EUR 850.00 For Business Accounts Only

Morningstar | Occidental Shares Walloped After Huge Capital Spending Increase

Occidental delivered production of 639 thousand barrels of oil equivalent per day in the second quarter, which was 5% higher sequentially and within guidance. The firm’s outlook for full-year production was tightened to 650-664 mboe/d, which was 2 mboe/d higher at the midpoint (7 mboe/d higher for Permian Resources and 5 mboe/d lower for the international segment, due to the production sharing contract impact of shifting crude prices). The uptick in expected overall production was modest in comparison to the $1.1 billion increase to the 2018 budget, but this hefty incremental spending will have a bigger impact on 2019 volumes (resulting in an additional 17 mboe/d over the full year). Almost all of the increase will be plowed into Permian resources.

The market balked at this step change in capital spending, which triggered a 4% slide in Oxy’s share price. This reaction dovetails with our view that current crude prices are unsustainable and that they are encouraging U.S. producers to ramp operations to a level that could eventually throw oil markets back into oversupply. But in Oxy’s case, we argue that there is some logic behind the increase. First, the firm is now expecting to generate an additional $5 billion in cash in 2018, due in part to the sale of noncore midstream assets (likely a well-timed deal, given the temporary spike in Permian spot tariffs ahead of next years’ planned capacity surge). And second, the firm has resisted the temptation to abandon its break-even target of $50/bbl in the face of higher prices (and has now achieved that goal). So it is better positioned to tolerate lower prices than many of its peers. This is further supported by the quality of its Permian portfolio, which includes some of the lowest-cost acreage in the U.S. onshore area.

We plan to incorporate these operating and financial results into our model shortly, but after this first look, our fair value estimate and no-moat rating remain unchanged.