The second quarter was a terrible one for the energy sector, as prices and crude oil cratered due to COVID-19. Those brutal market conditions had a major impact on Occidental Petroleum‘s (NYSE: OXY) results of the second quarter. Overall, the oil giant lost an eye-popping $ 8.4 billion, or $ 9.12 per share, partly fueled by a massive write-down. Even without those fees for levies, the company still incurred a steep loss.
But on a more positive note, the oil company has made some progress on its debt and cost reduction plans, which is helping to ease some pressure on its balance sheet.
Drilling in Occidental Petroleum results in the second quarter
|
Metric |
Q2 2020 |
Guidance / expectations |
|---|---|---|
|
Total production |
1,406,000 BOE / D |
1,340,000-1,400,000 BOE / D |
|
Production of Permian resources |
465,000 BOE / D |
432,000-442,000 BOE / D |
|
GAAP profit (loss) per share |
($ 9.12) |
($ 5.31) |
|
Adjusted earnings (loss) per share |
($ 1.76) |
($ 1.70) |
Data Source: Occidental Petroleum. BOE / D = tons of oil equivalent per day.
On the one hand, Occidental Petroleum delivered strong operating results in the second quarter. Output was 36,000 BOE / D above the center of its lead range, driven by better-than-expected Permian production. Unfortunately, this came at a time when oil prices were so weak that many of their peers reduced some of their production to maintain this value for the future. Occidental realized only $ 23.17 per barrel of oil in the quarter, down 51% year-over-year.
As a result of those prices, Occidental posted a steep quarterly loss. Overall, it wrote up $ 6.6 billion in assets in the quarter, with some of that attributed to its high-price Anadarko Petroleum award. Even after adjusting for those securities, the company still lost $ 1.6 billion. That is despite providing domestic operating costs per BOE under its guidance at $ 4.69, as it raised this year’s annual annual rate of return for operating costs to $ 800 million this year. The company also met its target for total overhead savings at an annual run rate of $ 1.5 billion, which exceeded its initial target above the Anadarko deal.
Image Source: Getty Images.
A look at what’s up for Occidental Petroleum
All the turmoil in the oil market this year has put significant pressure on Occidental Petroleum’s balance sheet, due to the amount of debt it took to get Anadarko. On a positive note, the company made some progress in addressing its financial problems during the quarter by increasing $ 2 billion in new debt, which was used to refinance some bonds that were completed the following year. While it pay a high price for that new debt, the company eliminated most of the debt it incurred in the first half of 2021.
However, the company still has a lot of work to do, as it has around $ 4 billion in debt next year and will have even more to pay off in 2022. It may also have to purchase $ 922 million in October if creditors exercise their option.
Occidental is working on a variety of ways to tackle its due date. It is currently trying to sell assets, which could raise more than $ 2 billion net for debt reduction. The company is also on track to generate free cash at the current oil price in the latter half of this year. Meanwhile, the second quarter ended with $ 1.1 billion in cash and had $ 5 billion in available credit. Finally, it offered its investors warrants with a strike price of $ 22 (shares are currently below $ 16.50). If the stock hits that level, and investors exercise their warrants, Occidental could deposit an additional $ 2.5 billion in cash.
Once the company returns its debt to a more manageable level, it intends to shift its priorities for cash flow. In the medium term, the company wants to pay a sustainable dividend – it has paid out twice this year – and brought back production growth. In the long run, the stock would want to buy and the preferred high-cost shares owned by Warren Buffett‘s Berkshire Hathaway, which uses it to fund the Anadarko deal. But all of that is desirable thinking if the company does not get past its next debt wall.
Not out of the woods yet
Occidental made some progress in addressing its financial woes in the second quarter. As a result, it has not paid off too much over the next 12 months. While that certainty helps, it still has a substantial amount maturing between the second half of next year and the end of 2022. All eyes will be on whether the company can address this debt before it runs out of time.
