Occidental Petroleum: Higher Profits Are Coming Soon

Occidental Petroleum Corporation (OXY) announced second quarter sales of $2.53 billion, up 19% from $2.12 billion in first quarter of 2016. Still, these results were down 27% year-over-year from $3.47 billion.

The company also declared a net loss of $139 million, an $0.18 loss per diluted share. That compares to a net income of $176 million or $0.23 per diluted share during the same period last year and a net income of $78 million or $0.10 per diluted share in first quarter of 2016.

The global upstream and midstream energy company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weakness in global commodity demand and pricing environment.
Weak pricing coupled with expanding energy exploration expenditures negatively impacted the company’s key margins.

Making consistent improvements  

Occidental has strategically achieved an attractive 27% of debt-to-capital ratio for second quarter of 2016, with $3.75 billion in cash on the balance sheet. This improvement came from minimizing net working capital, impressive cost-optimization initiatives, and capital expenditure savings,.

Occidental has impressively achieved a 56% reduction in total capital expenditures since the 2014 by focusing on operational efficiencies amid weaker global commodity demand and a difficult pricing environment.
Occidental Petroleum: Higher Profits Are Coming Soon
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For example, Occidental has gained nearly 80% of its drilling cost minimizations through quicker penetration rates, enhanced well development design, improved logistics, and lower material costs.

With a history of returning a majority of the invested capital to its stakeholders in form dividends and strategic share repurchases, investors should be pleased.

These cost-optimization efforts, in addition to the strategic sale of non-core company assets, reduction in both core and non-core expenses, and expanding production from existing assets should support the company throughout the current global operating environment. I believe it will emerge strongly from the situation and deliver sustainable long-term company returns.

Will energy prices keep pace with company improvements?

Occidental delivered second quarter average oil and gas production volumes of 609,000 BOED, up 19,000 BOE in total daily production over the first quarter of 2016. Going forward, the company targets adding nearly 2 rigs to its Permian Resources growth segment by fourth quarter of 2016. In addition, Occidental is focused on finding means to improve its overall position in the Permian Basin by strategically acquiring key growth assets.

Globally, the energy prices have improved somewhat with improvements observed in multiple global price indices. However, these pricing indices are still lower than last year and will likely require more time to recover completely as the global oil and gas pricing environment recovers slowly but steadily.

OXY is a great company, but risk remains

Overall, investors should hold off on accumulating shares of Occidental Petroleum Corporation. Significant long-term growth prospects exist, but its weaker financial position (total debt of $8.33 billion against a cash position of $3.75 billion) restricts the company in taking advantage of the downturn. Occidental will no doubt rise in share price if oil continues its latest strength, but there are likely other companies out there that can take advantage further.

Bullish on oil? Check out Continental Resources, Inc. (CLR): a Smart Bet for Rising Oil.
Published on Oct 6, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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