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Morningstar | Occidental Dials Back 2019 Budget in Light of Lower Crude Prices

The Permian Resources segment is still the main engine for Occidental’s production growth, with fourth-quarter volumes reaching the high end of guidance at 250 mboe/d (11% higher sequentially and 57% higher year over year). But international volumes in the period were slightly lower than expected due to the impact of lower prices on production-sharing contracts in Oman, combined with weather issues in Qatar. Overall, firmwide volumes were consistent with prior guidance at 700 mboe/d (3% higher sequentially and 13% higher year over year). And the firm’s financial results were in line with Street expectations as well (EBITDA and adjusted earnings per share were $2.4 billion and $1.22, respectively, relative to consensus estimates of $2.4 billion and $1.21).

The 2019 capital budget was confirmed at $4.5 billion. Management had previously suggested a figure north of $5 billion, contingent on $60/bbl crude (WTI). We are encouraged to see this being revised, given that prices have now slumped below that level, as it signals discipline regarding capital allocation. In the aftermath of the 2015-16 downturn Oxy repositioned itself to sustain its production, fund the dividend, and remain cash-flow-neutral at $40 oil. If prices range from $40 to $50, the incremental cash generated will be used to hit the firm's 5%-8% annual production growth target. And in a $60-plus environment, management plans to ramp up share repurchases and strengthen the balance sheet, rather than chase further growth. By cycling down its activity now that prices are below $60 the firm has telegraphed its willingness to stick to this long-term plan, instead of stepping on the gas.

We believe the reduction mainly applies to the Permian Resources segment, which is expected to deliver 180-190 new wells this year with 13-14 rigs. This compares with our previous model, incorporating 17 rigs. The slower pace weighs on near-term cash flows and lowers our fair value estimate to $56 per share.