In the wake of falling oil prices, Occidental Petroleum Corporation OXY announced that the board of directors has decided to slash quarterly dividend by 86% to 11 cents from the present level of 79 cents. To safeguard its liquidity, the company has decided to lower 2020 capital expenditure to the range of $3.5-$3.7 billion from earlier expectation of $5.2-$5.4 billion. It has plans to implement additional measures to cut operating and corporate costs.
The company has decided to cut dividend for the first time in 30 years to ensure enough liquidity to service its debts.
Why This Sudden Dividend Cut?
Occidental had incurred substantial debt to outbid Chevron Corporation CVX to fund the acquisition of Anadarko Petroleum for strengthening its position in the Permian Basin. Higher production from the region and sale of non-core assets aided Occidental to lower debts and pay interest due on its outstanding debts.
However, the sudden fall in global oil prices and declining demand for crude oil globally due to the outbreak of coronavirus will definitely have an adverse impact on Occidental’s top line. Historically, it remains exposed to market prices of commodities. Although the company has hedged a portion of 2020 oil production, nearly 20% drop in crude oil in the recent past might impact its liquidity.
The move is essential as the unexpected drop in crude oil price will not generate the desired returns, even if the company hikes crude oil production from its high-quality resources.
Oil Deal Collapse Could Further Impact Prices
Saudi Arabia, the world’s top oil exporter, has plans to increase crude oil production above 10 million barrels per day (bpd) in April, after the collapse of its OPEC supply cut agreement with Russia. Over the past three years, OPEC and its allies have been cutting down crude oil production to have a control over crude price, which in a way allowed the U.S. shale-based producer to increase crude production.
The decision of Russia and Saudi Arabia — the major producers of crude apart from the United States — to produce more crude volumes could further lower its price from the current level due to supply glut. This could adversely impact highly levered oil and gas companies like Range Resources Corporation RRC and Apache Corporation APA, among others.
Currently, Occidental carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Occidental’s shares have underperformed the industry in the past 12 months.
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