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Industry observer: Occidental in 'precarious situation' after Anadarko purchase

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Industry observer: Occidental in 'precarious situation' after Anadarko purchase

Occidental Petroleum Corp.'s determination to acquire Anadarko Petroleum Corp. has done enough damage to the company's balance sheet and reputation that it could take years to recover, Houston-based investment bank Tudor Pickering Holt & Co. said Oct. 8.

Occidental acquired Anadarko in a $55 billion merger that closed during the third quarter, but the process was anything but smooth. Even as CEO Vicki Hollub and members of Occidental's board of directors claimed that the acquisition was in the long-term interests of the company, a significant number of investors showed their disagreement by selling their stock. Shares hit a decade low of $42.17 per share at the close of the New York Stock Exchange on Oct. 7 and were down further at the open Oct. 8. Tudor Pickering Holt indicated that it expects shares to continue to slide, setting a price target of $32, less than half of what Occidental's shares traded for six months ago.

In its commentary, Tudor Pickering Holt said one of Occidental's biggest selling points, a clean balance sheet, evaporated in the wake of the Anadarko deal. Now, the company has to find a way to clean up a ledger that has become far less attractive to investors.

"In our view the road to recovery for [Occidental] will likely be a long one, as the company has placed its balance sheet in a precarious situation using significant leverage to guarantee a win in the Anadarko bidding war," the firm said. The difficulty of Occidental's situation is compounded by West Texas Intermediate crude oil prices that have stayed below $60 per barrel for much of 2019, save for a brief spike after the Sept. 14 attack on the Saudi Arabian Oil Co. facility at Abqaiq, and were trading at $52.18/bbl the morning of Oct. 8, Tudor Pickering Holt said.

"[The Anadarko acquisition] was done in a late cycle market with deteriorating crude fundamentals, which means [Occidental] will have to remain extremely defensive, paring back growth in order to defend the dividend while continuing to pursue asset sales to work down absolute leverage," the firm noted. Tudor Pickering Holt's projections for Occidental in 2020 were tepid, projecting fourth-quarter exit to exit growth of just 1%.

If such a scenario plays out, Occidental will be able to protect another key driver of interest, its 7.5% dividend, with about $210 million of free cash flow to spare. But every dollar drop in crude will likely force the company to cut capital expenditures by about $250 million, leaving Occidental in a difficult situation, Tudor Pickering Holt said.

"Given most of the cash is going to finance the dividend, we see a five-year growth [compound annual growth rate] of 3% from 2020-2025 and aggregate FCF … post dividend of $4.3B vs. ~$49B … in net debt," the firm said.