Occidental Petroleum (OXY): Risk of bankruptcy outweighs significant upside

Summary: Occidental Petroleum (NYSE: OXY) stock price was hit on two fronts in March: COVID and oil oversupply. As a result, the company dropped down to sub-$10 per share from their >$40 per share price before March. Since the initial drop, the price of a barrel of oil traded negative as storage for oil began to disappear. However, as nations and states are quickly opening again from lockdown, demand for oil seems to be increasing quickly. While recent trends bode positively for oil companies, OXY is in a precarious situation where it has significant outstanding debt that it needs to pay in the near term. As a result, we believe OXY is at risk of bankruptcy and assign it as a significantly risky investment. The risk profile for OXY is significant enough that we will not be initiating a position in the near future.

Here are the details:

  1. OXY is trading at 30% of its pre-COVID price, demonstrating significant upside potential. OXY took a huge hit due to reduced demand and oversupply of oil in the markets. With lockdowns due to COVID, oil demand dropped dramatically. Furthermore, Russia and Saudi Arabia had been increasing oil production to put pressure on American companies by dropping down oil prices. The combination of factors put OXY in a difficult situation.

  2. Oil demand in China has almost returned to pre-COVID levels after opening up from lockdown. As COVID lockdowns have begun to end, oil demand has quickly risen. In China, oil demand has almost risen to pre-COVID levels. Consumption has rebounded to about 13 million barrels per day, compared to 13.7 million barrels in December. Similar increases in oil demand in other countries can be expected as COVID lockdowns end.

  3. Crude Oil WTI has made a comeback, trading at $35 per barrel compared to negative values a month back. Oil futures are beginning to trade higher due to higher expected demand from nations as lockdowns end. Furthermore, production cuts by OPEC+ have helped reduce the oversupply of oil in the markets.

  4. A huge risk consideration for OXY is its $6.4B debt maturities in 2021 and $4.7B debt maturities in 2022. OXY has about $2B cash and $5B borrowing capacity to help meet their obligations in 2021 and 2022. However, with lowered oil prices, reduced demand, and oversupply in the near term, there is a significant possibility that OXY cannot meet the debt obligations without needing to take on more debt. If OXY cannot meet these obligations, they may need to consider bankruptcy.

  5. Furthermore, OXY cut its dividends from near $0.80 per share to $0.01 per share, making the stock less attractive. A huge incentive to buy OXY was for its significant dividends. However, OXY recently cut its dividends in order to help reduce costs and conserve cash to pay for their debt obligations. These dividends will not likely be re-instituted for years, if at all.

OXY is not currently a BUY in our eyes, but other oil companies who may be in better financial positions may be good investments. Big oil companies like ExxonMobil (XOM) may be safer investments. With that said, if OXY does figure out a way to address their impending debt obligations, there is significant upside to be reaped.