Occidental Earnings: Guidance Revisions Won't Stop Deleveraging

Key Morningstar Metrics for Occidental Petroleum

• Fair Value Estimate

  : $55.00

• Morningstar Rating

  : ★★

• Morningstar Economic Moat Rating

  : None

• Morningstar Uncertainty Rating

  : High

What We Thought of Occidental Petroleum’s Earnings

Occidental Petroleum OXY reduced its debt to under $14 billion in the first quarter and has set $10 billion as its next target. It guided production down 1% as asset sales, production-sharing agreements, and disruptions in the Middle East more than offset performance improvements in the Permian and Rockies.

Why it matters: The new $10 billion debt target is positive and would put the balance sheet in a stable position through the cycle. It is also achievable quickly. At current strip pricing, net debt might hit this target in the second quarter.

• The progress on deleveraging is good, but to be in solid financial shape as an exploration and production firm, we’d like to see net debt/EBITDA below 1 times. Thanks to elevated commodity prices, 1 times has been met today, but $10 billion in net debt will achieve it in a mid-cycle environment.
• After the target is hit, we expect a mix of capital priorities. First is building cash for Berkshire Hathaway’s redemptions. There should be no issue in achieving this. Second is boosting the dividend. Third is opportunistic share repurchases. Oxy repurchased $56 million in the first quarter.

The bottom line: We are raising our fair value estimate to $55 per share from $48 after incorporating first-quarter results. Higher strip pricing and lower debt more than offset the lower production guidance.

• We see the shares as fairly valued, trading in 3-star territory.
• Our no-moat, High Uncertainty, and Poor Capital Allocation Ratings are unchanged.

Long view: The retirement of CEO Vicki Hollub will end a turbulent chapter that led us to downgrade our Capital Allocation Rating to Poor. Her replacement, Richard Jackson, has decades with Oxy and has rotated through multiple parts of the business.

• Jackson’s comments on the call struck the right notes. It appears his focus is on efficiency, the balance sheet, and the return of capital. Management’s emphasis on organic inventory extensions through enhanced oil recovery and exploration points in the right direction.