very clearly said several times its priority is given to pay down debt, so it can get a better financial rating. I am not sure the author follows OXY well.
I need capital growth instead of div
in fact oxy handed me the best div last year, the warrant is way better
PS1789 profile picture
Loooooooooooooooong. Let’s get some more warrants ;)

How do we feel about Rolls?
"I don't think we'll see negative prices again anytime soon, but there could easily be a pullback into the $30s if we get a really harsh winter."

texas had a pretty harsh winter. but i didn't see oil crashing in to the $30's.
no divvies until debt is reduced to $25 B. no divvies. nothing to decide.
@CMUboy i like my oxy warrants.
@CMUboy sold my warrants this morning at 15 bucks. Still own lots of shares of OXY.
@tomjam You're going to kick yourself for doing so. This will be a $60 stock within two years. All kinds of good things are going to happen as they pay down their debt.
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