Wednesday, 16 March 2016 00:00

Occidental Petroleum: Liquidity Scenario Analysis

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Analysis Overview – Even with $35 per barrel oil assumption for 2016, Occidental Petroleum (NYSE: OXY) is positioned to pay dividends, reduce debt and maintain a healthy year end 2016 liquidity profile. The largest player in the Permian Basin is attractive for long-term and is likely to maintain S&P credit rating of “A” over the next 12-24 months.

Why Liquidity Analysis – In the recent past, I have written articles on liquidity analysis for Pioneer Natural Resources and Marathon Oil in the exploration sector. In challenging times, healthy balance sheet is of paramount importance and companies with robust liquidity buffer are likely to navigate the crisis with relative ease. Further, these companies will be well positioned to significant expand investments when industry conditions improve.

Occidental Petroleum Liquidity Analysis – The charts below provide liquidity analysis for 2016 considering two oil price scenarios ($35 and $40 per barrel). Occidental Petroleum expects $1 change in oil price to impact the company’s liquidity position by $100 million. In my view, $35 per barrel oil through 2016 is a good bear case scenario and $40 per oil is a good base case scenario.

 

Occidental Petroleum Liquidity At $35 Per Barrel Oil

Occidental Petroleum Liquidity Analysis At $35 Per Barrel Oil

 

Occidental Petroleum Liquidity At $40 Per Barrel Oil

Occidental Petroleum Liquidity Analysis At $40 Per Barrel Oil

 

The capital expenditure for FY16 is considered at higher range of the company’s guidance of $2.8 to $3.0 billion and the dividends are in line with the company’s guidance.

Even with oil at $35 per barrel, Occidental Petroleum is positioned to close 2016 with liquidity buffer of $2.5 billion. Considering that 2017 operating cash flow remains muted at $3.0 billion, Occidental Petroleum is fully funded for the next 24 months.

It is important to mention that sustained slowdown in the global economy can be a potential negative trigger. However, if oil producing countries agree on production freeze (very likely), I expect oil to trade in the range of $40 to $50 per barrel (slowdown, but no recession scenario).

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