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Occidental (OXY) to Cut More Spending Amid Choppy Prices

Zacks Equity Research

Occidental Petroleum OXY has decided to lower its 2020 expenditure again to preserve liquidity amid the economic crisis created by the breakout of novel coronavirus. Reduction in demand impacted prices of crude oil that have dropped 60.5% year to date, with hardly any indication of prices becoming steady anytime soon, which is forcing oil and gas companies to take remedial measures.

Earlier this month, Occidental cut dividend and capital expenditure to ensure enough liquidity to service its debts. It is evident that the earlier reduction was not enough to face the current challenges.

Taking into consideration the choppy commodity price scenario, the company is lowering 2020 production expectation to 1,275,000-1,305,000 barrels of oil equivalents per day (BOEPD), down 6% from the prior guidance in the range of 1,360,000-1,390,000 BOEPD.

Additional Cut in Expenditure

Occidental will now invest in the range of $2.7-$2.9 billion, down from the prior expenditure plan of $3.5-$3.7 billion. Initially, the company had plans to invest in the range of $5.2-$5.4 billion in 2020.

The company now aims at reducing 2020 operating and corporate costs by at least $600 million compared with the original 2020 plan, including salary reductions for executive leadership. These cost reductions are in addition to the previously announced operating and overhead synergies of $1.1 billion that are expected to be fully realized in 2020.

The above planned reduction of expenses will provide assistance to the company to face the challenges posed by the low commodity price environment.

What’s Impacting Oil Prices?

The breakout of COVID-19 is adversely impacting demand for crude oil. The U.S. Energy Information Administration release also indicates the same, and predicts global petroleum and liquid fuels consumption to average 99.1 million barrels per day in first-quarter 2020, indicating a decline of 0.9 million from the same period in 2019. Governments globally are issuing directives related to travel, asking people to stay at homes and avoid mass gatherings, as well as carrying out temporary closure of schools, factories and offices, which are adversely impacting the demand for crude.

Saudi Arabia — the world’s top oil exporter — has plans to increase crude oil production to 12.3 million barrels per day in April, after the collapse of its OPEC supply cut agreement with Russia. The decision of Russia and Saudi Arabia to produce more crude volumes could further lower the price of the commodity from the current level due to supply glut.

The factors mentioned above factors are having a negative impact on crude oil prices. International crude oil prices are trading below $30 per barrel for the past nine days. The sustained low cost of commodities will make it very difficult for oil and gas companies to sustain their normal level of operation without taking any corrective measures.

Other companies belonging to the oil and gas sector such as Devon Energy DVN, WPX Energy WPX and Murphy Oil Corporation MUR are also cutting down on capital expenditures to preserve liquidity and slow down expansion plans amid the falling oil prices.

The $2-trillion U.S. stimulus package can boost crude oil prices. However, this will only happen if the OPEC countries restrain from pumping out more crude oil.

Zacks Rank

Currently, Occidental carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Occidental’s shares have underperformed the industry in the past 12 months.



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