Oil is recovering and we change our view on Oxy

    We change our view on Oxy but brace yourself for a massive loss reported next week.

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    CEO of Occidental

    On April 26 2020, we issued a call when we blasted Occidental Petroleum and outlined how the company could file for voluntary Chapter 11 bankruptcy. At that time the share price was around $14.

    Fast forward 100 days later, Oxy is trading at just under $16 for a gain of 15%. Looks good, but that is of course largely as a result of the broad US Equity Indexes moving higher.

    Nonetheless, with the recent recovery in Oil prices, it is only logical that we change our view on Occidental from being a ‘basket case’ to a potential ‘hidden gem’.

     

    However, before that can happen Occidental has a small matter of next week’s 2nd Quarter earnings call report when the total loss indicated is of the range of $8bn or a loss of about $10 per share . Its cash position may not deplete so much as the Company successfully obtained $3 billion debt financing at just under 9%

    As to how much of that is baked into the stock price, I honestly don’t know.  Our view is on a slightly longer time frame and for those who believe in one of the following several things a) Covid 19 will be overcome, b) Demand for Oil will return. c) Occidental chemical manufacturing business is worth something.

    A review of Occidental’s 10Q for March 2020 shows that the Company can generate Operating Cash Flows in excess of $1 billion per quarter when oil prices are above $45 per barrel. How much of this translates to actual cash retained by the Company really is a function of its Capital Investment. Management has indicated that they are bringing the 2020 capital expenditure down from $5.6 billion to $2.4 – $2.6  billion, with over $1.1 billion spent in 1Q20. So for remaining year 2020, Occidental is intending to spend $1.2 – $1.3 billion.  Assuming that oil prices stay at the $45 range as is right now, Occidental can expect to earn $2.5 billion in Operating cashflow for the back half of the year. It may even be higher if they can the ‘synergies’ they promised when they swallowed Anadarko.

    With those assets hived off, Occidental still retains 1.1 million of US production, which is actually comparable to Conoco Phillips production.  Conoco Phillips is valued at an enterprise value of $48.7 billion (Net debt + Equity) whereas even at its current valuation, Occidental is value at $56 billion (Net debt after African disposition + Preferred equity + Current market cap). So unless one subscribes to the view that Occidental’s chemicals manufacturing business standalone is worth $10 billion or Occidental’s Permian assets are worth 20% more than ConoccoPhillips, it is not to say that the current Occidental valuation is an absolute bargain price.

    As the debt expense is sort of covered within the Operating cashflow, the remainder of the $1.3 b can be used for several things. $400m of it could be used to pay Buffet’s dividend, the other $900m could be used to retire debt. Of course this is assuming that oil is at $45 -ish, things become dramatically different if Oil shoots up to $55 or $60 per barrel. To give you an idea of the scale, Occidental’s US operations produces about 1.1 Million barrels of Oil Equivalent, so an increase in $1 of an Oil Equivalent basis increases its total revenues by $0.45 per share.

    With the share trading at $15 – $16 range, this is about 2.79% annualized increase in revenue growth on just $1 increase in Barrels of Oil equivalent.

    Of course there is the other positive in that Oxy is in talks with Pertamina to sell of its African oil units and Middle Eastern assets for about $4.5 billion. That amounts to just about 200K BoE of production. To give you an idea, thats about 10% of Petronas total BoE production.

    With those assets hived off, Occidental still retains 1.1 million of US production, which is actually comparable to Conoco Phillips production.  Conoco Phillips is valued at an enterprise value of $48.7 billion (Net debt + Equity) whereas even at its current valuation, Occidental is value at $56 billion (Net debt after disposition + Preferred equity + Current market cap). So unless one subscribes to the view that Occidental’s chemicals manufacturing business standalone is worth $10 billion or Occidental’s Permian assets are worth 20% more than Conocco Phillips, it is not to say that the current Occidental valuation is an absolute bargain price.

    So ultimately an investment in Oxy comes down to a view of how future oil prices will look like? Will it shoot down to $0 as it did in April? Or will it bounce back to $60?  Our view is that the latter scenario is more likely.


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    4 COMMENTS

    1. Why you think demand of oil is recovering? What I study when technology evolve so fast, oil will loss to renewable especially solar and biofuel. There is big shift to use natural gas too.

      • I agree with you. O&G will go into a gradual decline, but O&G is still here to stay. Oil is used in many products, from roads to cosmetic, from medical to fertilizer.

        Unlike many that says we are in an inflationary economy, I think we are in a deflationary economy, which explains why Japan and their crazy massive money printing programs fails to induce even 1% inflation per year. And the same will happen to USA. So many QE but where is the dooms day hyperinflation?

        We have a deflation problem, not inflation. And technology is accelerating the deflationary process. Imagine 10 or 20 years from now all the trucks and taxi or uber drivers losing their jobs? as technology becomes better and better, we need less labour, which is ok as our population globally is not growing that fast.

        I doubt oil will go to 100 anytime soon. biggest oil consumption sectors are transportation and elec power, both are facing an on slaughter from renewable energy. also, people will travel less, and zoom more for meetings.

        oil is a sunset industry, not dead and will never die, just gradually decline into another small industry.

        • I see the possibility of China and Iran coordinating a simultaneous attack on US allies in order to stretch American military power. Statistically commodity prices are leptokurtic I.e they have fat tails. At $43 WTI, $100 Oil means a gain of about 150%. Possible not by increase in demand but by sudden sharp geopolitical risk events .

    2. My view for WTI price gain is the following
      a. General recovery in business activity in the US which will drive up gasoline and middle distillates.
      b. At some stage airlines will resume increasing demand for jet kerosene
      c. Consolidation of US oil sector
      d. Global war coming soon.

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