In its second-quarter earnings call, management at Occidental Petroleum (OXY) reiterated its commitment to maintaining (near-term) and growing (intermediate-term) the dividend, asserts Elliott Gue, editor of Energy & Income Advisor.
This goal will require the company — a holding in our Wealth Builders model portfolio — to grow cash flow to levels that support the current payout and fund the capital expenditures needed to hold production flat at $40 per barrel.
Management also made the case for Occidental Petroleum to cover its payout and grow production by 5 percent to 8 percent annually if oil prices hover around $50 per barrel.
In the near term, Occidental Petroleum must focus on replacing last cash flow from divested assets via production growth in the Permian Basin, the start-up of projects in its petrochemical segment and the expansion of the AlHosn gas project in the United Arab Emirates.
Occidental Petroleum boasts an impressive footprint throughout the Permian Basin, as well as substantial acreage position in the region that hasn’t been evaluated, creating the potential for additional inventory upside as other operators delineate nearby assets.
The company continues to run rigs in the Texas portion of the Delaware Basin and the Midland Basin. Its economics in the Delaware Basin should continue to improve from the build-out of logistics hubs.
Growth-oriented investors argue that Occidental Petroleum’s generous dividend would be better deployed in additional drilling and completion activity; income-oriented investors remain skeptical about the payout’s sustainability and growth potential.
Despite this tension, Occidental Petroleum exhibits many of the qualities we prize in an exploration and production company: a strong balance sheet (a leverage ratio of 2.39 times and $2.2 billion in cash), franchise assets in the Permian Basin and steady cash flow from conventional fields. Occidental rates a Buy up to $70.
Elliott Gue is editor of Energy & Income Advisor.
About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.