Occidental Axes Dividend — But Warren Buffett’s $800M A Year Is Safe

Occidental Petroleum announced today that it would slash its dividend on common shares from 79 cents per quarter to 11 cents, for an annual savings of $2.4 billion. Oxy will also reduce capital spending this year by about $1.7 billion. Under its old payout schedule Oxy’s implied dividend yield was 23% at today’s price. Instead the stock will now yield 3.1%.

The move will free up about $4 billion in cash per year for the beleaguered oil bellwether, which has sunk in value ever since acquiring Anadarko Petroleum for $57 billion last year.

The opportunity cost: growth. Bill Featherstone, analyst with Credit Suisse, said in a note this afternoon that under the new capex budget Oxy will be unable even to maintain its production levels, roughly 1.3 million barrels of oil (and gas equivalents) per day.

CEO Vicki Hollub didn’t have much of a choice. “Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” said Hollub in a statement.

In two months Oxy shares have lost 2/3rds of their value. And although today Oxy is up 10%, it’s only to $13.80 — a level not seen since 2002 (and a far cry from all-time highs above $100 in 2011).

“These actions lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment,” said Hollub.

More importantly, saving cash will help pay off its debt. In 2021, $6.4 billion of Oxy’s $38 billion in debt comes due. That’s followed by $4.7 billion due in 2022. Raising that cash would have been tough even under the $55 oil prices seen in the fourth quarter, when the newly combined Oxy-Anadarko generated $1.2 billion in “adjusted” income (excluding some extraordinary expenses). Now that West Texas Intermediate crude sells for $33/bbl, that income will be greatly diminished.

What’s more, according to a note today from CreditSights, Oxy may not be able to generate as much cash from divestitures as hoped: “The war on shale, and related crude price selloff, also calls into question the $10-$15bn asset sale plan with OXY only closing $6.1bn to date.”

Good thing for Hollub, she has Warren Buffett as something of a backstop. Last April, when Hollub was desperate to secure financing for her takeover of Anadarko, she flew to Omaha. Buffett agreed to invest $10 billion of Berkshire Hathaway capital into Oxy, for which he got a chunk of Oxy preferred stock paying a dividend of $800 million per year — about double what all of Oxy’s common shareholders will get under the new dividend plan. Naturally, Uncle Warren’s dividend is unaffected by today’s announcement.

Billionaire investor Carl Icahn, a longtime Oxy investor and persistent critic of Hollub’s Anadarko deal, said at the time that Buffett took Hollub to the cleaners and said he would have provided the financing at the cheaper price. In an open letter to Oxy shareholders on February 12, Icahn reasserted his position that Hollub should be replaced as CEO for having “destroyed over $30 billion in stockholder value” with the Anadarko deal. Since Icahn’s letter Oxy shares not only fell by 66%, to levels not seen for nearly 20 years, but now they’ve been stripped of dividends. As Icahn said a month ago: “If ever there was a time for a CEO and board to be held accountable, it is now.” The legendary raider shaved his stake in Oxy to 22 million shares as of December, worth about $300 million now.

Forbes Christopher Helman