Business Overview
Occidental Petroleum Corporation (OXY) is a leading global energy company that has established itself as a diversified player in the oil and gas industry. With a rich history spanning over a century, Occidental has weathered various market cycles and emerged as a resilient force, continually adapting to the changing dynamics of the energy landscape.
The company's origins can be traced back to 1920 when it was founded in California as the Occidental Petroleum Corporation. Over the decades, Occidental has undergone a remarkable transformation, expanding its operations across the United States, the Middle East, and North Africa. Today, the company is recognized as one of the largest oil and gas producers in the U.S., with a strong presence in premier basins like the Permian and DJ.
Occidental's business model is built upon three core pillars: oil and gas exploration and production, chemical manufacturing, and midstream and marketing operations. This diversified approach has allowed the company to capitalize on various revenue streams, mitigating risks and enhancing its overall financial resilience. In 1986, OxyChem, Occidental's chemical subsidiary, acquired Diamond Shamrock Chemicals Company (DSCC), which included the Diamond Alkali Superfund Site (DASS) in New Jersey. This acquisition brought significant environmental liabilities that Occidental has been managing for decades, demonstrating the company's commitment to addressing complex challenges.
In the early 2000s, Occidental made a strategic shift, focusing on higher-margin oil and gas assets and divesting lower-value chemical and midstream assets. This move allowed the company to grow its production and cash flow. However, Occidental faced challenges during the 2014-2016 oil price downturn, leading to asset impairments and restructuring. Despite these obstacles, the company maintained its position as a leading independent oil and gas company in the United States.
A significant milestone in Occidental's history came in 2019 when the company acquired Anadarko Petroleum Corporation for $55 billion. This bold move solidified Occidental's status as one of the largest oil and gas producers in the United States, particularly in the Permian Basin. While the acquisition significantly expanded Occidental's asset base and production, it also added substantial debt to the company's balance sheet, presenting both opportunities and challenges for the future.
Core Operations
Occidental's operations are divided into three main business segments: Oil and Gas, Chemical, and Midstream and Marketing.
The Oil and Gas segment is responsible for exploring, developing, and producing oil, condensate, natural gas liquids (NGLs), and natural gas. This segment generates revenue primarily from the sale of these products. During the second quarter of 2024, the oil and gas segment benefited from higher domestic crude oil volumes and prices, which contributed to an increase in segment earnings compared to the previous quarter. However, lower domestic natural gas prices partially offset these gains.
The Chemical segment is operated by Occidental's subsidiary, Occidental Chemical Corporation (OxyChem), which manufactures and markets basic chemicals and vinyl products. Key drivers of performance in this segment include product pricing, demand, and input costs such as ethylene. In the second quarter of 2024, the chemical segment saw higher earnings compared to the prior quarter, due to improved caustic soda and PVC pricing as well as stronger product demand, partially offset by elevated ethylene costs.
The Midstream and Marketing segment is responsible for purchasing, marketing, gathering, processing, transporting, and storing oil, condensate, NGLs, natural gas, CO2, and power. It also includes Occidental's low-carbon ventures businesses, which focus on carbon capture, utilization and storage projects, as well as investments in other low-carbon technologies. In the second quarter of 2024, midstream and marketing segment earnings improved compared to the first quarter, driven by higher gas marketing income due to better transportation spreads from the Permian to the Gulf Coast.
In the oil and gas segment, Occidental has established a reputation for its technical expertise and operational efficiency. The company's prowess in unconventional resource development, enhanced oil recovery techniques, and offshore operations has enabled it to consistently deliver strong production and reserve replacement metrics. As of the latest financial reporting period, Occidental's total proved reserves stood at 3.1 billion barrels of oil equivalent, with a reserve-to-production ratio of over 10 years.
Occidental's chemical subsidiary, OxyChem, is a leading manufacturer of basic chemicals and vinyls, serving a diverse customer base across various industries. This segment has historically provided a stable and reliable source of cash flow, complementing the volatility inherent in the upstream oil and gas business.
The company's midstream and marketing operations further enhance its integrated approach. Occidental's extensive network of pipelines, storage facilities, and marketing capabilities allow it to optimize the value chain, ensuring efficient transportation and distribution of its energy products.
Financials
Financially, Occidental has demonstrated resilience in the face of industry challenges. For the most recent fiscal year, the company reported total revenue of $28.26 billion and net income of $4.70 billion. Its operating cash flow for the same period stood at $12.31 billion, while free cash flow reached $6.06 billion.
In the most recent quarter, Occidental reported revenue of $6.82 billion, representing a 1.8% increase compared to the same quarter last year. Net income for the quarter was $1.17 billion, showing a significant 36.3% increase year-over-year. Operating cash flow for the quarter stood at $2.39 billion, while free cash flow was $623 million. However, it's worth noting that both OCF and FCF decreased year-over-year by 18.4% and 38.1% respectively.
Geographically, Occidental operates primarily in the United States and internationally in the Middle East and North Africa. In the most recent quarter, 86% of revenue was generated in the United States, with the remaining 14% coming from international markets.
These robust financial metrics underscore Occidental's ability to generate sustainable cash flows and maintain a healthy balance sheet, even in the face of industry volatility.
Liquidity
Occidental's strong financial performance has contributed to its solid liquidity position. The company's cash flow generation capabilities, combined with its disciplined approach to capital allocation, have allowed it to maintain adequate liquidity to fund its operations and strategic initiatives.
As of the most recent quarter, Occidental reported cash and cash equivalents of $1.84 billion. The company has a $4.15 billion revolving credit facility that matures in June 2028, with no amounts drawn as of the most recent quarter. This provides Occidental with significant financial flexibility to manage its operations and pursue growth opportunities.
The company's debt-to-equity ratio stands at 0.61, indicating a manageable level of leverage. Occidental's current ratio of 1.04 and quick ratio of 0.75 suggest that the company has sufficient short-term assets to cover its near-term liabilities, although the quick ratio indicates some reliance on inventory for liquidity.
Environmental Initiatives
One of the key strategic priorities for Occidental has been its commitment to environmental stewardship and the transition towards a lower-carbon future. The company's Oxy Low Carbon Ventures (OLCV) business unit is at the forefront of this initiative, focusing on developing and deploying innovative technologies such as direct air capture, carbon capture and sequestration, and other emissions-reduction solutions.
Occidental's efforts in the low-carbon space have garnered widespread recognition, including a recent landmark agreement with Microsoft for the sale of 500,000 metric tons of carbon dioxide removal credits from the company's flagship STRATOS direct air capture facility. This partnership highlights Occidental's position as a leader in the emerging carbon management industry.
Recent Performance and Future Outlook
Despite the challenges posed by the COVID-19 pandemic and the volatility in global energy markets, Occidental has demonstrated its resilience and adaptability. The company has proactively implemented cost-cutting measures, optimized its portfolio through strategic divestitures, and maintained a disciplined approach to capital allocation – all while continuing to invest in its core operations and low-carbon initiatives.
In the second quarter of 2024, Occidental exceeded the midpoint of their total company production guidance, generating $1.3 billion in free cash flow before working capital. The company's onshore new wells across all basins are exceeding production expectations, with approximately 10% improvement in unconventional well costs compared to the first half of the previous year. Occidental's per BOE lease operating expenses decreased over $0.60 a barrel, a 6% improvement relative to the average of the prior three quarters.
Looking ahead, Occidental has provided updated guidance for the upcoming periods. Excluding the CrownRock acquisition, the company's total company and Permian full year production guidance is expected to remain flat. However, including the CrownRock acquisition, the midpoint of Occidental's total company production guidance has increased from 1.25 million to approximately 1.32 million BOE per day. Notably, excluding CrownRock, the midpoint of Occidental's Q3 2024 production guidance would represent a new record for the highest quarterly production in over four years.
The company has revised OxyChem's full year guidance down to a range of $1 billion to $1.1 billion due to challenging economic conditions in China and the continued deferral of interest rate reductions. However, Occidental has raised their full year midstream and marketing guidance by $220 million, reflecting the strong performance of this segment.
In terms of capital expenditure, Occidental has increased their full year total company net capital range to $6.8 billion to $7 billion to maintain CrownRock's 5-rig program. This adjustment demonstrates the company's commitment to strategic growth and operational efficiency.
The global oil and gas exploration and production industry is expected to grow at a compound annual growth rate (CAGR) of approximately 4-6% over the next 5 years, driven by increasing energy demand, particularly in emerging markets. Occidental's diversified business model, strong balance sheet, and commitment to innovation and sustainability position it well to capitalize on these industry trends.
As Occidental Petroleum continues to navigate the dynamic industry dynamics, its proven track record, operational excellence, and strategic vision position it as a formidable player in the global energy landscape. The company's ability to adapt to changing market conditions, coupled with its focus on both traditional energy production and low-carbon initiatives, makes it a compelling investment opportunity for those seeking exposure to the evolving energy sector.