Occidental Petroleum (OXY) Slashed The Dividend

On March 10, 2020, Occidental Petroleum Corporation (OXY) slashed its regular quarterly dividend from $0.79 per share to $0.11 per share. The company also cut capital spending. The main impetus for this was the collapse of oil prices due to a combination of the Russia and Saudi Arabia oil price war, coronavirus, unprecedented transportation restrictions, and debt from the recent Anadarko acquisition in 2019 for $55 billion. The result of the current crisis is that oil demand will be reduced dramatically worldwide. The dividend cut ended a 17-year streak of consecutive dividend increases and also ended Occidental Petroleum’s status as a Dividend Contender. Notably, the last time Occidental Petroleum cut the dividend was in 1990 in response to a decline in oil prices when Iraq invaded Kuwait.

Overview of Occidental Petroleum

Occidental Petroleum is an oil and natural gas company that was founded in 1920. The company is headquartered in Houston, Texas. The company operates worldwide in the U.S., Middle East, and Latin American. Occidental Petroleum has three operating segments: Oil and Gas, Chemical, and Marketing and Midstream. Total revenue was $20,393 million in 2019.

Occidental Petroleum’s Dividend Cut

Specifically, the company’s CEO stated:

Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt. These actions lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low-commodity-price environment.

Oil Prices Continue To Decline

Despite, the dividend cut, Occidental Petroleum’s current dividend may still not be safe. U.S. crude oil futures continue to decline and are now at a 17-year low. This means that prices are the lowest since 2003. West Texas Intermediate crude or ‘WTI’ is now trading at $23.64 per barrel, whereas it was over $60 per barrel at the start of 2020. Similarly, Brent crude is now trading at $26.98 per barrel, whereas it was almost $70 per barrel at the start of 2020. Current prices are below the Occidental Petroleum’s aforementioned breakeven level. 

It is not clear where oil prices will bottom out but a note from Goldman Sachs is forecasting Brent crude to fall to $20 per barrel, which would be lowest price since 2002. They are also forecasting a demand contraction due to the coronavirus pandemic and transportation restrictions. Typically, when supply is decreasing most companies will cut production in order to stabilize prices. That is likely to occur in the U.S. But with both Saudi Arabia and Russia increasing production crude oil prices are likely to remain depressed in the near future. A price war in the face of weakening demand is not logical or even sensible.

But in the short-term most oil companies will need to hunker down and that may mean more dividend cuts. Not to mention cuts to capital expenditures and no share buybacks for U.S. companies. Ultimately though both Russia and Saudi Arabia are ill equipped to handle a protracted oil price war. Russia reportedly has a breakeven oil price of ~$42.50 per barrel and Saudi Arabia’s breakeven price is ~$85 per barrel. At the current price for oil, this means that both countries will experience loss of revenue, loss of exports, and likely lower GDP. This is unsustainable over the long-term. But one never knows how this will play out.

Occidental Petroleum’s Dividend Safety

But with that said, it is the near term that one must assess from the perspective of dividend safety. What about Occidental Petroleum’s current regular quarterly dividend at $0.11 per share? Is that safe? In my opinion likely not based on consensus 2020 earnings per share of ($2.62). This does not cover an annual regular dividend of $0.44 per share. 

The new dividend is also likely not safe from a free cash flow perspective. In fiscal 2019, operating cash flow was $7,203M and capital expenditures were $6,355M giving free cash flow of $848M. The dividend required $2,624M in fiscal 2019 meaning the that the dividend-to-FCF ratio was ~309% prior to the recent cut.

The new dividend will require about $356.4M (810 million shares x $0.44 per share). But the price of oil is now roughly half of 2018 and 2019. So, assuming operating cash flow drops 40% from 2019 levels and capital expenditures are now $3.6B (after the recent announcement) we get free cash flow of $721.8M. Granted, this seems to give a decent dividend-to-FCF ratio. But one must remember that Occidental now has higher interest payments and must start paying back principal from the Andarko acquisition. Interest converge is about 1.2X at the moment, which is not a great value. Occidental will need to mange cash flow carefully to pay interest and the dividend. I view this as unlikely. On the other hand, I view a divided cut as more likely.

The company has reduced flexibility in asset sales as well as most other oil companies are now trying to conserve cash and maintain their balance sheet in the face of low oil prices. This suggests that Occidental will not be able to sell assets to raise cash or deleverage in the near-term. The current long-term debt is about $38,538M and this is offset by only $3,032M in cash and equivalents at end of 2019. This debt has also been recently downgraded by Moody’s to ‘Ba1’, which is not investment grade. Any new debt to change the maturity profile will likely be expensive.

Final Thoughts on Occidental Petroleum Slashed the Dividend

Hence, at the moment I do not believe that even the reduced regular dividend of $0.44 is safe, especially if the oil price war is protracted or COVID-19 affects global transportation for an extended period. Both of these events are largely out of Occidental Petroleum’s control. There is also the consideration of Warren Buffett’s Berkshire Hathaway’s ownership of $10 billion in preferred shares. This helped finance Occidental’s $38 billion acquisitions of Anadarko. Warren Buffett arguably gets better deals than most small investors. The Occidental deal was no exception. The preferred shares have an 8% coupon or $800 million per year. This adds to the requirements on Occidental’s cash flow. With that said, the dividend on the preferred shares can be paid in stock but at a 10% discount. This is seemingly more likely at the moment.

Occidental Petroleum Slashed the Dividend Again

On May 29th, 2020, Occidental Petroleum slashed the dividend a second time in response to COVID-19, low oil prices, and too high leverage. This time the regular quarterly dividend was cut about 91% from $0.11 to $0.01 per share. This second cut will save another $360 million annually in cash. My assessment when I first posted an article on Occidental Petroleum’s dividend cut was correct. The dividend at that time was not safe or sustainable. It will be a long time before the company returns to Dividend Contender status.

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