Occidental Petroleum (NYSE:OXY) is sitting on a huge pile of debt with little cash, very little cash flow with just one drilling rig operating today, and a flat oil price movement. No wonder OXY stock is down 70% year-to-date, 71% over the past 12 months and even down 22% in the last month alone.
But all is not lost. We are close to the bottom. OXY stock is trading for under 43% of its net tangible book value per share (TBVPS).
There is good reason to believe that as the global economy turns around, the price of oil will rise, moving Occidental’s cash flow and prospects higher.
Poor State of Occidental’s Finances
Occidental is in bad financial shape, due in large part to last year’s massive takeover of Anadarko Petroleum. The problem is Occidental paid $31.8 billion in cash costs, plus $25.6 billion in other costs to buy Anadarko Petroleum in late 2019. Anadarko was not FCF positive as of its last quarterly report in June 2019.
Occidental now has $38.5 billion in long-term debt, including $2.5 billion due within a year. But it has just $1.1 billion in cash on its balance sheet.
Moreover, the oil and gas company generated just $587 million in operating cash flow before changes in working capital in Q2. And after working capital and capex costs, its free cash flow was negative $10 million for that quarter.
As a result, Occidental has $22.19 billion in net tangible assets and 930.1 million shares outstanding, as of July 1. That means its net TBVPS is $23.86 per share. So at yesterday’s close, $10.19, Oxy stock price is just shy of 43% of its TBVPS.
However, this tangible book value includes $9.762 billion in preferred stock issued to Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). Berkshire Hathaway bought these preferred shares, which have an 8% annual coupon, to help pay for last year’s Anadarko acquisition.
Excluding those preferred shares, the common stock TBVPS is $12.43 billion, or $13.36 per share. Therefore, at $10.19, OXY stock trades for 76.3% of its common stock TBVPS.
But this doesn’t really capture the full picture of its troubles.
Oil Production and the Oxy Plan
Bloomberg painted a dire picture on Occidental in its Aug. 11 article, “Occidental’s Lone Permian Rig Shows Severity Of Shale Bust.” This scathing piece points out that Occidental went from 12 rigs drilling in west Texas, along with 10 from Anadarko, to just one in the second half of 2020. “Humbling” was Bloomberg’s word for it.
Moreover, despite Occidental’s paltry cash flow this past quarter, The Wall Street Journal reported that $10 billion in debt is coming due by 2022. It could borrow another $5 billion, along with its $1 billion in cash, but this is a “flimsy” solution.
So far, the company is trying to sell assets, buying back some of the debt, cutting back expenses, and is reducing necessary capex spending. Bloomberg reported that its $2.5 billion capex spend this year is below the $2.9 billion per year it needs to sustain production going forward.
Obviously the company expects oil prices will turn around sometime in the near future.
What to Do With OXY Stock
CEO Vicki Hollub said the company would produce 1.2 million barrels/day by the end of 2020, or 200,000 b/day below last year. Moreover, she stressed to OXY stock holders that the company would significantly reduce debt to ensure it meets its debt obligation going forward.
I do not think investors or even potential investors in this cheap stock should panic. The idea is that at some point oil and gas prices will turn around. They are highly correlated to the rise and fall in economic activity.
This correlation between oil prices and economic growth has been studied and documented. For example, an article on oilprice.com refers to a 2011 study by the IMF that cites a high positive correlation between oil prices and macroeconomic aggregates.
Morgan Stanley analyst Devin McDermott recently raised his rating on OXY stock to equal weight from under weight and set a price target of $14. He believes the company has low costs and strong free cash flow.
Moreover, J.P. Morgan analyst Phil Gresh raised the stock to neutral and a $19 price target. He likes the stock, “given the magnitude of underperformance, the de-risking of the maturity wall and the recent stability in the oil price.” He also talks about its “oil price torque.”
It might be possible that Occidental’s TBVPS could continue to fall this quarter and next. That might lead to a further hit to the stock price. But Oxy stock is already below its present common stock TBVPS. It is likely close to a bottom.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Written by Mark R. Hake.
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