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Occidental Petroleum: Cash Flow Counts Also


  • If management can demonstrate superior earnings power, then this stock may well soar.
  • The market is preoccupied with the financial leverage.
  • The industry recovery benefits this company at a time when those benefits are sorely needed.
  • The easy improvements come from Occidental being a better operator than Anadarko.
  • Cash flow from operating activities before changes in working capital took a sizable jump.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

Oil drums stacked on top of each other
GlobalStock/E+ via Getty Images

Mr. Market has been so obsessed with the balance sheet leverage of Occidental Petroleum (NYSE:OXY) that one would think that bankruptcy is just around the corner during the next cyclical downturn. But the sales of some

I analyze oil and gas companies like Occidental Petroleum and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies - the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OXY either through stock ownership, options, or other derivatives. 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.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

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 (82)

Long Player profile picture
Occidental just blew the doors off
@Long Player it did. My estimate was on the mark. About $2bn FCF at $65 realized oil price. If Oil stays > $65 for the next 2-3 years, Oxy could easily get IG rating back and could easily double its stock price!
@Raul_Raul @$2B FCF, it won't even be that long. Should be by the end of next year.
@Long Player any idea what is the derivative loss? My guess is the natural gas hedge, but their ceiling is at $3.61 which should have been fine for Q2. Also I don't understand how their realized price for natural gas was $2.59 for Q2.
Hey NEWS flash OXY is NOT a better operator than Anadarko
Period....! OXY will NEVER be an equivalent to APC....OXY management may try but in my opinion will never happen....

OXY has not demonstrated by the current management the wanting to be that operator that APC once was it takes more than just a perceived notion that they are. I want OXY succeeded And it won’t be by luck are articles!
Long Player profile picture
@Lepowell787 OXY has continued to demonstrate it is many times the operator that APC was. APC was always a big mess.
@Long Player well well well I worked under both and APC was an excellent operator OXY no so much.
What you mean by mess is ambiguous! If your talking about financial reporting again ambiguous.
jodihn profile picture
@Lepowell787 will you elaborate on why OXY is not the operator APC was? What makes APC better?
i think OXY is undervalued. They were down to 1 well and pumping 1.2 million barrels a day out of ONE! well. The lift cost was about 6 bucks. At 70 bucks a barrel, they have got to be making money. If they have a bad report, I will likely start selling and just buy Fidelity ETF ( FENY) and at least get 3.5% divies . If they dont make huge profits, now, there is no reason to hold the company. I think they will blow it out of the water though and surprise many . Then , those that sold @ 9 a share will buy it back at $30. No?
What is the ebitdax and maint capex for this dog?
DougBodde profile picture
Debt is not a binary between imminent bankruptcy and easy financing of interest obligations through profitable activity. Debt is a long term anchor on capital returns to shareholders. It cannot be rolled over forever, despite current opinions to the contrary. The oil price isn’t stable and the current price is a top. If you’re in energy E&P, you’d better have a Dave Ramsey mentality.
@DougBodde - not so much about rolling over debt, more about paying it off.. they are going to be paying off debt with cash flow...

total debt will be less over time, so equity could benefit as debt is eliminated... the higher the oil price, the faster it could happen...

my opinion only fwiw
jodihn profile picture
@65wildcat Yes, and is why OXY should not do dividends or anything else aside from paying off debt. Am 100% aligned with MGMTs plans on this and expect to see it on the earnings report tomorrow. Oil prices being unstable is another reason why #1 focus is utilize the cash to pay off debt and reduce its production cost per barrel. Let's go OXY.
Long Player profile picture
@DougBodde I think that management will likely sell some things to speed up the process
I have a Flotilla of OXY Warrants and I'm HODL. I'm hoping for OXY Stock Price of $60 but it's taking forever and I'm only human. All is my opinion.
jodihn profile picture
@nasa_rss I will stay the course. We always knew it would take a while for the debt payoff. For OXY to get to $60 it needs to be less than $25B debt and probably pay a larger dividend. These will not happen until 2023 (maybe end of 2022) in my opinion and I am investing as such.

This is not a get-rich-quick AMC/GME YOLO stock. This is a get rich in 3 years stock.
Long Player profile picture
@nasa_rss Sometimes that happens.
Long Player profile picture
@jodihn It will take some time to get the house in order.
Thank you for the article. I still don't understand the stock price versus what the assets OXY has.
Long Player profile picture
It sometimes happens when there is a merger followed by a mess.
Don’t discount carbon capture technology too. ESG pressure will be lessened when they shift a shade more green
Long Player profile picture
@thetazbull The chemicals division of OXY has a green presence
Nice article!
Thanks for the article. Well written. How much cash flow from operations do you expect with Oil at >$70 and also medium/long term when Oil is >$60?

I don’t understand how the market is missing this unbelievable setting for this stock / public warrants.

Conservatively, if the company earns around $8bn in FCF per year for the next 2-3 years - all that repayment of debt will mostly transfer to market cap.

If the company can de-lever by $25bn, the stock will more than double from here and warrants will return more than 4x.

Hence, upcoming earnings will give us a good indication of FCF capability.
Long Player profile picture
@Raul_Raul Then let's see what happens. With earnings around the corner, might as well find out the results.
Imo, the biggest obstacle for share price appreciation right now is a sector wide problem. Goldman has a chart showing the divergence of WTI strip price vs energy select ETF since 2018. My guess is that was when ESG mandate rolled in. I don't know if and when this divergence would correct itself.
Long Player profile picture
@Dorka It is really about long term oil and natural gas pricing which is still relatively low. That has to come up. Otherwise the divergence will continue.
@Long Player thanks, I wonder what it takes for longer dated pricing to gain momentum
@Long Player

1. When do you estimate OXY will retire the preferred shares?

2. Can OXY buy back warrants instead of stock? Or can OXY force a retirement of the warrants?

3. Do you consider a more significant asset sale likely during 2022? Something like $5-$10 billion?

4. Is it the departure of Vicky likely during the next 2 years?
Long Player profile picture
@Daniel07 We have Vicky for a very long time. She was Chazen's choice to succeed him originally and I don't believe anything has changed that. Asset sales will happen when the right bidder comes along which is more likely the way things are going right now. I suspect anything that might happen though will close in 2022.
OXY can buy back anything it wants whenever it wants. However, right now the debt will be first. The warrants do have an expiration date. Off the top of my head I do not remember if they have an acceleration provision.
Preferred retirement would be more likely after the warrants convert.
@Long Player August of 2027 on the warrants. I'm just guessing, but IMO this is the order things happen:

1. Pay down debt and regain investment grade.
2. Use cash to either restore the quarterly dividend or pay a one time$3.97 special dividend.
(The redemption clause of the preferreds requires $4 in dividends paid over a 12 month period)
3. Borrow money at lower rates to buy pay off Buffett.
4. Implement full reinstatement of dividend if they chose to pay the $3.97. Otherwise, begin Stock buybacks.

I'm not aware of any acceleration clause on the warrants. It should also be noted that the preferred shares also come with warrants of their own that are exercisable after the preferred shares are repurchased. I believe the original exercise price was $62, but those are subject to dilution. Last I checked I think they were repriced around $57 or so.
Long Player profile picture
@usedcarguy Depending upon the situation, they may be able to make Buffet an offer for say part of the preferred and kind of see what happens. Of course if that does not work.......
You give me hope. Although not an investment tool, it sooth the anxiety. Appreciate your post.
Long Player profile picture
@AndreP Thanks. During a recovery, not too many things are dangerous for at least the time being. Now let's see what this crew does during this time.
galicianova profile picture
LP, just to gauge your interests, what is the ratio between AR/Oxy of your holding?
Long Player profile picture
@galicianova off the top of my head, this one is speculative so 3 or 4AR to 1 OXY dollar wise. The problem is my portfolio right now is goofed up from buying stuff last year. AM in particular is way out of whack at 10% of the portfolio because it climbed way up from where I bought it.
galicianova profile picture
@Long Player thanks! the ratio between something you believe in (AR) and something you hope for is very important and perhaps even crucial. On your list of trusted you have EQT and to lesser amount Hess, mcf and the Egyptian goodie. if i remember correctly, in amount i suppose larger than OXY(-moron, if i have to be funny).
Long Player profile picture
@galicianova the HES partnership with XOM is probably a "sure thing" relatively speaking as all those discoveries now have production increasing probably for the rest of the decade. Similarly EQT with the Rice Brothers is probably another impressive money making machine.
Moats and Income profile picture
Anyone that invested in OXY near the bottom made a very nice gain…all it took/takes is WTI >= $60 and OXY wins huge longer term, too…LONG OXY! :))
Long Player profile picture
@jmerlo This one is leveraged at the right time. So things should go very well right now
@Long Player It seems to me that several Canadian companies such as CVE, ERF, and SPGYF are both safer and cheaper than OXY.

At the current oil and gas strip prices, the valuations of oil and gas companies are much lower than their historical normal. What is your view on the probable reasons for the cheap valuation ? Is the market discounting a near term slowdown/recession or the introduction of carbon taxes ?
Long Player profile picture
@Easy Al Canadian companies traditionally trade at a discount to the US crowd with a few exceptions of course.
After that its the longer term price of oil and gas that are slowing the whole thing down. That has to come up and I suspect it will.
Kbbradford profile picture
Justice would dictate she is fired for destroying shareholder value. But PC culture gives everyone but white males a break.
Long Player profile picture
@Kbbradford Did she destroy value? Or did the market overreact as usual?
@Kbbradford I think most will agree with the presentation of LONG PLAYER. I would think that the major issue stockholders should/can have about OXY is the way the Anadarko acquisition transpired and the Buffett financing. With that said I think Mr. Icahn and HIS fellow new Board Members have their Financial Eyes on creating value. Lets review the wts. issued at say ~ $5.00 in 2020, and now worth ` ~$11.00, at posting, (up ~ $6.00). Value created for the stockholder at NO CURRENT COST to OXY. Warrants will probably not be exercised at current price level and probably not until there is a mention of real upward movement of the $0.04 annual dividend. Meanwhile stock price has recovered for mid June, 2020 levels of $17-$18.50 to $25-$30 range. Granted if you bought common at the $44-$45 level there is still a ways to go; but, as LONG PLAYER indicated, risks abound, but at least OXY is moving in a positive direction.
anil92691 profile picture
When a failed management has good cash flow; it is just a matter of time before she blows it up.

Surprised the Board and Management that blew this company up is still enjoying a lucrative compensation. The only happy man is Buffet.
Long Player profile picture
@anil92691 Possibly. But then again, hindsight is 20/20. Now they finally get a chance to show if this thing is going to work. No one saw 2020 coming or lot of things in this industry would not have happened.
02 Aug. 2021
@Long Player don't even bother reply to ppl that are still talking about Anadarko. It's time to move on... I'm expecting amazing results on the 3rd. BTW. V good article 👏
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