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Occidental shares up on positive update, but analyst skepticism remains in place

Shares of Occidental Petroleum Corp. were up Jan. 6 after the company provided an update on its divestment strategy and plans for 2020, but analysts remain skeptical about the company's plans.

Occidental announced a series of amendments to its relationship with Western Midstream Partners LP, largely intended to allow the partnership to operate as its own entity. Occidental said it would continue its relationship with Western, but would reduce its holdings in the partnership to less than 50% in 2020. The amendments announced Jan. 6 will give the partnership "the right to remove and replace Occidental as the general partner."

Occidental also detailed its latest maneuvers to reduce debt in the wake of its $57 billion acquisition of Anadarko Petroleum Corp., which sent shares crashing to decade lows in 2019. The company has publicly announced a goal of $15 billion worth of divestitures in order to cut into debt, a process that remains ongoing. Occidental said it had not only sold its real estate assets in both Houston and The Woodlands, Texas, to Howard Hughes Corp. for $565 million but had retired $2 billion in bank term loans due in 2021 during the fourth quarter of 2019.

"The sale of office complexes in the Houston Energy Corridor and The Woodlands is part of our plan to divest non-core assets and continue to improve the strength of our balance sheet," President and CEO Vicki Hollub said. "We repaid $7 billion of debt less than five months after closing our acquisition of Anadarko and will continue to reduce debt in 2020 with proceeds from asset divestitures and free cash flow."

Occidental also moved to increase its oil hedges from 50,000 barrels per day to 350,000 bbl/d in a move it said protected it against lower prices while preserving "significant upside" if prices improve.

"For every $1 increase in oil prices, Occidental's free cash flow increases by $260 million per annum. In a low oil-price environment, Occidental's 2020 hedging program enhances cash flow to support its dividend during the post-acquisition transitional period," the company said.

Occidental shares were up 3% to $44.93 in early afternoon trading on the New York Stock Exchange Jan. 6, but analysts commenting on Occidental's update made it clear they thought the company has more work to do to impress shareholders.

"OXY's 2020E leverage forecast is ~3.5x (ex-WES), compared to OXY's pre-deal leverage of ~1x and the [Investment Grade] E&P median of 1.7x. Debt per flowing barrel and debt/[proved developed] reserves will be ~$33,500 and $11.1, respectively, compared to the group median of ~$12,700 and $4.65," said CreditSights, which reiterated an "underperform" rating on Occidental due in part to its "stretched credit metrics."

"Other than [Devon Energy Corp.], which has been using asset sale proceeds for buybacks, OXY has the weakest retained cash flows in our coverage at 56% and this will get weaker as the increased share count and $10bn preferred issuance from the APC acquisition begins to impact [last 12 months] financials," CreditSights said.

SunTrust Robinson Humphrey said it expected shares of Occidental to rise Jan. 6 on news of another "incremental step" toward its $15 billion divestiture goal, but kept its price target of $40 per share in place. One of the firm's major concerns with Occidental: "The inability to sell assets at market prices to help delever the balance sheet from the Anadarko acquisition."