Few snips from a report dated May 18, 2022:
This week, we hosted investor meetings with OXY’s management team in New York & Boston. OXY’s strong FCF is driving rapid balance sheet improvement, supporting a commencement of share repurchases in the near-term. Longer-term, the company’s differentiated low-carbon strategy is a source of upside.
-Near-term debt goal nearly reached, buybacks on the horizon. Year-to-date, OXY has addressed $3.6 B of its $5 B near-term debt reduction goal, bringing gross debt to ~$24.9 B. On Monday, the company announced a cash tender offer for an incremental $2 B. Once this is complete, OXY will be in a position to begin executing its $3 B share repurchase program, which could all be done in 2022. With excess cash beyond the planned buybacks, OXY plans to further reduce gross debt to $18-19B, a level which should support regaining investment grade (IG) credit ratings. Once this balance sheet goal is reached, the company will shift from proactively reducing debt to addressing maturities as they come due, and excess cash will be allocated to additional shareholder returns (i.e. more share buybacks and growing the base dividend). Longer-term, management plans to grow the base dividend to a more competitive yield and set the payout at a level that can be fully covered at $40/bbl.
-Preferred equity could be redeemed with FCF as shareholder returns rise, but refinancing with new debt is unlikely. Notably, OXY’s preferred stock (owned by Berkshire Hathaway) was topical in the investor meetings. Under the company’s 2019 agreement with Berkshire, if OXY’s trailing 12-month distribution exceeds $4/sh, OXY will be required to repurchase Berkshire’s preferred shares at an amount equal to 50% of the excess distribution (e.g. 50% of the amount above $4/sh) plus a 10% early redemption fee. Management indicated the $4/sh distribution level is not a ceiling and it could begin exceeding this threshold and redeeming the preferred stock after achieving its $18-19B gross debt goal. Any redemption of the preferred would likely be done with organic FCF rather than issuing new debt as a source of funds.
-Low-carbon strategy is a potential source of long-term value creation. OXY has decades of experience handling and sequestering CO2 as part of its enhanced oil recovery (EOR) business, making commercial carbon capture synergistic with its existing operations. As an early mover in the US Energy sector in establishing a low carbon growth strategy, the company is developing multiple potentially transformative solutions to de-carbonize its own operations and provide carbon management services to other industries through its Low Carbon Ventures (LCV) business unit formed in 2018. While we do not yet reflect value for LCV in our price target, we believe it could create meaningful incremental value over time with successful execution (see Capturing the Low Carbon Opportunity). Management expects the low carbon business to generate cash flow comparable to the chemicals business within 10-15 years.