Oxy under pressure
Crumbling revenues heighten concerns over looming debt maturities and the firm’s ability to avoid becoming another high-profile casualty
The first half of the year has proven disastrous for many firms operating across the US shale patch. Punishing economic conditions have proven foolhardy previous strategies of prioritising production growth, often financed by ever-increasing debt, with domestic bankruptcies rapidly gathering pace.
For US independent Occidental Petroleum, the volatile market conditions have drawn eyes to the company’s mammoth debt maturities amid fears for its long-term survival. Oxy faces a wall of over $40bn in debt payments starting next year—mainly due to last year’s controversial merger with fellow indie Anadarko. The firm posted a $10.6bn net loss across the first six months of 2020, further adding to its debt pile.
Oxy has tried to dramatically cut costs to offset the financial pain. Capex was hacked back by over 50pc and $1.5bn achieved in overheads savings. But heavy production declines are poised to impact through the second half of the year and into 2021. The firm estimates that Q3 output will fall by 13pc quarter-on-quarter and that there will be a further 5pc drop into Q4. Operations in the Permian basin have been reduced to just one rig.
Offloading non-core assets is the immediate priority to generate extra cash and help pay down the company’s most pressing debt. The firm has targeted over $2bn in divestment for 2020, with another $2-3bn planned for the first half of 2021. “So far, we have divested close to $6bn in assets,” says Occidental CEO Vicki Hollub. “We are confident about the additional asset sales and expect to more than achieve the lower end of our target of $10bn.”
“We are confident about the additional asset sales and expect to more than achieve the lower end of our target of $10bn” Hollub, Occidental
The Union Pacific Land Grant, which covers almost 7mn acres in land and mineral rights across the states of Colorado, Wyoming and Utah, is one of the biggest ticket items in the pipeline, valued at almost $2bn. Occidental says it has a received an unnamed bid for the assets, but the state of Wyoming quickly denied it was the interested party.
The firm’s Ghanaian assets, which came with the Anadarko deal, also remain on the table, but host government approval of any would-be buyer poses a risk to progress. Earlier in the year, Total was a potential buyer for the assets together with a big chunk of Algerian acreage, but the deal broke down—first after the Algerian government blocked Total ownership there, then Total also walked away from a Ghana-only transaction. Oxy has since reclassified the Algerian assets a core part of the business and pledged to hold onto its stake in the country.
Despite lofty divestment ambitions for 2020, the reality is that Oxy has made little progress in terms of concrete transactions. The firm completed just $181mn across the first six months, with $67mn from the sale of the Greater Natural Buttes gas assets in the Rockies a rare highlight in Q2.
Although it is keen to sell, Oxy is also wary of offloading assets at a discount, despite the looming debt maturities. “One of the key things to manage our divestitures is doing them on a timeline that allows us to get the greatest value for those and not being sort of in that fire sale position,” says Occidental CFO Robert Lee Peterson.
In July, the firm retired $2bn in debt maturities due for 2021 by issuing three new bonds. But the producer still has around $4.4bn to pay back in 2021 and another $4.7bn in 2022, hence the importance of pushing through divestments.
One lifeline that the company does have, though, is its untapped $5bn credit facility. This resource provides the company some breathing room to wait out an oil price rally into 2022, and crucially avoid needing to rush through asset sales at huge discounts.
Oxy is also targeting a breakeven price of less than $40/bl in the event that depressed prices are sustained. But without a long-term substantial recovery of at least over $50/bl, the company’s situation will remain precarious.