Occidental Petroleum’s (NYSE: OXY) finances have benefited from high benchmark prices in recent months. In Q2, the company reported $2.7 billion of operating cash flow before working capital changes which assisted $3 billion of debt retirement in July. Considering EIA’s average WTI benchmark price projection of $65.93/bbl for 2021, operating cash flows are likely to assist debt retirals apart from asset divestments in the near term. Per recent filings, the company remains committed to deleverage the balance sheet and create long-term value for shareholders. Thus, the stock can observe an upside as debt retirements happen in the near term. Our interactive dashboard analysis highlights Occidental Petroleum’s stock performance during the current crisis with that during the 2008 recession.
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- From 3/24/2020: S&P 500 recovers 100% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here’s how OXY and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Occidental Petroleum Stock vs S&P 500 Performance Over 2007-08 Financial Crisis
OXY stock declined from levels of around $63 in September 2007 (pre-crisis peak) to levels of around $50 in March 2009 (as the markets bottomed out), implying OXY stock lost 22% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $78 in early 2010 – rising by 57% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.
Long-term debt obligations are a drag on shareholder returns
Occidental Petroleum’s revenues (adjusted for interest and dividend income, as well as one-time gains/losses from asset sales) declined 15% from $20.9 billion in 2019 to $17.8 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. Anadarko’s acquisition increased OXY’s balance sheet with $28 billion of long-term debt in 2019. Thus, the annual interest expenditure of more than $1 billion is a drag on shareholder returns. However, the recent uptick in benchmark prices has been a boon for the company as operating cash flows are assisting debt retirements. Notably, the company reported $64.18/bbl of realized crude oil price in Q2 2021 – fairly comparable to the WTI benchmark projection by EIA for 2021.
Phases of Covid-19 crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
The company plans to maintain a prudent capital investment plan along with divestitures to provide long-term shareholder returns. Considering the WTI benchmark price projection by EIA for 2021 and Occidental’s strong operating cash generation capabilities, Trefis believes that investors can observe near-term gains as debt retirements occur.
Is Exxon Mobil a better pick over Occidental Petroleum? Check out Exxon Mobil Stock Comparison With Peers to see how XOM compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.