Occidental (OXY) Benefits From Improving Permian Presence

We have recently issued an updated research report on Occidental Petroleum Corporation (NYSE:OXY) . The company is well poised to benefit from its strong presence in the Permian Basin region and acquisition of Anadarko Petroleum (NYSE:APC).

Driving Factors

Occidental Petroleum's continued focus on the Permian Resources has been beneficial for it. The company’s core development area in the Permian region is recording strong results. Production from this region is expected to improve further from the current levels, thanks to the new wells added in this region.

During the second half of 2019, the company completed the acquisition of Anadarko Petroleum outbidding Chevron Corporation (NYSE:CVX) , which further expanded its operation in the resource-rich Permian Basin. The combined company will generate $3.5 billion of free cash flow through $2.0 billion of annual cost synergies and $1.5 billion of annual capital reductions. The company has already achieved 60% of its $2 billion synergy target since closing the acquisition, including $799 million of overhead synergies, $83 million of operating synergies and $323 million of capital synergies. Occidental expects to produce 1,360-1,390 thousand barrels of oil equivalents in 2020, courtesy of contribution from acquired Anadarko assets and its legacy assets.

Occidental Petroleum executed a strategic initiative to divest lower-margin, lower-return oil and gas production, with the plan to replace it with higher-margin and higher-return production assets. The company aims to divest $15 billion non-core assets and will continue to lower its debt level in 2020 by utilizing free cash flow and the sale proceeds to strengthen its balance sheet.

Offsetting Factors

Occidental’s debt balance has increased substantially to fund the acquisition of Anadarko. The company is working to lower its debt level. Even then, the cost of financing huge debts has increased its capital servicing costs, impacting margins.

Fluctuations in demand and prices of commodities may affect Occidental Petroleum’s results of operations. The company's practice is to remain exposed to market prices of commodities. If the price of commodities continues to remain soft, it will fail to realize full benefits from the improvement in production volumes from domestic and international assets.

Coronavirus Impacting Commodity Prices

The outbreak of Coronavirus across the globe is adversely impacting oil prices as there is a rapid decline in demand for oil due to significant decrease in business activities, travel restrictions and factory shutdown. The ongoing decline in prices will primarily hurt the small producers of oil and gas as it will be difficult for them to sustain in the weak price environment. Having said that, we have seen share prices of big operators like Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (LON:RDSa) plc RDS.A substantially decreasing over the past one month as coronavirus cases are being reported in many countries outside China.

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Occidental Petroleum Corporation (OXY): Free Stock Analysis Report

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