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Occidental Petroleum Continues to Make Progress on Its Turnaround Plan

Last year was brutal for Occidental Petroleum (NYSE: OXY). Crashing crude oil prices forced the oil giant to take quick action to stay afloat. It slashed its dividend twice and significantly reduced its capital spending program to preserve cash. It also cut operating costs, sold assets, and refinanced debt so that it didn't sink under the weight of its debt-laden balance sheet.

Occidental continued to take steps in the right direction during the fourth quarter, so the company entered 2021 in a much better position. While it still has more work to do this year, things finally seem to be looking up for the oil giant.

Image source: Getty Images.

Ending the year on a high note

On the one hand, the fourth quarter was another challenging one for Occidental Petroleum. It posted a loss of $1.3 billion, or $1.41 per share, due partly to recording an $820 million loss related to the sale of some noncore assets in the Permian Basin. Even after adjusting for that asset sale, Occidental still lost $731 million, or $0.78 per share, which missed analysts' consensus estimate by $0.20 per share.

However, the company produced an average of 1.143 million barrels of oil equivalent per day (BOE/D) during the period, which exceeded the midpoint of its guidance range by 13,000 BOE/D, fueled by high-end results in the Permian Basin. Further, the company continued to reduce costs.

Despite the reported loss, Occidental produced enough cash during the fourth quarter to cover its capital budget with about $800 million to spare. On top of that, it closed $2.4 billion of asset sales. That enabled the company to repay $2.3 billion of debt during the quarter. Occidental also raised an additional $2 billion of new debt and extended $2 billion of near-term debt maturities. Overall, the company reduced its net debt by $2.3 billion last year and extended $7 billion of debt maturities to 2025 and beyond, buying it a significant amount of breathing room.

Image source: Getty Images.

A look at what's ahead for Occidental Petroleum

Occidental Petroleum plans to invest $2.9 billion into capital projects in 2021. That's enough capital to stabilize its production around last year's exit rate of 1.14 million BOE/D for the full year. That spending level should enable Occidental Petroleum to continue generating free cash flow in 2021. The company could produce a gusher of excess cash in 2021 now that crude oil prices are over $60 a barrel.

The company also plans to sell another $2 billion to $3 billion in assets this year, which includes the $350 million of noncore assets it recently sold in the Permian Basin. Those two sources, along with its $2 billion cash balance, will give Occidental the funds to continue chipping away at debt, which ended 2020 at $35.7 billion.

Occidental's near-term focus for its excess cash will remain on reducing debt. However, once it gets its balance sheet back into a better position, the company plans to return more money to shareholders via a sustainable dividend and share repurchase program. It also intends to eventually start growing its production once the market needs more oil.

Occidental is also investing some capital to clean up its carbon emission profile. The company has ambitious targets of reaching net-zero emissions associated with its operations by 2040 and achieving net-zero emissions related to the use of its products by 2050. For example, it signed an agreement to purchase solar power for its oil and gas operations in the Permian Basin. It's also leveraging its expertise in using carbon dioxide for enhanced oil recovery to capture and store atmospheric carbon dioxide. It hopes that by offering net-zero oil and gas, it can continue fueling the global economy without contributing to climate change.

Another small step forward

Occidental Petroleum made meaningful progress on its debt reduction strategy last quarter. This year, it should make even more thanks to the recent improvement in oil prices. That should allow it to generate more free cash flow and fetch higher valuations for the assets it sells.

However, the oil company faces a challenging road ahead. It needs oil prices to cooperate so that it can make a real dent in its debt level. Meanwhile, it's facing an uphill battle as the global economy shifts to cleaner fuel sources. While Occidental hopes that selling net-zero oil will enable it to compete against alternatives, it's not yet clear if that strategy will pay dividends for investors in the future.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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