Why Rising Oil Prices Won’t Help OXY Stock

Traders love Occidental Petroleum (NYSE:OXY) stock. The stock is trying to find a floor at over $20 a barrel and has more than doubled since bottoming out in March.

I’m not buying the rally. The conventional wisdom is that oil is a rising tide that can lift all boats in the oil patch. And frankly that’s the only reason I can see for OXY stock to be up over 100% since mid-March. I’m sure it’s made for some interesting, and profitable, trades.

But making a long-term bet on OXY stock is to simply not understand the situation that Occidental Petroleum faces.

The Company Has $40 Billion of Debt to Service

And servicing that debt is going to be the company’s priority for the near future. It has to be. If you don’t believe me, then maybe you’ll believe the words that came directly from OXY’s chief executive officer (CEO) Vicki Hollub. On the company’s latest earnings call, the CEO was pressed about what the company’s short-term priority would be. Here was her response:

“Yes. Our highest priority will be to lower the debt. So rather than generate or have a growth target, our target is more to take free cash flow to lower debt. And we'll structure our capital programs around ensuring that we can do that. We believe that with the assets that we have, we can get to a scenario where our sustainability price is such that we can generate free cash flow in a lower price environment. That free cash flow would then be used to lower debt. So debt will be the highest priority in the near term. And when I say near term, I'm talking over the next couple of years.”

Don’t Be Fooled by “Less Bad” Earnings

With oil demand at historically low levels due to hundreds of millions of citizens sheltering in place, investors braced for the worst regarding company’s earnings reports.

So it was impressive that Occidental managed to pull out a beat on revenue. But when you look at earnings per share (EPS), the story is a little different. Yes, they posted a “less bad” number than expected. Occidental posted an adjusted EPS of negative 52 cents as opposed to the negative 63 cents that was forecast. But that was the company’s worst number in almost four years.

And then when we look back at the company’s revenue number, other questions arise. First, where are they finding buyers? And where is that oil going to be stored? Hollub admitted on the earnings call that OXY can’t just drill its way out of debt.

You also can’t overlook the company’s dividend, or lack thereof. For all of their volatility, one of the compelling reasons to hold onto oil stocks was because of their ability to pay a dividend, and usually a generous one at that. On June 1, Occidental’s Board of Directors issued a quarterly dividend of one cent per share. The previous dividend was 79 cents per share.

In times like this, a company cutting its dividend is not surprising. But OXY didn’t just cut their dividend; they slashed it to the bone. And in doing so, they broke a streak of 17 consecutive years of dividend growth.

Oil Stocks May Not Be a Good Defensive Play

Oil stocks have frequently been seen as good defensive stocks. In the first place, they traditionally pay dividends. We’ve already shown that there are other better options than Occidental for value investors. But oil stocks are also considered defensive because demand was always seen to be relatively stable.

In a typical recession, millions of Americans are still driving to work. Business travel is more limited, but still taking place. And families are still taking vacations. None of those conditions apply to a global pandemic.

In the first place, companies like Twitter (NYSE:TWTR) are allowing workers to work from home indefinitely. And a recent Gartner survey of chief financial officers (CFOs) revealed that approximately 74% expected at least 5% of their employees to continue working from home after the pandemic ends.

But a deeper dive shows even more interesting numbers. In fact, 17% expect 20% of their workers will remain remote. And that’s not necessarily by their choice. The survey noted that CFOs are under pressure to cut costs and keeping workers at home is low-hanging fruit.

Another piece of juicy fruit is business travel. It’s no surprise that companies like Zoom Communications NYSE: ZM are surging. But this is not just a momentary trend. You have to expect that many companies are going to narrowly define the “essential” nature of many trips.

And that brings us to leisure travel. Although I believe that there is a lot of pent-up demand and consumers will take to the skies, where will they go? To be blunt, a lot of the popular destinations, Disney (NYSE:DIS) for example are going to be … challenging, particularly for families with young children, a prime demographic.

Live sports appear to be coming back, but without fans, so that’s a no-go. The reality is that many consumers may choose to travel to more local, familiar locations where they can control the guidelines.

And all of this points to the fact that, until there is a vaccine or significant treatment for Covid-19 and the underlying novel coronavirus, there will be pressure on oil prices.

What Is the Long-Term Outlook for OXY Stock?

I suppose if the company manages to work through their debt issues efficiently, there may be some growth, but I’m still skeptical. The oil industry is contracting. Chevron (NYSE:CVX) announced it was cutting up to 15% of its workforce at the end of May. British Petroleum (NYSE:BP) and Halliburton (NYSE:HAL) also announced layoffs. Other companies such as Whiting Petroleum (NYSE:WLL) have already declared bankruptcy.