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Earnings miss, CapEx increase put Occidental Petroleum 'in the penalty box'

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Earnings miss, CapEx increase put Occidental Petroleum 'in the penalty box'

Occidental Petroleum Corp. will be able to avoid the worst of the Permian Basin pipeline shortfall, executives assured analysts, but a second-quarter earnings miss and a larger-than-anticipated increase in capital expenditures sent shares sharply lower Aug. 9.

Occidental officials during their earnings call noted several positives from the quarter, including the commencement of a $2 billion stock buyback program and an increase in full-year production guidance from 650,000 barrels of oil equivalent per day to 664,000 boe/d. Production in the Permian exceeded the company's growth target of 80,000 boe/d, which helped strengthen the company's financial position.

"This outperformance helped us … to generate approximately $2.5 billion more cash flow than our original 2018 plan, which was based on a WTI oil price of $50 per barrel," CEO Vicki Hollub said on the Aug. 9 call. "This achievement strengthens our ability to provide a meaningful dividend with growth while maintaining a strong balance sheet at low prices."

Occidental reported adjusted net income of $848 million, or $1.10 per share, for the second quarter, up from an adjusted profit of 15 cents per share in the second quarter of 2017. But it was not enough to meet the S&P Global Market Intelligence normalized earnings estimate of $1.22 per share, and Occidental's shares were down 4.1%, to $77.86, in late afternoon trading.

Occidental will also receive $2.6 billion from the sale of noncore midstream assets in the third quarter, which it said would not affect its ability to carry volumes from the Permian — a problem many producers face.

"There are significant bottlenecks and barriers to growing production economically in the Permian right now, and [Occidental] has unique assets and solutions that enable us to overcome the most significant ones," Hollub said. "We know of no other [producer] in the Permian that can check all of these boxes or is better positioned to deploy capital, and our cycle of improvement is happening faster now than ever before."

The Permian will also receive the bulk of the company's full-year CapEx increase of $1.1 billion, to a total budget of $5 billion. Joseph Elliott, senior vice president and president of domestic oil and gas, said Occidental will increase its Permian production guidance by 7,000 boe/d for the remainder of 2018 after better-than-expected totals in the first half.

"The 2018 production increase from the additional activity provides a modest increase to this year's production, but we expect it will add over 17,000 boe per day in 2019," he said.

Analysts at Jefferies LLC were unimpressed with the justification for the CapEx boost. "The stock is likely in the penalty box in the near term, but the medium-term trajectory is attractive, in our view," they wrote Aug. 9.

"We had expected capital expenditures to increase to maintain activity levels in Permian Resources (the original plan assumed a ramp-down as break-even targets were achieved), but the magnitude of the increase caught us by surprise and diminishes the free cash yield component of the Oxy story," Jefferies said in its analysis of the company's quarterly results. "Conversely, growth becomes more compelling and we now expect an 11% production rise in 2019."

Tudor Pickering Holt & Co. was even more blunt in a brief commentary, saying the combination of a CapEx boost and earnings miss "more than offsets" the company's stock buyback and Permian production increase. The energy investment bank expressed concern that Occidental's early plans for 2019 call for CapEx of $5 billion to $5.3 billion, while analysts had been anticipating a budget closer to the $4 billion range.