Large 'debt maturity wall' a concern given oil price needed for breakeven free cash flow was worse than expected
Occidental Petroleum Corp.'s stock fell Wednesday after it got a rare bearish rating from J.P. Morgan analyst Phil Gresh, who cited concerns over the oil price needed to cover capital expenditures.
Gresh downgraded the oil and natural gas exploration and production company (OXY) to underweight, reversing his upgrade to neutral just four months ago. Only 14% of the companies covered by J.P. Morgan are rated underweight, while six of the 26 analysts surveyed by FactSet rate Occidental the equivalent of a sell rating.
The downgrade comes after Occidental reported late-Monday () that it swung to a wider-than-expected third-quarter loss as revenue fell more than forecast. That was the fourth time in the past five quarters that the company missed bottom-line expectations.
Gresh said that he remains "comfortable" with the "debt maturity wall concerns" that were a factor in his previous upgrade. However, 2021 guidance provided by Chief Executive Vicki Hollub that a "high-$30s" oil price was needed for "breakeven" free cash flow, to sustain capital expenditures was "worse than our model." He said that guidance would imply that a low-$40s West Texas Intermediate (WTI) price would be needed to also cover preferred dividends.
Occidental's stock dropped 2.8% in midday trading. Through Tuesday, when it closed at a 10-week high, the stock had soared 39.4% since closing at a 20-year low of $8.88 on Oct. 28. Meanwhile, crude oil futures were up 2.1% toward a 10-week high in midday trading Wednesday, and have rallied 12.9% since Oct. 28. See Futures Movers ().
The company also indicated that another large asset sale program to pay down debt should not be expected.
Occidental disclosed in its 10-Q filing with the Securities and Exchange Commission that it had $35.90 billion in long-term debt as of Sept. 30, which compares with Occidental's market capitalization of $11.20 billion. In comparison, Exxon Mobil Corp. (XOM) said it had $46.89 billion in long-term debt as of Sept. 30, but Exxon's market cap was $155.51 billion.
Moody's Investors Service rates Occidental credit at Ba2, which is two notches into speculative grade, or "junk" territory, to reflect the company's "very high debt levels," following the completion of the acquisition of Anadarko Petroleum Corp. last year.
J.P. Morgan's Gresh said Occidental's stock valuation looks "expensive," on a free-cash-flow/enterprise value basis, particularly given its high debt level.
He concluded that Occidental's stock is mostly "an oil beta story," meaning it's a bet on oil prices.
"[W]e think that there are other stocks with enough oil beta and less debt that provide similar exposure to a COVID-19 recovery trade in 2021," Gresh wrote in a note to clients.
He said the main risk to his bearish view on the stock would be higher oil prices, but he thinks prices would have to rise to more than $60 per barrel to matter.
Occidental's stock has plunged 70.8% year to date, while the SPDR Energy Select Sector exchange-traded fund (XLE) has tumbled 43.7% and the S&P 500 index has advanced 10.6%.
-Tomi Kilgore; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
November 11, 2020 12:04 ET (17:04 GMT)
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