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Occidental Petroleum (OXY) Continues to Cut Debt: Hold or Fold?
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Occidental Petroleum (OXY - Free Report) recently announced that it has reduced its principal debt by $3 billion in the third quarter of 2024, utilizing robust organic cash flow from operations and proceeds from divestitures.
Occidental is on course to achieve its $4.5 billion debt reduction target, set to be completed within 12 months of closing CrownRock L.P. The company completed the acquisition of CrownRock on Aug 1, 2024.
Over the past three months, Occidental has experienced a 7.3% fall, underperforming the industry’s 4.6% decline.
Price Performance (Three Months)
Image Source: Zacks Investment Research
Occidental Nears 85% Debt Reduction Target
Occidental Petroleum’s top priority is to strengthen its balance sheet and reduce capital servicing expenses. The company, at the time of the announcement of the CrownRock acquisition on Dec 11, 2023, set a target of $4.5 billion in debt reduction. Occidental intends to use its free cash flow and proceeds from non-core asset divestiture to redeem its outstanding debts.
Occidental Petroleum is working efficiently to meet its debt reduction target. Occidental will utilize the $818 million proceeds from the previously announced Delaware Basin Barilla Draw divestiture, which is expected to close late in the third quarter. Utilization of proceeds will allow the company to achieve a total year-to-date reduction of over $3.8 billion in principal debt or 85%.
Occidental Benefits From Debt Reduction
Occidental will continue to evaluate its high-quality asset portfolio for divestment opportunities and will apply those proceeds to further debt reduction, thereby strengthening its balance sheet. Occidental’s long-term target is to further reduce its outstanding debt through divestiture proceeds and excess free cash flow until Occidental reaches a principal debt target of $15 billion or less.
The debt reduction continues to lower the capital servicing expenses of the company. Interest expenses of Occidental at the end of second-quarter 2024 were $252 million, down 11% sequentially.
A strong balance sheet allows Occidental to retain its investment-grade credit ratings from the credit rating agencies. Occidental’s investment-grade credit rating shows that the company is in a good position to repay its debts and can borrow funds for the business at favorable terms.
Acquisition of CrownRock’s high-quality assets will complement and enhance Occidental’s premier Permian portfolio with the addition of nearly 156 thousand barrels of oil equivalent per day (Mboed) of high-margin production in 2024.
CrownRock’s high-quality assets will upgrade Occidental’s existing portfolio of assets. Courtesy of this acquisition, Occidental’s 2024 Production from the Permian region is expected to improve by more than 10% due to its acquisition. This acquisition is going to be instantly free cash accretive for Occidental. Headwinds
Occidental remains exposed to fluctuating market prices of commodities, and as of Dec 31, 2023, there were no active commodity hedges in place. If the commodity prices drop substantially from their current level, it will definitely impact Occidental Petroleum’s performance.
Returns Lower Than the Industry
Occidental’s return on invested capital (ROIC) has underperformed the industry average in the trailing 12 months. ROIC of OXY was 6.53% compared with the industry average of 7.92%.
Image Source: Zacks Investment Research
Occidental’s EPS Estimates Moving South
The Zacks Consensus Estimate for Occidental Petroleum’s 2024 and 2025 earnings per share has moved down 4.9% and 2.2%, respectively, in the past 60 days. The downward revision in earnings estimates indicates analysts’ decreasing confidence in the stock.
Image Source: Zacks Investment Research
Occidental Trades at a Premium
Occidental’s shares are somewhat expensive on a relative basis, with its current trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA TTM) being 5.7X compared with its industry average of 4.76X.
Image Source: Zacks Investment Research
Rounding Up
Occidental’s focus on the Permian region, the acquisition of CrownRock and its ongoing initiatives to lower debts will boost performance.
However, exposure to commodity price fluctuation and a very competitive oil and gas industry pose challenges for the company. Occidental’s premium valuation and lower return compared with the industry also do not make a strong case for the company.
Image: Bigstock
Occidental Petroleum (OXY) Continues to Cut Debt: Hold or Fold?
Occidental Petroleum (OXY - Free Report) recently announced that it has reduced its principal debt by $3 billion in the third quarter of 2024, utilizing robust organic cash flow from operations and proceeds from divestitures.
Occidental is on course to achieve its $4.5 billion debt reduction target, set to be completed within 12 months of closing CrownRock L.P. The company completed the acquisition of CrownRock on Aug 1, 2024.
Over the past three months, Occidental has experienced a 7.3% fall, underperforming the industry’s 4.6% decline.
Price Performance (Three Months)
Image Source: Zacks Investment Research
Occidental Nears 85% Debt Reduction Target
Occidental Petroleum’s top priority is to strengthen its balance sheet and reduce capital servicing expenses. The company, at the time of the announcement of the CrownRock acquisition on Dec 11, 2023, set a target of $4.5 billion in debt reduction. Occidental intends to use its free cash flow and proceeds from non-core asset divestiture to redeem its outstanding debts.
Occidental Petroleum is working efficiently to meet its debt reduction target. Occidental will utilize the $818 million proceeds from the previously announced Delaware Basin Barilla Draw divestiture, which is expected to close late in the third quarter. Utilization of proceeds will allow the company to achieve a total year-to-date reduction of over $3.8 billion in principal debt or 85%.
Occidental Benefits From Debt Reduction
Occidental will continue to evaluate its high-quality asset portfolio for divestment opportunities and will apply those proceeds to further debt reduction, thereby strengthening its balance sheet. Occidental’s long-term target is to further reduce its outstanding debt through divestiture proceeds and excess free cash flow until Occidental reaches a principal debt target of $15 billion or less.
The debt reduction continues to lower the capital servicing expenses of the company. Interest expenses of Occidental at the end of second-quarter 2024 were $252 million, down 11% sequentially.
A strong balance sheet allows Occidental to retain its investment-grade credit ratings from the credit rating agencies. Occidental’s investment-grade credit rating shows that the company is in a good position to repay its debts and can borrow funds for the business at favorable terms.
CrownRock’s Acquisition Strengthens Permian Portfolio
Acquisition of CrownRock’s high-quality assets will complement and enhance Occidental’s premier Permian portfolio with the addition of nearly 156 thousand barrels of oil equivalent per day (Mboed) of high-margin production in 2024.
CrownRock’s high-quality assets will upgrade Occidental’s existing portfolio of assets. Courtesy of this acquisition, Occidental’s 2024 Production from the Permian region is expected to improve by more than 10% due to its acquisition. This acquisition is going to be instantly free cash accretive for Occidental.
Headwinds
Occidental remains exposed to fluctuating market prices of commodities, and as of Dec 31, 2023, there were no active commodity hedges in place. If the commodity prices drop substantially from their current level, it will definitely impact Occidental Petroleum’s performance.
Returns Lower Than the Industry
Occidental’s return on invested capital (ROIC) has underperformed the industry average in the trailing 12 months. ROIC of OXY was 6.53% compared with the industry average of 7.92%.
Image Source: Zacks Investment Research
Occidental’s EPS Estimates Moving South
The Zacks Consensus Estimate for Occidental Petroleum’s 2024 and 2025 earnings per share has moved down 4.9% and 2.2%, respectively, in the past 60 days. The downward revision in earnings estimates indicates analysts’ decreasing confidence in the stock.
Image Source: Zacks Investment Research
Occidental Trades at a Premium
Occidental’s shares are somewhat expensive on a relative basis, with its current trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA TTM) being 5.7X compared with its industry average of 4.76X.
Image Source: Zacks Investment Research
Rounding Up
Occidental’s focus on the Permian region, the acquisition of CrownRock and its ongoing initiatives to lower debts will boost performance.
However, exposure to commodity price fluctuation and a very competitive oil and gas industry pose challenges for the company. Occidental’s premium valuation and lower return compared with the industry also do not make a strong case for the company.
Despite the headwinds, it is advisable to keep this Zacks Rank #3 (Hold) stock in your portfolio, given its strong domestic operations and exposure to the prolific Perman Basin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.