Despite decreased profits, the oil firm continues to generate substantial cash, which is being distributed back to stockholders. A hike in oil prices post-Russia’s Ukraine invasion significantly boosted Occidental Petroleum’s (NYSE: OXY) earnings last year. Nonetheless, crude oil prices have seen a noticeable dip lately due to macroeconomic apprehensions. This decline led to a 48% drop in Occidental’s Q1 earnings, falling short of the projections of market analysts.
However, the oil powerhouse still had some positive takeaways. Occidental Petroleum generated substantial cash distributed back to stockholders, including Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), which holds approximately a quarter of the shares.
A closer look at Occidental Petroleum’s Q1 Outcomes
Occidental Petroleum posted an adjusted net income of $1.1 billion, or $1.09 per share, during Q1. This was a significant 48% drop compared to last year’s period and was below the consensus estimate of $1.24 per share from market analysts.
The major reason for this was the dip in oil and gas prices. Occidental sold oil at an average of $74.22 per barrel during the quarter, marking a 19% reduction from last year. In the meantime, the firm’s U.S. natural gas yield was sold for $3.01 per million cubic feet, 32% lower than the previous quarter.
On a brighter note, the production average was 1.22 million barrels of oil equivalent per day (BOE/D) during the quarter. This increased from the previous year’s 1.08 million BOE/D, surpassing the company’s guidance midpoint by 40,000 BOE/D. The company witnessed robust production results across the board. The noteworthy point is that the company hit its highest quarterly production in the Gulf of Mexico in over ten years, partially driven by record production from the Caesar-Tonga field following a successful expansion the previous year.
Transforming crude into cash and distributing it back to stockholders
The solid operational performance of Occidental Petroleum allowed the company to generate ample cash. It produced a $3.2 billion operating cash flow during the quarter, 24% lower than last year. The company allocated around $1.5 billion to capital projects, doubling the investment made in the previous year. This significant investment boost is helping to increase its oil and gas production while expanding its carbon capture and storage platform.
Despite lower cash flow and increased capital expenditure, Occidental Petroleum generated considerable excess cash. The free cash flow amounted to $1.7 billion during the quarter.
A majority of this money was given back to stockholders. Occidental Petroleum repurchased $752 million of its stock, constituting a quarter of its $3 billion share buyback program. The company also distributed its quarterly dividend, which had increased by 38.5% earlier this year to $0.18 per share.
These payouts to regular shareholders led to a compulsory redemption of a fraction of Berkshire Hathaway’s preferred stock investment in the company. Buffett’s company made a $10 billion preferred investment in 2019 to assist Occidental Petroleum in acquiring Anadarko Petroleum. The oil company had to initiate the redemption of this investment when it returned over $4 per share in cash to ordinary shareholders via dividends and repurchases over a 12-month period, which it achieved during the first quarter. Occidental redeemed $647 million of the preferred stock investment and paid Buffett’s company a $65 million premium (10% of the total), aligning with excess cash distributions to ordinary shareholders.
This preferred stock redemption will result in savings for Occidental over the long term. It pays an 8% rate to Buffett’s company on those shares ($800 million annually before the recent redemption). By redeeming this investment, Occidental will have more financial wiggle room to return additional cash to all shareholders.
Steady performance despite reduced oil prices
Although Occidental Petroleum’s earnings were negatively affected in Q1, its operation still performed efficiently. Production surpassed expectations and managed to generate a large amount of surplus cash. This allowed the firm to repurchase Buffett’s preferred stock investment, offering more financial flexibility. Therefore, despite the challenges, it was a solid quarter as the company demonstrated the effective implementation of its strategic plan.
Despite the headwinds of declining oil prices, Occidental Petroleum demonstrated resilience and robust operational performance in the first quarter. The company’s strategy to turn crude into cash and maintain shareholder returns, coupled with the initial steps towards redeeming Berkshire Hathaway’s preferred stock investment, signals financial solid flexibility for the future. The ability to perform well in these challenging times reflects the potency of Occidental’s strategic approach, promising better prospects for stakeholders as the firm navigates the shifting energy landscape.
