When oil was trading around $30 per barrel, there were few stocks I discussed that had strong fundamentals to survive even at $30 per barrel oil and expand rapidly when oil prices recover. Occidental Petroleum (OXY, Financial) was one, and the stock has not disappointed in terms of stock returns.
From 2016 lows of $59.62, the stock is currently 29% higher at $76.6, and the rally is likely to continue.
The first point that is worth discussing is the company’s cash position as Occidental Petroleum closed fiscal year 2015 with a robust cash position of $4.4 billion. Even with $2.0 billion during the quarter related to capital expenditure, dividends and debt repayment, Occidental Petroleum closed the first quarter of 2016 with total cash position of $3.2 billion, and the company’s strong cash position was supported by operating cash flow (after WC changes) of $120 million and asset sale proceeds of $600 million.
With strong liquidity into the second quarter and with oil prices witnessing gradual recovery, I maintain my bullish view; the current cash position (along with next 12 to 18 months OCF) is likely to ensure that the company is fully funded for investments in the coming quarters. Further, Occidental Petroleum retired debt worth $700 million in the first quarter, and I expect further debt reduction in the coming quarters as cash position remains strong. Importantly, the company is well positioned to navigate the crisis of low oil prices even if oil remains sideways in the foreseeable future.
Besides the cash position remaining robust, another important credit development is the point that Occidental Petroleum has managed to retire or call back debt maturity in 2016 and 2017. The debt has been replaced with new debt that has increased the weighted average maturity of debt by more than five years. This is a big positive as Occidental Petroleum does not have any major debt maturity until 2021. Just considering the positive of strong cash and excellent debt maturity profile, it is not surprising to see Occidental Petroleum rated “A” with a “Stable Outlook” by Standard & Poor's, and I expect the rating to continue in the next 12 to 18 months even with sideways oil prices.
Even from a production perspective, the numbers are positive with Occidental Petroleum registering production growth of 11% in the first quarter as compared to first quarter 2015. With 2016 capital expenditure budget of approximately $3.0 billion, I expect production growth to continue through 2016, and that will (to some extent) offset the negative of relatively lower realized prices.
Occidental Petroleum has also done well in terms of production cost reduction; for the first quarter, the company’s production cost was $10.28/BOE as compared to $13.36/BOE as of first quarter 2015. Occidental Petroleum expects the cost structure to continue improving, and this is likely to be positive from EBITDA margin perspective.
Occidental Petroleum remains attractive and has a robust dividend payout that is likely to sustain even in challenging times. Even after the rally from oversold levels, I remain bullish on the stock for fresh exposure at current levels. I expect oil to trend higher in the foreseeable future and that will further support the rally.
Disclosure: No positions in the stock.
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