Clock ticking for Oxy
Producer in race against time to generate funds needed to pay down mounting debts
US independent Occidental Petroleum looked well-placed to tackle its hefty debt load at the start of the year, with strong capital efficiency, $6bn in completed asset sales and significant cost-cutting in place. The negative investor sentiment surrounding the $25.5bn acquisition of its peer Anadarko Petroleum was finally starting to fade.
But the oil price collapse and the demand destruction triggered by Covid-19 has torn up everyone’s best-laid plans and revived fresh concerns that Oxy could fail to meet its huge looming debt maturities. The company faces $11bn in payments for the period 2021-23.
$11bn – Debt maturities
Capex and other non-essential outlay have been hacked back to shore up the balance sheet and protect liquidity. Capital spending has been revised down three times since the economic downturn deepened, resulting in a 53pc drop compared with early-January projections. The dividend has been stripped back by 85pc and $1.2bn achieved in savings.
Oil sales revenues, previously expected to lessen the debt burden, will suffer this year. With capex down by 61pc year-on-year, production is forecast to start to decline from the fourth quarter and continue to do so into 2021. “Capex cuts will definitely impact production over the next few years,” says Leo Mariani, managing director at US investment bank Keybanc Capital Markets.
Oxy is projecting Q2 production of 1.34-1.4mn bl/d, down by just 3pc quarter-on-quarter, but it has thrown out full-year guidance following its third capex revision. Bank Credit Suisse estimates the company will suffer a 15pc decline in output year-on-year in Q4 and another 13pc fall in 2021.
Permian Basin assets account for around 50pc of Oxy’s remaining capex budget for the year, supporting a two-rig programme and 35-45 new wells. By comparison, the original plan would have supported 15 new rigs and the start-up of 270-295 wells.
Asset sales would be one solution to the company’s long-term debt problem. Oxy has shed around $6bn since the Anadarko deal but aims to complete sales worth $15bn.
Last year, the company agreed to sell $8.8bn in African assets in Mozambique, Algeria and Ghana to French firm Total. In September, the Mozambique sale was finalised, netting Oxy $3.9bn. But the deal has since suffered complications, with the Algerian sale blocked by the country’s government—due to residual bitterness over France’s time as the country’s colonial power—and Total subsequently walking away from the Ghana part of the deal too.
“They will eventually need a rebound in WTI prices to north of $50/bl to handle the leverage situation” Mariani, Keybanc Capital Markets
Oxy says it has a further $2bn in near-term divestitures planned, despite the loss of some of the African funds. The US indie could also target sales of rights it holds to non-oil mineral assets to generate extra cash. Non-oil mineral rights have proven to be a durable source of cash generation for other US oil firms, with Appalachian producer Range Resources a prime example. Last year, the company sold more than $600mn in royalties to pay down its total debt by 17pc.
But the question surrounding most producers hoping to reduce debt is where to find buyers, especially given the challenging economic conditions. During its first-quarter earnings call, Oxy admitted it would be difficult to achieve its divestment target this year.
The company will likely have to sell at a discount or wait until asset values recover to raise the funds to pay down its debt. But the latter strategy could be risky if the downturn drags on, as it would eat up valuable time.
Besides asset sales, there are a few other options for Oxy to meet its looming payments. Free cash flow could be diverted towards debt reduction, and the firm has yet to tap a $5bn credit revolver. Management has also spoken of plans to refinance by accessing debt capital markets.
Mariani believes Oxy’s strong liquidity will ultimately delay any threat of bankruptcy until at least 2022. “They have enough liquidity to handle the $4.4bn in bonds maturing next year,” he says. “But they will eventually need a rebound in WTI prices to north of $50/bl to handle the leverage situation.”
However, it could take until 2025 for oil prices to recover to upwards of $50/bl and there could be permanent changes to global demand, warns Brazilian state oil firm Petrobras. Should oil prices fail to rebound long-term, Oxy faces significant financial hardship and may ultimately never recoup its Anadarko investment.