Phil Gresh resumed coverage of Occidental Petroleum with an Underweight rating and $50 price target.
Occidental's dividend as a percentage of free cash flow is too elevated at an estimated 95% in 2021, and the stock's valuation isn't attractive enough to mitigate any concerns, Gresh said in a Tuesday note. (See his track record here.)
Occidental's elevated dividend commitments imply minimal ability to organically de-lever itself following the acquisition of Anadarko, the analyst said.
Strip prices are hovering around an estimated $55 per barrel range in the coming years, and Occidental's downside risk is worse than that of peers, he said.
Assuming $60 per barrel Brent prices, Occidental's dividend as a percentage of free cash flow is 128% in 2022 versus about 87% for U.S. peers.
Occidental does have some self-help initiatives and levers it can count on to improve its outlook, Gresh said, but any benefits look limited for two reasons.
First, the company has already offered material cost reduction commentary from the Anadarko transaction that will take up to two years, the analyst said.
Second, any potential asset sale will likely have a dividend coverage versus leverage trade-off, he said.
Warren Buffett holds the right to buy 80 million shares — or around 9% of the company — at $62.50, which likely creates a cap or upside potential for the stock, Gresh said.
"Bottom line, we believe that there is 'no easy way out' of this financial predicament, absent a higher oil price case."
Occidental Petroleum shares were trading down 1.51% at $44.34 at the time of publication Tuesday.
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