The oil patch is once again under pressure in the United States, where WTI crude has fallen back below $60 per barrel amid fears of global over-supply.
For companies that explore for and produce crude oil and natural gas, falling prices are a severe threat to cash flow. Investors need to tread carefully, by focusing on the strongest oil majors.
Occidental Petroleum (OXY) has top-tier assets, with a huge presence in the oil-rich Permian Basin. In addition, the Houston-based company has a strong balance sheet. With low operating costs, the company can support its growth plans and sustain its dividend, even with these low oil prices.
Occidental has a high dividend yield of around 4.4% and a long history of annual dividend increases. It has raised its dividend each year for 16 years in a row, which makes it a Dividend Achiever.
Occidental's high yield and dividend growth make it a very attractive stock for dividend investors.
Premier Assets Fuel Strong Cash Flow
After a strong rally off the 2016 lows, the price of oil is on the downtrend once again. OPEC recently cut its forecast for 2019 oil demand for the fourth consecutive month. OPEC now forecasts global demand for crude rising by 1.3 million barrels per day next year, down significantly from its July forecast of 1.5 million barrels per day. At the same time, oil-producing nations across the world continue to increase production.
Lower expected demand growth, combined with accelerating production, is bearish for oil prices and explains why the price of oil recently sunk to $56 per barrel in the United States.
Declining commodity prices create a headwind for Occidental, a global energy company primarily engaged in oil and gas production. Occidental also has midstream and chemicals operating segments. The good news is that Occidental's exposure to high- quality oil fields allows the company to navigate industry downturns better than many of its competitors.
For example, Occidental's third-quarter earnings report blew through expectations. The company reported earnings per share of $1.77, compared with analyst estimates of $1.54 per share. It was Occidental's highest quarterly earnings in the last four years, even though oil prices were roughly flat from the previous quarter. Adjusted pre-tax earnings increased by 24% for the quarter.
The main reason for Occidental's earnings growth is because of a major ramp-up in production. Daily production in the Permian Basin, one of the highest-quality oil fields in the United States, increased 60% from the 2017 third quarter. This led to 7% total production growth for Occidental in the most recent quarter.
Occidental is the leading producer in the Permian Basin, and has increased its exposure to the Permian in recent years. The company expects to be producing nearly 260,000 barrels per day from the Permian Basin by the end of the year, which gives the company an operational advantage. Permian oil is very high-quality, with low rates of decline and low drilling costs for producers.
Occidental's strategy to focus on its Permian acreage has lowered the company's cash flow break-even point to $50 per barrel. Even at $50 oil, Occidental would generate enough cash flow to maintain its dividend and still increase its production by as much as 8% each year.
Pumping Out Cash to Shareholders
Occidental is a very shareholder-friendly company, as it returns cash to shareholders each year through dividends and share buybacks.
The current dividend payout of $3.12 per share, which results in a 4.4% yield. This is a highly attractive dividend yield, especially in a low interest rate environment. The average dividend yield in the S&P 500 Index is currently below 2%, so Occidental's generous dividend policy is highly appealing for income investors.
Occidental has a uniquely long dividend history, particularly since the company operates in a highly cyclical and often-volatile industry. It has increased its dividend every year for 16 consecutive years, including a 1.3% hike for 2018. Over the course of Occidental's 16-year streak, the company has raised its dividend by more than 500% overall. Occidental has paid uninterrupted quarterly dividends since 1975.
Producing oil and gas is a "boom-and-bust" industry. Financial results depend largely on commodity prices, which can fluctuate wildly from year to year. This makes Occidental's history of consistent dividends and steady growth all the more impressive.
In addition to dividends, the company also returns cash through share buybacks. Occidental repurchased $887 million of its own stock in the most recent quarter. Continued repurchases will boost future earnings growth.
Occidental's cash returns to shareholders have not come at a cost to the balance sheet. The company generates enough cash flow to sustain its cash returns, and it is also using strategic asset sales to raise cash. For example, Occidental sold certain non- core midstream assets last quarter for $2.6 billion. As a result, the company now has $3 billion in cash on the balance sheet, which it can use to pay down debt, buy back stock, or raise the dividend.
Investing in the oil industry can be fraught with risk. As investors saw over the past few years, a prolonged period of falling commodity prices can wreak havoc across the energy sector. Many companies cut or eliminated their dividend payments to shareholders as a result of falling oil and gas prices from the 2014 peak of $100 per barrel. Some companies even went bankrupt, as a result of overleveraged balance sheets and mounting losses.
Despite operating in a volatile industry, Occidental Petroleum has a long history of steady dividend payments and dividend growth. With a top-tier lineup of oil assets, a strong balance sheet, and a 4.4% dividend yield, Occidental is an attractive stock for income investors.
(This article was originally sent Nov. 14 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Nick McCullum, Peter Tchir, Chris Versace and others.)