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 at the end of Q3 2019. Since then, mainly due to divestitures, the amount of debt has come down by almost $11.5 billion. While quarterly interest expenses have risen due to some expensive refinancings, management has greatly improved the near-term debt maturity profile, pushing a lot of debt out into the future. Here is how things look for the next couple of years, as detailed in the company's 10-K filing:
At December 31, 2020, future principal payments on long-term debt aggregated approximately $35.2 billion, of which, $398 million is due in 2021, $2.1 billion is due in 2022, $0.9 billion is due in 2023, $3.9 billion is due in 2024, and $27.9 billion is due in 2025 and thereafter.
Before even thinking about any positive free cash flow that will be generated, management has also discussed an additional $2 billion to $3 billion in additional divestitures planned for the remainder of this year. That alone should basically be enough to cover any debt maturities coming due before the end of 2022. Then, the only other capital item to really worry about is the preferred dividend being paid, currently at $200 million per quarter if it is paid out in cash.
The 10-K filing stated that there were over 931.5 million shares outstanding at the end of January 2021. A four-cent per year common stock dividend only comes out to about $37.25 million in cash outlays. With oil prices now in the $60s, free cash flow could be more than a few billion per year right now. I'm not saying that the board has to go back anywhere near the pre-cut dividend rates, but even a little increase would likely increase investor sentiment a bit.
So what would be a workable dividend rate at this point? Well, let's say the company targets a 1% annual yield at the moment, or about 30 cents per year. That would cost about $280 million annually, which I think is extremely doable at these oil prices. After the company gets another few quarters in the books, the situation can be evaluated again and perhaps the dividend can be raised even further. You do have to start somewhere though.
With oil prices having surged to more than $60 recently, I think it is time for Occidental to revisit its dividend program. The company doesn't have a lot of debt coming due anytime soon, and decent free cash flow should be produced thanks to the current business environment. If you look at the company's dividend history, ignoring last year as an outlier, the next dividend declaration should likely come in late April or early May. While investors aren't going to get a tremendous yield anytime soon, an increase in the payout would at least show the Street that Occidental has turned the corner.