Morningstar | Our Bearish Oil Outlook Translates to Slower Long-Term Growth for Oxy - Reducing FVE
We previously commented that the steep increase in Oxy's 2018 capital budget, announced with the firm's second-quarter earnings, made more sense than the market was willing to give credit for (shares slumped 4% after the hike was announced). The firm now plans to spend an incremental $1.1 billion this year, mainly in the Permian Resources segment, bringing the firmwide budget to $5 billion. Management believes the uptick is justified given that the firm will generate an additional $5 billion in cash in 2018, mainly due to higher crude prices (the original budget was based on $50/bbl West Texas Intermediate). The upcoming sale of noncore midstream assets for $2.6 billion was a contributing factor as well.We see this as a responsible, cash flow-neutral ramp that aims to make hay while the sun shines with favorable crude prices. Management repeatedly stressed on the second-quarter conference call that it can dial back spending to maintenance levels within six months, if the commodity environment worsens. We do expect prices to deteriorate eventually, given that shale activity has spiraled to an unsustainable level (which could reverse the current tightness and throw the market back into oversupply). But the near-term outlook is rosier, due to the likelihood of further supply disruptions and continued strong demand. We think the firm's expectation to grow its Permian Resources volumes by more than 50% during 2019 is reasonable, and a good use of this year's windfall.
Nevertheless, we still expect prices to retreat toward our midcycle forecast of $55/bbl WTI eventually. That makes our previous terminal rig count forecast look optimistic at 20. The firm is likely to run 15-17 rigs in the next 12 months, and will step off the gas if crude subsequently declines. We now model an average long-term rig count of 15, and the decrease drags on our net asset value projection for the Permian Resources segment. Commensurately, our new fair value estimate is $73/share.
Occidental Petroleum has three reporting segments: oil and gas, which explores for, develops and produces oil and condensate, natural gas liquids (NGL) and natural gas; chemical, which mainly manufactures and markets basic chemicals (chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates and calcium chloride) and vinyls (vinyl chloride monomer, polyvinyl chloride and ethylene); and marketing and midstream, which purchases, markets, gathers, processes, transports and stores oil, condensate, NGL, natural gas, carbon dioxide and power.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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