Source: Apache Corporation.
Occidental Petroleum recently turned insurprisingly strong third-quarter results, despite the fact that oil prices were down more than 20% during the quarter. Further, the company achieved this feat even though it is in the middle of a major transition period. That theme of transition was really clear on the company's third-quarter conference call where its management team detailed a number of the transitions being made.
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1. We have one goal in 2015Vicki Hollub, who will be transitioning into the CEO role in the future, took the lead on the third-quarter call. One of her leading remarks was:
Transitioning back to cash flow breakeven has been the primary goal of most oil and gas companies this year. Occidental has a clear line of sight to this goal, which it believes is achievable at a $60 oil price thanks in part to a combination of cost savings and cash flow growth from its Permian Resources business as well as the recent start-up of its Al Hosn project.
Each oil company has a different path to cash flow breakeven. Rival Apache , for example, is already there with the company noting last quarter that its primary focus for 2016 will be to spend within its cash flows. One reason for this is the fact that Apache's dividend outlay is smaller than Occidental, which when combined with the fact Apache generates a lot of cash flow from its positions in the North Sea and Egypt, enables the company to achieve break even at a lower oil price.
2. We expect oil prices to improve but are prepared if they don'tThat said, while Occidental's current plan calls for breakeven at a $60 oil price, it is prepared for whatever the market throws its way. Hollub pointed out:
Occidental made it clear that it will push for an even lower breakeven price than $60 per barrel and that those cuts might be difficult. In addition to pressuring suppliers and reducing staffing levels, the company could also pull back the reins of capital spending even further to keep production roughly flat. It would appear that all options are on the table to get back to breakeven.
3. Our future will be fueled by the Permian BasinOne thing that has become abundantly clear over the past year is the fact that the Permian Basin is the foundation of the company. Hollub pointed out:
Because the returns are so good, even at current prices, Occidental is building its company around its position in the Permian. It has ample running room to drive growth with more than a decade's worth of economic drilling locations at a sub-$60 oil price.
Source: Occidental Petroleum Corporation.
4. We plan to reduce our exposure outside the U.S.Because the company is focused on growing within the Permian, it is transitioning away from other areas. Hollub said:
Occidental is transitioning away from investing in riskier war-torn locations such as Iraq, Libya, and Yemen and instead will focus its international investments on its core assets in less risky locations. This is a trend we've seen with a lot of U.S. oil companies over the past few years. Apache is another company that has reduced its exposure to riskier locations after it sold a third of its stake in its Egyptian operations in 2013.
5. We're in a strong financial positionWhile Occidental Petroleum isn't yet back to cash flow breakeven, CFO Chris Stavros wanted to make one thing clear on the call. He said:
In other words, while not breakeven via operational cash flow, Occidental isn't stressing its balance sheet by adding debt. Instead, it has enough cash on hand from recent asset sales to pay for a year's worth of capital expenses. That alone puts it in a strong financial position while it continues its transition to run at a lower oil price.
Investor takeawayOccidental Petroleum is a company in transition in more ways than one. Not only is it in the process of transitioning leadership, but its operations are really being transformed to focused on a few core regions. It's a transition that the company believes will lower its breakeven point enabling it to become financially sustainable even if oil prices remain weak.
The article 5 Things Occidental Petroleum Corporation Wants You to Know originally appeared on Fool.com.
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