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Analyst: Occidental can sustain dividend as long as oil prices stay atop $45/bbl


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Analyst: Occidental can sustain dividend as long as oil prices stay atop $45/bbl

While Occidental Petroleum Corp. took on a lot of debt in its quest to win oil and gas producer Anadarko Petroleum Corp., its common dividend can be "comfortably sustained" as long as West Texas Intermediate crude oil prices generally stay above $45 per barrel, analysts from Raymond James said in a May 22 research note.

Front-month West Texas Intermediate oil futures on the New York Mercantile Exchange are trading above $60/bbl.

The analysts expect that Occidental's interest expense will jump about fivefold from just under $400 million to $2 billion due to its $57 billion acquisition of Permian Basin heavyweight Anadarko. In addition, Occidental, a company known for paying a steady and consistently increasing dividend well above its Permian peers, will begin paying $800 million per year in preferred dividends on the preferred stock being purchased by Berkshire Hathaway Inc.

At the end of April, Warren Buffett committed to investing $10 billion in Occidental to help fund the transaction. As part of the investment, Berkshire Hathaway would get 100,000 cumulative perpetual preferred shares with a liquidation value of $100,000 per share and a warrant to buy up to 80 million Occidental common shares at $62.50 apiece. The preferred shares would accrue dividends at 8% per year, or 9% if dividends are accrued and unpaid.

"Whereas the interest expense is tax-deductible, the preferred dividend is not. It is also worth noting that the (relatively modest) common equity portion of the purchase price will increase the common dividend payout in absolute terms. ... [B]ut even with that, Occidental remains a highly cash-generative business," Raymond James wrote. "Among large-cap E&P companies, Occidental's cash flow generation — both on an absolute basis, and net of capital spending — screens near the high end of the spectrum."

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Since the start of the year, Occidental stock has been one of the worst energy stock performers, losing nearly 15%. However, a "silver lining" for those investors who had not owned Occidental stock before the merger is that its dividend yield has widened to 5.8%, making the company one of the top 20 highest yielders in the S&P 500, Raymond James said.

Taking into account that stronger oil prices generally lead to wider basis differentials and higher cash operating costs, the analysts looked at various capital spending cost scenarios spanning a wide range.

They found that even in an "ultra-bearish" scenario of $30/bbl West Texas Intermediate oil prices, Occidental could still cover its full capital program.

"The threshold of all-in cash flow neutrality — capital spending plus the full dividend — comes approximately at the midpoint between $40 and $50," the analysts said. "With WTI in the mid-$60s, which is slightly higher than where the futures strip is currently, dividend coverage rises to 2x."

Raymond James' long-term forecast is for West Texas Intermediate oil prices of $75/bbl.

"The bottom line is that [Occidental] shareholders do not need to lose sleep over the safety of the dividend unless you believe that WTI will fall below the $45 level, and stay there permanently," the analysts wrote. "To be crystal clear, a short-term dip to those levels would not cause a dividend cut."

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