Seeking Alpha

Occidental's not-so-costless oil-price hedge

|About: Occidental Petroleum Co... (OXY)|By: , SA News Editor

Describing Occidental's (NYSE:OXY) massive oil price hedge, designed to help it maintain its dividend in the wake of the Anadarko acquisition, as "costless" isn't accurate, Reuters says.

“With the additional leverage from the Anadarko acquisition, these new hedges will strengthen our 2020 cash flow in a low oil price environment, and provide additional assurance that our dividend is safe, while we are deleveraging,” CFO Cedric Burgher said on an earnings call in August.

But a source with direct knowledge of the transaction says that in order to set up the hedge quickly and under the radar while avoiding bankers' fees, Occidental accepted a bigger potential hit to future revenues and received limited protection against falling oil prices.

Sources say the hedge guarantees it can sell 110M barrels of oil for a minimum of $55 in 2020 as long as prices remain above $45, but is capped at $74.09.

Occidental set up a naked hedge implementing the same cap for 2021 without providing downside protection.

Still, analysts say Occidental needed to secure a hedge quickly to defuse some of the pressure from investors. “Doing this gives Oxy a lot of flexibility in 2020 with cash flow,” said Trisha Curtis, President of PetroNerds, an energy analytics and advisory firm specializing in U.S. shale. “You can’t have an acquisition that big and then willy-nilly hope that oil prices hold up. Regardless of what it cost them, it was needed for a number of reasons.”

Reuters breaks down the hedge with a terrific infographic here.

Try Seeking Alpha PREMIUM for unlimited analysis on OXY