(Illustration by Rafael Henrique)
After the coronavirus or Covid-19 pandemic triggered yet another downtown in a notoriously cyclical oil and gas industry, much of market commentators’ glare turned to the so-called small scale U.S. shale chancers, many of whom are over-leveraged, have overpaid for fringe acreages and have barely made money.
That’s deservedly so because it appears that since 2010 frackers have burned through $300 billion, having brought millions of barrels of U.S. crude oil to market and yet a third of them can barely break-even at $35 per barrel, according to the number crunchers at Deloitte.
Whilst not sidestepping dire data and instances of fuzzy operational economics coming out of the oil patch in general, the excesses at one of the industry’s beleaguered big guns in particular – Occident Petroleum (NYSE:OXY) – offer a symbol of all that shouldn’t have plagued the U.S. industry, Covid-19 pandemic or not.
In a short space of two quarters in 2020, OXY has lost nearly 60% of its value with its stock plummeting to as low as $9 at one point, having started the year at $42.58. The company is saddled with $40 billion of debt, could write-down its assets by as much as $9 billion, has been downgraded to junk status by rating agency Moody’s
The reason for it all – an ill-fated, ill-judged and ill-conceived fist fight with Chevron
OXY’s egregious boss ultimately forked up a whopping $55 billion for the company; including a $38 billion offer plus an assumption of Anadarko’s debts. The sum – over 17% more than what Chevron was prepared to pay for Anadarko – was one that OXY could ill afford on it’s own leaving the company beholden to billionaire investor Warren Buffet’s holding company Berkshire Hathaway.
So for supporting the acquisition, Berkshire received $10 billion in OXY’s preferred stock with a hefty 8% dividend yield. There was also the little matter paying Chevron $1 billion in break-off fees. As the market tide turned, OXY buckled under the weight of its own hubris.
After Buffet was paid in stock for $200 million in due dividends as other shareholders lost 91% of theirs, the burden to OXY’s balance sheet stands at over $35 billion of debt and $10 billion of preferred stock. With this metaphorical financial noose around its neck, Covid-19 disastrous downturn has meant oil and gas monetization is less than half of what OXY imagined at the time of the inflated Anadarko deal.
What’s more, the company has had to reduce its 2020 U.S. output by 85,000 barrels of equivalent per day (boepd) in response to lower crude demand. Some of the lost production may never come back, and uptick in activity over the near-term is likely to be muted.
Other avenues to dig itself out of a whole are limited too, including asset divestment plans that aren’t going swimmingly either. To quote Andrew Brooks, Vice President at Moody’s: “Asset sales initially projected to raise cash for debt reduction have been insufficient to meaningfully address sizable upcoming debt maturities, leaving OXY with a significantly weakened credit profile whose prospects for near-term improvement remain uncertain.”
No camouflaging there then. Hollub’s answer to the problem – $3 billion in junk bonds! Reports suggest new high-yield debt issuance is in the pipeline via five-, seven- and 10-year unsecured notes to fund its repurchase offer and refinance existing debt. Doubt that’s a panacea for excesses in the boom times.
A way out – via higher oil prices in the region of $50 per barrel – appear remote over 2020, and its management’s fuzzy hedging strategy has left OXY exposed to oil prices lurking below that threshold.
Meanwhile, OXY’s bungling also attracted the ire of activist investor Carl Icahn who raised his stake to 10% in the company, and repeatedly called for Hollub and OXY’s senior management to be sacked. Ultimately, peace was made by allowing Icahn to add three of his people to the company’s board of directors.
Underscoring the company’s plight is its value destruction on an unprecedented scale. When Hollub’s aggressive intent for Anadarko became apparent in April 11-12, 2019, OXY’s stock was averaging just north of $65. At the time of writing (June 26, 2020 at 14:06 EDT), it traded at $17.65 down 73% having flirted with a 52-week low of $9 at one point; a level of decline hardly any of its Covid-19 hit peers have had to bear.
Big question here is – if the U.S. oil patch excesses of small and medium players are a subject of ridicule and anger often constituting examples of oil industry excesses, why should OXY be regarded differently? Like many of them, it managed the same sort of bungling amplified several times over in dollar terms with little prospect of a near-term reversal in fortune.
In some ways, OXY’s fault is even more glaring. It was a viable low-cost operator holding attractive Permian Basin acreage and selected international plays. From that respectable spot, its slipped to being basket case for bankruptcy with a junk status; a much repeated tale for players of a smaller scale around a Covid-19 ravaged U.S. oil and gas landscape.
