In a March 10 research note, Raymond James analyst Pavel Molchanov reported that Occidental Petroleum Corp. (OXY:NYSE) cut both its capex and dividend in response to the recent "meltdown in the oil market." Molchanov added, "We are emphatically not fans of the latter move, although we acknowledge that at [a] sub-$40 West Texas Intermediate [oil price], it would have been hard to avoid."
Molchanov discussed the steps Occidental took. For one, the Texas-based company reduced its 2020 capital spend by 30% to $3.5–3.7 billion from $5.2–5.4 billion. "Our sense is that Occidental's new level of spending will result in a low to mid single-digit production decline over the next 12 months," he wrote.
Two, the oil & gas exploration and production company cut its quarterly dividend by 86%, to $0.11 per share from $0.79. The new yield is 3.2%. "This is genuinely frustrating and disappointing to see, especially after the repeatedly, consistently stated commitment to the dividend from management, including after the Anadarko deal and, in fact, just last week," commented Molchanov.
Company management did say its dividend is only sustainable above a $40 WTI oil price. "However, we had thought, wrongly, that the company would hold out for a price improvement, at least for several quarters, before taking such a step," Molchanov noted.
Taking both changes into account, Raymond James estimated "all-in 2020 cash flow neutrality at $36 WTI," meaning Occidental Petroleum can fund the new capex and dividend amounts without borrowing. Additionally, "we expect costs are certain to decrease, for the company and indeed the entire industry. Thus, we believe the point of neutrality has room to come down further."
Raymond James has a Strong Buy rating but no target price on Occidental Petroleum. The stock is trading now at around $11.80 per share.
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Disclosures from Raymond James, Occidental Petroleum Corp., March 10, 2020
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
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