The reaction to Occidental Petroleum Corporation’s (NYSE:OXY) first-quarter earnings has been mixed, but based on the after-hours trend, it is reasonable to conclude they were more negative than good. The corporation was compelled to start redeeming preferred shares and is still dealing with the capital consequences of previous decisions. Nonetheless, as we’ll see throughout this piece, OXY stock may provide significant shareholder returns.
Results for the First quarter of 2023 for Occidental Petroleum
Despite sustained price weakness, the company reported rather strong first-quarter results.
For the quarter, the company generated $1.7 billion in free cash flow (FCF). Annualized, that’s $6.8 billion, or an FCF yield of around 13-14%. We expect the company to keep its solid investment-grade credit rating in the future. Furthermore, the company’s production of 1.22 million barrels per day is at the upper end of its projection.
The corporation repurchased $750 million in shares or around 1.5% of the total number of outstanding shares. It also resulted in $650 million in preferred equity redemptions as a result of shareholder return limits, which we anticipate will be high next quarter before things settle down. We’ll go over these redemptions in further depth later, but the company has done well overall.
Business Update from Occidental Petroleum
The corporation has worked hard to improve its operations.
Production has continued to rise up ahead of schedule. It also kept breaking production records in the DJ Basin, with new highs for good productivity and later length. The company’s continuous improvement in good efficiency should allow it to minimize capital expenses and provide further shareholder returns.
The company’s business must function well in order to continue earning money.
Financials for Occidental Petroleum
The company’s priority is to continue generating shareholder profits.
Occidental Petroleum’s cash flow priority is to maintain output while paying a 1.2% dividend. It is a sustainable dividend for the company’s business, although it is significantly lower than the company’s historical yield. We’d like to see the corporation increase its dividend indefinitely while focusing on significant share repurchases in the short term.
The corporation is still repurchasing shares and redeeming preferred equity. The company’s debt has been reduced to its target level, and it has sufficient capital that it can continue to use for long-term cash flow growth.
Occidental Petroleum has a clause that requires preferred equity redemptions of an equal amount of annualized shareholder returns exceeding $4 per share (7% yield). The corporation redeemed $650 million in principal at a 10% premium, but it also saved the 8% coupon on preferred securities. It’s not the best deal in the world, but it’s a good one.
The company’s $4/share returns, however, are skewed by its 3Q 2022 returns, which occurred during high prices of more than $2/share. We do not expect that to continue at current levels, which means that future returns will be substantially more balanced in the absence of compulsory redemptions. Nonetheless, we want to emphasize that the redemption loss isn’t exceptionally big in comparison to the saved interest.
Paying down the redemptions over time would result in $800 million saved per year or a double-digit cash flow growth.
Occidental Petroleum Dilution/Redemption
Occidental Petroleum now has a dilutive capital stack as a result of both warrants issued and warrants granted to Berkshire Hathaway Inc. (NYSE:BRK.B).
Current share prices are actually a hair below Berkshire Hathaway’s break-even price, thanks to the company’s dilutive calculations. That means there is currently no dilutive effect, given the cash from the warrants. However, it’s worth remembering that these warrants contain around $5 billion in cash.
More crucially, the OXY+ shares are worth 103.9 million warrants with a strike price of $22. That’s a 10% dilution that’s well in the money and will most likely happen. To boost long-term returns, we would like to see the firm repurchase shares.
Occidental Petroleum Direction
The company’s forecast should sustain ongoing shareholder returns.
The firm anticipates annualized production of approximately 1.195 million barrels per day, a little reduction from the company’s most recent output. We anticipate that production may potentially outperform guidance. The Permian Basin is still at the heart of the company’s portfolio. Operating expenses are likely to remain extremely low.
Occidental Petroleum Corporation’s other companies continue to generate significant revenue. Oxychem revenue is expected to reach $1.5 billion, with midstream income remaining about balanced. The corporation anticipates $5.8 billion in capital expenditures and $0.9 billion in interest expenses. The company’s low break-even point implies that profits will remain high.
FCF is very price reliant, yet we expect the company to earn double-digit returns in the future. Early share repurchases can contribute to stronger long-term returns.
Thesis Peril
The most significant risk to our argument is that crude oil prices have fallen below $80 per barrel, despite robust government backing. Occidental Petroleum has a low break-even point and a strong asset portfolio. The OPEC+ output cut has helped to keep prices stable. However, prices have remained low, and a recession or default could cause them to fall even further. This could harm the company’s future profits.
Conclusion
Occidental Petroleum Corporation had a solid first-quarter performance. Despite the fact that share repurchases are restricted by mandatory preferred equity redemptions, the company’s overall cash flow and returns remain high. The company has one of the most robust Permian Basin asset portfolios, and it is always breaking new ground, highlighting the overall quality of its portfolio.
The company’s debt is at goal levels, and it is continuing to invest heavily in capital projects. We anticipate that Occidental Petroleum Corporation will be able to sustain, if not increase, production. Overall, we anticipate that OXY stock will be able to provide double-digit shareholder returns, making it an excellent long-term investment.
Featured Image: Unsplash @ worksite
