Occidental Petroleum (OXY, Financial) was among the oil and gas exploration stocks I recommended for exposure when industry conditions were significantly depressed in January.
The stock did trend higher from the lows of January but has been trading sideways in the last 3½ months. This sideways movement is a good accumulation opportunity.
In my analysis on oil and gas stocks, my first consideration has been the company’s liquidity and broad credit profile as it puts into perspective the company’s potential to successfully navigate the crisis. For Occidental Petroleum, the company’s cash position of $3.8 billion as of the second quarter is a big positive, and it ensures the company is fully financed for capital investments for the next 12 to 24 months.
Just to put things into perspective, Occidental Petroleum has cash of $3.8 billion and the company’s annualized operating cash flow comes to $3.5 billion. This is compared to $3.0 billion in capital expenditure for fiscal year 2016. In other words, the operating cash flow is more than sufficient to cover for investments through 2016.
Occidental Petroleum recently increased dividends to $3.04 per share, and this implies an annual cash outflow of $2.3 billion. The current cash buffer is therefore more than sufficient to cover for robust dividend payout.
While the discussion has been focused on liquidity, Occidental Petroleum is also on track to achieve high-end of 4% to 6% production guidance for sical year 2016. With $3.0 billion in capital allocation for the year and robust financial muscles for similar or higher capital allocation in fiscal year 2017, I expect production upside to remain strong even if oil trends marginally higher.
The EIA expects oil to be around $52 per barrel for fiscal year 2017. At $40 per barrel oil, Occidental Petroleum expects operating cash flow of $3.5 billion for fiscal year 2016. Even if oil is around $50 per barrel for fiscal year 2017, the operating cash flow is likely to be in the range of $4.5 billion to $5.0 billion (also considering incremental production in fiscal years 2016 and 2017).
From a cost perspective, Occidental Petroleum did well with second-quarter production cost at $10.57 per barrel as compared to $12.98 per barrel in the second quarter of 2015. This further supports the company’s EBITDA margin, and I expect continued cost controls. It is important to mention here that the cost reduction has been largely due to efficiency gains and not due to service company unit cost reduction.
Going back to the credit perspective, I see the following positives besides the liquidity factor that was discussed at the onset.
- Occidental Petroleum has no debt maturity in 2016 and 2017. Further, debt maturity in 2018 and 2019 is not significant and can be financed through internal cash flows. I don’t see any near-term need for debt refinancing.
- The company’s debt to capital stands at 27% as of the first half of the year, and this gives the company high financial flexibility to significantly increase investments if oil moves meaningfully higher from current levels. The company’s investment outlook for 2017 (beyond Permian) largely depends on how oil prices trend.
In conclusion, Occidental Petroleum has strong financial flexibility, quality assets to deliver strong production growth and the company is fully financed for the next 12-24 months. Further, with sustainable dividend of $3.04 per share, the stock is certainly worth considering for the long-term and I also expect medium-term upside after the current consolidation is over.
Disclosure: No position in the stock.
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