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Occidental Petroleum Breaks Even At $60 WTI


Occidental Petroleum Corporation's cash flow generation firms up, provides some 2017 guidance, balance sheet remains strong after Q2 report.

Its Al Hosn complex in UAE is outperforming on the back of optimization efforts de-bottlenecking production.

Occidental Petroleum needs $60 WTI to breakeven due to its hefty dividend payments, a picture that will improve once its downstream & midstream expansion comes online in Ingleside, Texas.

Another solid quarter for Occidental Petroleum Corporation (NYSE:OXY). Its cash flow generation from continuing operations improved from $139 million in Q1 (which included almost $700 million in negative working capital and other effects) to $803 million in Q2 2016 (includes $132 million in net negative effects). That is enough to cover its $657 million in capital expenditures but falls short of covering that plus $575 million and $80 million in quarterly dividend and interest payments, respectively.

Occidental Petroleum's CFO commented that "we (Occidental) expect working capital changes to be much less burdensome to our cash flow during the second half of the year." Before working capital effects, Occidental's $935 million operating cash flow streams would equate to a rough quarterly outspend of $350 million - $400 million.

Aiding its financial situation was a $550 million cash infusion from its settlement with Ecuador in Q1, which was followed by another $326 million infusion in Q2 as Ecuador sent Occidental the remaining portion. Divestitures provided another net $260 million during the first half of 2016.

On the back of its strong balance sheet, Occidental Petroleum decided to raise its annual dividend to $3.04 per share from $3. I would speculate the reason for the increase in the face of negative free cash flow generation is to highlight the company's "commitment to shareholders". Occidental's CEO Vicki Hollub noted;

"[D]ue to the strength of our (Occidental's) balance sheet and the quality of our portfolio, we have raised our dividend for the 14th consecutive year...

At our Board meeting in July we announced a modest increase in our annual dividend rate from $3 to $3.04. We have now increased our dividend every year for 14 consecutive years and a total of 15 times during that period. The dividend increase reflects our commitment to shareholders to grow the dividend annually, as is consistent with our long-standing capital priorities."

This isn't a fiscally prudent endeavor as Occidental's lofty yield is the sole reason the firm isn't cash flow positive. At least the increase is small which highlights why this move was primarily for sentimental value. Occidental Petroleum wants to keep its status as a yield king in the oil & gas space and to show investors that it can maintain its payouts in the face of immense external pressures.

At the end of Q2 2016, Occidental Petroleum Corporation had $8.97 billion in current assets, up from $8.23 billion in Q1 as its cash pile grew by almost $600 million. The oil & gas firm's current liabilities fell from $6.83 billion to $5.27 billion as Occidental refinanced its upcoming maturities. Its net debt burden ticked up from $7.61 billion to $8.33 billion, all of which doesn't start maturing until 2018 or much later. Below is a look at Occidental's debt schedule, which after its recent maneuvers is very favorable.

Source: Occidental Petroleum Corporation Earnings Presentation

Occidental Petroleum has been able to shrink its cash flow shortfall by enough to the point where it isn't to outlandish to speculate the company will see FCF generation in the medium term. The company forecasts that for every $1 increase in WTI and every $0.50/Mcf increase in Henry Hub leads to a $100 million and $45 million boost, respectively, in its...