In the wake of falling oil prices, Occidental Petroleum Corporation OXY announced that the board of directors has decided to slash quarterly dividend again to preserve liquidity amid weak commodity prices and demand. The new quarterly dividend will be 1 cent down from the prior rate of 11 cents. The new dividend will be payable on Jul 15 to shareholders on record as of Jun 15, 2020.
Earlier in March 2020, the company slashed quarterly dividend by 86% to 11 cents for the first time in three decades to ensure enough liquidity to service its debts.
What Calls for Another Dividend Cut?
Occidental had to incur substantial debt to fund the acquisition of Anadarko Petroleum for strengthening its position in the Permian Basin. The company outbid Chevron Corporation CVX but added a lot of debt to the balance sheet in the process. Occidental has been efficiently lowering debts since the acquisition of Anadarko. It exited the first quarter with a long-term debt of $36,826 million, down from $39,391 million at 2019-end.
Occidental had been moving according to plans, selling non-core assets and utilizing the proceeds to repay debts. The demand for oil and prices of the same supported its performance, and the company generated ample cash flow to pay dividend to shareholders. However, the outbreak of COVID-19 completely changed the scenario, with oil prices and demand for the same dropping substantially. To preserve liquidity amid the difficult times, Occidental decided to lower dividend and trimmed its capital expenditure guidance for 2020.
Oil prices have been moving up at a very slow pace and the same as of May 31 declined 42.2% from the beginning of the year. In addition, Occidental and TOTAL S.A. TOT canceled the remaining part of the deal for Africa assets. The deal cancellation closed another window for Occidental to generate funds by selling assets. It will have to search for new parties to sell assets in this difficult period.
In the 2021 to 2022 time period, Occidental will have to repay debt worth $11.1 billion. However, the current weak commodity price scenario, declining demand trends and lower probability of selling non-core assets will hinder the company’s debt reduction plan. Plus, the cancellation of the TOTAL African asset deal will aggravate problems. Hence, cutting down dividend again was one of the ways for Occidental to preserve liquidity. The decision to cut dividend twice is expected to enhance liquidity by $2.8 billion annually.
Cutting down of dividend will not be enough for Occidental to preserve liquidity in this unprecedented economic crisis. The company has also taken other measures to face the challenges created by this pandemic. Occidental reduced 2020 capital expenditure budget by more 50% to $2.4-$2.6 billion. In addition to achieving the $1.1-billion overhead and operating expense synergy target one year ahead of schedule, the company also identified $1.2 billion in operating and overhead cost reductions to be realized in 2020.
Another oil and gas company Devon Energy DVN also lowered capital spending twice in recent times to preserve liquidity.
Occidental’s shares have underperformed the industry in the past 12 months.
Currently, Occidental carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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