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Occidental Makes Tactical Move to Cut Western Midstream Stake

Zacks Equity Research

Occidental Petroleum Corporation OXY has taken a few strategic and financial initiatives that are directed to strengthen operations and financial conditions in 2020. The company also entered into several agreements with Western Midstream Partners, LP WES. This will enable the latter to operate as a stand-alone midstream business.

Per the agreement, Occidental will no longer consolidate the firm’s statement of operations, balance sheet and cash flows. Also, it will lower its economic interest in Western Midstream below 50% during 2020. This deal also provides rights to the firm to remove and replace Occidental as the general partner.

Focus on Core Operations & Debt Reduction

After acquiring Anadarko Petroleum for $38 billion, Occidental is concentrating on selling non-core assets and using the proceeds to lower debts — incurred to fund the acquisition.

Occidental has repaid $7 billion of debt after closing the acquisition of Anadarko, and will continue to reduce debt in 2020 with proceeds from asset divestitures and free cash flow. The company announced the sale of $565 million of Houston and Woodlands real estate assets to the Howard Hughes Corporation HHC, and continues to make progress toward meeting the $15-billion divestiture target.

Cutting down stake in Western Midstream will generate funds for Occidental, which will be utilized to lower debt levels. This deal will also remove significant debt, which the company inherited after acquiring Western Midstream through the Anadarko deal.

Other Initiatives

Occidental expects to produce 1,335-1,365 thousand barrels of oil equivalent per day (Mboed) in 2020, courtesy of contribution from acquired Anadarko assets and its legacy assets. Occidental’s focus on high-return assets will also help it to boost production levels. The company’s guidance indicates a 2% increase in annual production, primarily due to higher contribution from Permian Resources assets.

Occidental has increased its 2020 volume of hedged oil production by 50,000 barrels of oil per day (BOPD) to 350,000 BOPD, representing a significant portion of 2020 oil production. These hedges will safeguard Occidental’s production against ongoing fluctuation in commodity prices. Moreover, courtesy of the hedges, for every $1 increase in oil prices, Occidental’s free cash flow is expected to increase by $260 million per annum.

The 2020 hedging program will boost cash flow and assist it to carry on with shareholder-friendly moves. In the first nine months of 2019, the company returned $2,003 million to its shareholders through share buybacks and repurchases, and we expect these strategic moves to allow it to continue the same in 2020.

Price Performance

In the past month, shares of Occidental have outperformed its industry.



Zacks Rank & Key Pick

Occidental currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Antero Midstream Corporation AM, currently holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Antero Midstream’s long-term earnings growth is projected at 5.8%. The Zacks Consensus Estimate for its 2020 earnings has moved up 7.9% in the past 60 days to 95 cents per share.

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