A year ago, Occidental Petroleum led the fight of its life, on the verge of bankruptcy.

As economic lockdowns and travel restrictions crushed demand and prices for crude, Oxy lost $ 15.7 billion in 2020, down from a loss of $ 985 million a year earlier. The company’s shares fell to a low of $ 9.13 in October 2020, from nearly $ 46 per share at the start of the year.

“(Oxy) is near the whirlwind of Connecticut bankruptcy and will have to paddle furiously, likely for years, to avoid being sucked in,” veteran oil analyst Paul Sankey wrote in a research note in August 2020. “The only one option is to crush costs, cut (capital spending) and reduce debt, and resist the rise in oil prices in at least a year. ”

Oxy managed to do just that, enduring the downturn brought on by the pandemic without resorting to Connecticut bankruptcy. The company posted its first profitable quarter in more than two years this month, making $ 638 million in the third quarter. Its stock is trading at around $ 32 per share, still below pre-pandemic levels, but tripling the price of a year ago.

“We continue to view Oxy as one of the most attractive games on higher oil prices in our hedging universe,” Stephen Richardson, analyst at Evercore ISI, wrote in a note to investors this month.

Oxy appears to have turned a corner, emerging from the worst oil recession in a generation as a leaner, more efficient company with the ambition to become a leading carbon management company for a low-emission future. of carbon.

He acted quickly to stem his losses after the drop in oil prices. The company cut capital spending by a third and cut shareholder dividends for the first time in 30 years, lowering the payout to 1 cent from 79 cents.

The company’s turn of fortune was not the result of these large cuts, although they certainly helped, said Ed Hirs, professor of energy economics at the University of Houston. The company has benefited from a recovery in the oil market, helped in large part by coronavirus vaccines and OPEC’s decision to gradually increase production in the face of strong growth in demand.

“Oxy is definitely in better shape, like all the oil companies are compared to last year, but that’s because of OPEC,” Hirs said. “You can’t attribute any of this to the management sense. They can all breathe a little easier, but that’s only as long as OPEC allows them to. They haven’t come out of the woods yet.

Riding the Oil Wave

Indeed, the deployment of coronavirus vaccines and OPEC’s decision to limit production increases have been a boon for oil companies. Since the vaccines began rolling out nearly a year ago, oil prices have skyrocketed, hitting around $ 85 a barrel last month, from around $ 48 in January, as demand for the commodities grew. oil companies such as gasoline and jet fuel has increased.

West Texas Intermediate, the benchmark for US crude, was down 15 cents in New York on Thursday at $ 81.19.

Rising oil prices have helped Oxy sell more oil and gas assets while paying off debt. The company announced in the third quarter the sale of its stake in two offshore oil fields in Ghana for 750 million dollars. Earlier this year, the company sold mineral rights in Colorado’s DJ Basin for $ 285 million and non-core acreage in the Permian Basin for $ 510 million.

This is good news for the company, which relied on the sale of assets to quickly repay the debt resulting from the Anadarko acquisition.

After demand for oil fell within a year of the deal, Occidental’s asset values ​​plummeted, buyers evaporated, and the company struggled to offload its properties. In May 2020, the French oil major Total withdrew from a deal to buy Oxy’s assets off the coast of Ghana. The company was also unable to sell Algerian assets, ultimately pulling them off the market.

With oil prices now above pre-pandemic levels, buyer interest increased and deals were finally closed. With the recent sale of its assets in Ghana to Dallas companies Kosmos Energy and Ghana National Petroleum Corp, Oxy has achieved its goal of selling between $ 2 billion and $ 3 billion in assets this year.

Oxy has sold around $ 10 billion in assets since acquiring Anadarko, using the proceeds from its sales to pay off $ 14 billion in principal debt. The company repaid $ 4.3 billion in long-term debt in the third quarter, reducing its total to $ 30.9 billion.

Richardson, Evercore ISI analyst, warned that Oxy remains one of the most indebted producers nationally, despite recent progress in debt reduction.

“Asset sales have helped generate income for debt reduction and management has done well to push back short-term maturities through debt swaps and tenders, but going forward the Deleveraging will come primarily from organic free cash flow, as the non-core portfolio has been significantly reduced, ”Richardson said in a research note.

‘Clearance Mode’

Despite improving market conditions, Oxy’s CEO Vicki Hollub continues to maintain capital discipline, taking into account investor demands. Since the start of the pandemic, the company has become more efficient at drilling wells and producing oil with less capital, she said.

“Future growth for us would really be in favor of growth for a dividend, not growth for growth,” Hollub said.

For now, however, Oxy is waiting to increase his dividend to shareholders until he pays off more debt.

Hirs, Professor UH, said that it is easy for oil companies like Oxy to make a lot of money when they are not spending large sums of money to drill new wells to replenish oil reserves in decline. But at some point, Oxy will have to start spending money to drill additional wells, he said.

“When oil companies stop drilling and cut down on their exploration staff, then all you produce is basically cash flow,” Hirs said. “It always looks better when you deplete your assets. You are essentially in liquidation mode.

Oxy, however, has no choice but to rely on existing production and asset sales to continue paying off the debt of the $ 42 billion deal with Anadarko. The 2019 purchase, for which the company was criticized by many analysts at the time for overpaying, made it one of the biggest players in the Permian Basin of West Texas.

It remains to be seen whether Oxy’s bet in the Permian will ultimately pay off, Hirs said. Shale deposits, even in the prolific Permian, are an expensive and high-risk endeavor, especially since shale wells produce the most oil in the first or two years before they decline.

Meanwhile, Oxy’s rival ConocoPhillips waited for the depths of the pandemic to make an acquisition. The Houston independent acquired Concho Resources for $ 9.7 billion in shares and is in the process of acquiring the Permian business of Royal Dutch Shell for $ 9.5 billion in a cash deal and in actions. These moves made ConocoPhillips the second largest Permian player behind Exxon, all at a fraction of the cost Oxy paid to expand its position in the Permian.

Essential for carbon capture

Oxy, however, has ambitions beyond the Permian to emerge from the recession.

As some oil companies invest in renewable energy, Oxy hopes to transform into a carbon management company in the hopes of reducing emissions and keeping fossil fuels viable in a low carbon future.

The oil giant is developing its first direct air carbon capture facility in the Permian Basin, capable of removing up to 1 million tonnes of carbon dioxide per year from the atmosphere. The project is expected to start construction next year.

The company also plans to develop a “direct air to fuels” facility in British Columbia, which will combine carbon dioxide captured in the air and hydrogen from water to produce up to 26 , 4 million gallons of ultra-low carbon fuel for the Canadian market. The project is expected to start construction in 2023.

“We think this is a gap that no one else is filling,” Hollub said of carbon capture. “The transition will take a while, but over the next 10 to 15 years I think we will make a lot of progress to become a carbon management company and a go-to company for those who need (carbon) offsets.”

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