Oxy: Dividend Takes Priority Over Permian Growth

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Occidental Petroleum is one of the largest producers in the US Permian Basin. But CEO Vicki Hollub expects only “modest” output growth in the coming years as the US E&P plans to reinstate a more competitive dividend instead.

“We don’t see in 2022 and beyond that we need to grow significantly,” Hollub told the Energy Intelligence Forum 2021 on Thursday. “I think we will modestly grow over time — but it will be to ensure our break-evens stay below $40 [per barrel of oil equivalent] and our dividend can grow."

The outlook is notable given how far Oxy’s oil and natural gas production in the Permian has pulled back since early 2020 as the pandemic-led downturn crippled its ability to reinvest.

Oxy’s volumes stood at 629,000 barrels of oil equivalent per day in the fourth quarter of 2019 following the completion of its acquisition of Anadarko Petroleum.

But its output slid by 147,000 boe/d over the next five quarters — excluding temporary winter storm impacts — as Oxy cut its Permian operations to just a single rig in the second half of 2020, ushering in a more than 23% decline in underlying production.

Oxy was hardly alone in hitting the brakes as pandemic lockdowns crushed oil demand — and prices — for much of 2020. But the company's production declines have been among the most acute, as the monstrous debt stemming from its Anadarko acquisition raised genuine concerns about its ability to stay solvent through the crisis and forced it to prioritize debt repayment.

Oxy’s Permian volumes are now once again on the upswing, which should allow company-wide production to “level out” heading into 2022.

But it’s the dividend, not incremental production, that will get the first call on capital once Oxy’s debt is reduced to sustainable levels.

Dividend Doldrums

Oxy once prided itself on offering one of the highest dividend yields for an independent producer and consistently growing its payments to shareholders.

In 2006, it was even able to support a two-for-one stock split, which translated into a 22% increase in payments to existing investors.

But that track record came to a screeching halt last year. Oxy first announced plans to cut its dividend by 86% in March — only to have to cut it to a single penny two months later.

It is that squeeze on common shareholders that Hollub wants to reverse instead of funding higher Permian output.

Additional debt reduction and restoring Oxy’s investment-grade credit rating are key to making that happen. Encouragingly, ratings agency Fitch revised Oxy’s credit outlook to “positive” this week, opening the door to a potential ratings upgrade in the coming months.

Disciplined Shale

Oxy’s balance sheet reset still has a ways to go, but it is hardly alone in its intention to stay fiscally disciplined in shale.

Hollub told the virtual Forum that public investors are essentially defining capital discipline as “producing just enough to meet demand” and remain adamant that US E&Ps keep returns front of mind, even as oil prices toy with $80.

Given this framework, Hollub does see US oil output potentially breaking above 12 million barrels per day in the future, should global markets need additional supplies. But the Oxy boss isn’t convinced the country’s pre-Covid-19 peak of 13 million b/d is in the cards.

“I think certainly — I hope — we’ve learned our lesson around exceeding demand with too much supply,” Hollub said.

She added a reminder to fellow producers that the industry generally earned lower returns the last time oil was $100 per barrel than it does today due to a lack of discipline.

Equity and Debt Markets, Corporate Strategy , Independent E&Ps, Shale, ENERGY INTELLIGENCE FORUM 2021
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