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Occidental Petroleum Stock Investors See Things Go From Bad to Worse

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·5 min read
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Occidental Petroleum (NYSE:OXY) stock is in freefall. A year ago, shares traded for as much as $50. After the March crash, OXY stock enjoyed a considerable bounce back up to the $25 level. Since then, there’s been hardly any signs of life. Shares have lost the majority of their remaining value and now trade for less than $10 a pop.

A magnifying glass zooms in on the Occidental Petroleum (OXY) website.
A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

Source: Pavel Kapysh / Shutterstock.com

With oil firming up a bit recently, it appeared that Occidental might finally be able to turn the corner. In September, Occidental stock rallied for a moment. However, management quickly snuffed that optimism out with another shockingly bad asset sale, as it sold off one of its best oil fields to private equity for an incredibly low price.

Given this unexpected and highly unfortunate development, any enthusiasm for OXY stock has disappeared in the short-term. What had been trend lines in sync, specifically the United States Oil Fund, LP (NYSEARCA:USO), shifted around Oct. 14. Oil started a slow ascent while OXY stock went the other way.

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That day, CEO Vicki Hollub told an industry conference that “America’s oil production will never again reach the record 13 million barrels a day set earlier this year, just before the pandemic devastated global demand,” Bloomberg reported.

As they say, Occidental is burning the furniture to stay warm. And until that stops, OXY stock could keep dropping even lower.

OXY Stock Investors Hit With Another Blow

Throughout 2020, I’ve urged readers to avoid OXY stock. The company’s problems are numerous and its management team fails to inspire any confidence that they can fix the mess that it’s in. There are much better quality energy companies out there to buy for a sustained recovery in oil and gas.

However, in September, I gave Occidental a chance. With shares down to $10, I argued that they finally looked cheap enough to be worth the risk. Shares initially popped nicely and it looked like OXY stock’s long-running nightmare was ending.

But then, CEO Hollub shocked shareholders with another inexplicable decision. Earlier this month, Occidental announced that it is selling off its Colombian assets for just $700 million. Occidental had been involved in Colombia since the 1980s and has been a key partner with state oil company Ecopetrol (NYSE:EC) for ages. Colombia’s oil assets are highly attractive long-life assets with costs far below what Occidental sees on its U.S.-produced oil.

As a result, according to Credit Suisse estimates, these Colombian fields were generating $250 million a year in cash flow for Occidental, even at current low oil prices. Think about that. Occidental dumped one of its best assets for less than three times their trough cash flow. Given the overall valuation of OXY stock (far higher than 3x cash flow) this actually made the remaining Occidental company less attractive as an asset.

Crippling Debtload Forces Brutal Decisions

From the regrettable Anadarko merger on, Occidental’s CEO has proven to be a poor decision-maker. The decision to give away Colombia’s crown jewels to private equity at a knockdown price is another such error.

Still, given Occidental’s massive debtload, there admittedly are not a lot of good choices here. Leadership promised at least $2 billion in asset sales in 2020 to help make a dent in the company’s liabilities. Since Occidental’s higher-cost Permian assets aren’t meaningfully profitable or cash flow positive at the moment, the assets that can be easily sold are the best ones, such as the Colombian production.

Unfortunately, Occidental will be left with increasingly high-cost, marginal production as it sells off Colombia, Wyoming, and other basins in the current liquidation spree. This means that the upside for OXY stock is fading by the month. Oil will eventually recover, but what will Occidental have left by the time the slump is over?

OXY Stock Verdict

Occidental’s decision to abandon Colombia and receive only pocket change in return is a devastating development. Every time you think Occidental might finally have reached rock bottom, it finds some way to dig even deeper.

It’s especially disappointing because in September, it seemed like OXY stock might finally be ready to make a comeback. It had already sold off enough assets that its financial situation appeared alright for the foreseeable future. Perhaps management could get back to improving efficiency on its existing operations. But no, by dumping its decades-long position in Colombia, Occidental signaled to the market that there’s no end in sight to the company’s downward spiral.

If you think oil is going back to $60 a barrel in the near future, you might be able to justify owning OXY stock here for its higher leverage to the price of oil. Otherwise, stay far away. The most recent asset sale made it clear that Occidental’s management team still hasn’t learned from its previous mistakes.

On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.

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