Occidental Reports Strong Q2 Results
Summary
- Revenues and adjusted earnings beat as oil prices rise.
- Free cash flow tops $2 billion for the quarter.
- Improving financials show dividend return is coming soon.
After the bell on Tuesday, we received second quarter results from oil and gas company Occidental Petroleum (NYSE:OXY). While the company was in rough shape a year ago during the early stages of the pandemic, a rebound in oil prices has certainly turned this name around. With another strong quarter in the books, investors should remain confident that things are on the right path.
For the quarter, net sales came in at $5.96 billion, a little more than $100 million above street expectations. This figure was more than double the year ago period, as last year's quarter was heavily pressured by the coronavirus. Occidental's worldwide net realized oil price was just over $60 in Q2 2021, up $4.40 sequentially and nearly $25 above Q2 2020. Gas prices also showed tremendous year over year increases as one might expect.
For the first time in two years, Occidental was able to report a GAAP profit before counting the preferred share dividend. Management has certainly been able to control costs during this transition period, as adjusted earnings per share of $0.32 smashed estimates for just a three cent profit. Don't forget that with a good portion of the expense base being non-cash depreciation and amortization, the company doesn't need to report massive profits to drive meaningful cash flow. As a result, the financial situation continues to get better as seen in the chart below.
(Source: Occidental earnings reports, seen here)
For the quarter, free cash flow came in over $2 billion. Over the past twelve months, the net debt position has improved by more than $6 billion, allowing for meaningful repayments of borrowings like the major debt tender seen last month. Don't forget that oil and gas prices in Q3 have been a bit higher than they were in the early stages of Q2, so free cash flow could be even better in the current period if prices remain near current levels. Some hedges put on could limit potential cash flow upside, but that would be a good problem to have if we get there.
Quarterly interest expenses have already come off $24 million off their high to $385 million in the latest period. The July debt tender should knock around $90 million per year off that figure, and we likely will see more debt paid back in the next few months based on the opportunities shown below. By this time next year, if current commodity prices hold, we should see interest expenses in the low $300 million area in a worst case scenario. That helps the bottom line and cash flow situation moving forward.
(Source: Q2 earnings slides, seen here)
It was back in early July that I mentioned how the company should start considering an increase of the quarterly dividend. With another 5 weeks of oil prices mostly in the $70s recorded, that argument will only get louder as Occidental prints more $2 billion free cash flow quarters. Again, this doesn't have to be a significant dividend, and there still will be plenty of opportunities to further reduce the massive debt pile. An increase in the payout would be a strong signal to investors that the business is in much better shape, and of course would provide a little extra income for shareholders.
While shares of Occidental have recovered from their pandemic lows, it's also nice to see street analysts with more faith in the name. As the chart below shows, the average price target (at the end of each respective quarter) dropped into the teens last year, hitting a monthly ending low of $13.11 last October. Going into Tuesday's report, the average was $32.71, and it wouldn't surprise me if we see some price hikes after this week's strong report.
(Source: Seeking Alpha ratings page, seen here)
In the end, Occidental announced a very strong second quarter, beating on both the top line and adjusted bottom line. The strong oil and gas price rebound has helped the company return to GAAP profitability, while producing more than $2 billion in free cash flow. Management has done a good job of reducing debt, and the financial situation will only improve with commodity prices where they are. Now we just need to see the dividend start to recover in the near future, which will put investor sentiment in a much better place.
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