Investidental Petroleum Corp. (NYSE: OXY) is one company that invested the guru during 2019, according to filing 13-F. Indeed, it is one of Icahn's largest holdings according to GuruFocus data.
In 2019 investors would have a year of disappointment if they followed the guru to Occidental early last year. The share price declined significantly and the wide market was not successful due to disappointing financial performance and the risk of the acquisition of Petroleum Anadarko, completed in April last year. After the acquisition was announced, the stock fell, as shown in the performance graph below.
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "Carl Icahn (Trades, Portfolio) Anadarko's criticism was also criticized, stating that the transaction was "one of the worst markets" he had ever seen. Nor did this help the performance of the shares. The legendary investor is a reviewer of the Occidental management entry to get $ 10 billion from Warren Buffett (Trades, Portfolio) Berkshire Hathaway as well. Under the terms of the deal, Buffett would receive 100,000 shares of accumulated perpetual stock giving 8% per annum, with a value of $ 100,000 per share. In a letter to shareholders in July, Icahn made the comments below about this contract: "data-reactid =" 54 "> criticized Carl Icahn (Trades, Portfolio) the Anadarko deal as well, citing the transaction was" head " This has not helped the performance of the shares either. The legendary investor is a critic of the agreement that Occidental management entered to receive $ 10 billion funding from Warren Buffett (Trades, Portfolio). ) as Berkshire Hathaway as According to the terms of the deal, Buffett would get 100,000 shares of perpetual stock accumulated as a result of 8% per year, with a value of $ 100,000 per share. In a letter to shareholders in July, Icahn made the comments below about this:
"Buffett took her (Vicki Hollub, Occidental CEO, Petroleum) with the cleaners. Buffett wanted to accept candy from a baby and in particular thanked him publicly for enough to negotiate to deal with Buffett of this amount despite her limited experience in M&A and the Board enough to rub it, then one could say in Warren's defense that he was almost as a confident duty on Berkshire Hathaway to accept it. "
Wall Street analysts also questioned the transfer by the company, while Occidental was downgraded by famous institutions including JPMorgan after the transaction.
Source: Yahoo Finance
However, despite all these dark clouds, there are also a number of silver liners, which believe that it would help Occidental deliver attractive returns to investors in 2020 and beyond. It is not surprising that analysts are again – many are now saying that the company is the worst and that the future is bright. This analysis will look at the expectations of an event and whether investors could benefit from investing its shares.
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "Company profile"data-reactid =" 77 ">Company profile
Occidental participates in the acquisition, inspection and development of oil and gas properties, mainly in the United States but also in some international locations. The company operates in three business segments and provides various services under each of them:
Oil and Gas
Mid-Stream and Marketing
This is the main business operation. At the end of the third quarter, Occidental had a production capacity of 1.11 million barrels of oil.
This segment consists of the production and marketing of chemical products. OxyChem has 24 manufacturing facilities and operates them.
This segment supports both the company's oil and chemical operations and third parties.
Source: Filing company
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "The deleveraging process"data reactid =" 87 ">The deleveraging process
This is a huge amount of debt on a balance sheet that encourages investors away from a company. This was evident from the devaluation that prompted last year as Occidental funded the acquisition of Anadarko with a debt issue of $ 21.8 billion. At the end of the third quarter of 2019, the company had a long-term debt of $ 48.3 billion.
According to the third quarter filing, Occidental had a $ 9 billion capital investment plan for 2019, but a maximum of $ 5.5 billion was cut in 2020 to release cash to meet debt repayment obligations and to support shareholder distributions.
Source: Presentation of investors
Even with this huge reduction in expenditure, the company has barely paused after allocating capital to other sources. If Occidental generates cash flows from operations (at least $ 10 billion) in 2020 and allocates $ 5.5 billion to investments, the company would only have left $ 100 million after $ 800 million and $ 3.6. billion distributed to selected and common shareholders, respectively. However, management is aware of this situation and has introduced a plan to sell part of its non-core assets to raise funds. The company sold two such assets in 2019 and repaid $ 4.9 billion to its long-term debt, leaving no maturity for 2020. This is a positive sign for investors because the company can focus now on enforcing integration and pursuing other growth opportunities without allocating time and resources to manage debt levels.
The statements below were made by CEO Vicki Hollub in November 2019:
"Since the acquisition of Anadarko, we continue to make rapid progress towards achieving our post acquisition acquisition and deleveraging targets. On completion of the contract divestment centers from May 2019, we essentially reached the Our target divesting target was $ 10 billion to $ 15 billion net of taxes.We have abolished our 2020 debt maturities. I am very proud of the progress our staff have made over the past few months. top of the target. "
It is a sign of the success of the deleveraging process in early 2020. It is likely that the balance sheet will be strengthened this year with management meeting its commitments on higher profitability as a result of attractive oil prices, continued global economic growth and the current economic climate. contribution from Anadarko.
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "Attractive dividend"data reactid =" 113 ">Attractive dividend
At a market price of about $ 47.24 on Wednesday, a 6.7% dividend is very attractive by Occidental shares. The thing is not so attractive that the company is distributing much more than what it earns. For example, Occidental paid dividends per share of $ 3.13 over the past twelve months, but the earnings per share were much lower at $ 1.37 in this period. However, the sales program will contribute to the company's cash flow, which is a good sign for investors. This dismantling of business operations will provide sufficient time for the successful integration of Anadarko and the expected revenue and cost synergies. Taking these factors into account, it is safe to say that the company would not be obliged to cut the dividend in the short term.
Morgan Stanley shares Devin McDermott: t
"We believe that the dividend, which offers the best 7% yield in class, is safe to ensure that most cases will have long-term growth. While efforts to reduce leverage have made significant progress in the business. refusal, Occidental is still trading at least 2 times the free cash flow result from the United States integrated and full-capital colleagues. "
McDermott expects the dividend yield to decrease by around 5% by 20% before 2022, suggesting that the shares would receive momentum and respect in the next few years.
Occidental Petroleum has been a great success in each of the last 17 years, a significant performance for an oil and integrated company as there has been a significant volatility in energy prices over the last decade.
This highlights the shareholder-friendly management policies of the company. In the third quarter earnings call, Cedric Burgher, Occidental's chief financial officer, confirmed this ongoing commitment:
"We have established a capital budget for 2020 which we expect to maximize free cash flow and that we can grow production in a capital efficient manner and maintain the safety of our dividend. T We returned $ 600 million of money to protecting our dividend is a top priority and we look forward to bringing significant capital back to our shareholders. "
This reassurance should help the expected improvements in Occidental financial performance with revenue investors awaiting the lines to proceed with planned investments.
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "Analysts are noting the improvements"data-reactid =" 143 ">Analysts are noting the improvements
Wall Street is beginning to understand the ongoing changes at Occidental Petroleum. Many analysts who followed the company have maintained their ratings in the last few months, and two have upgraded the stock as late as last week. There was no downgrade since August last year.
Source: Yahoo Finance
The average target price is $ 51.20, indicating that around 9% of the market price is around $ 47.10 on 15 January.
Source: Tip Classes
Based on discounted cash flow calculation, the company has an intrinsic estimate of the value of $ 61.00 per share, which is closer to the high end of analysts estimates.
2020 will be an important year for the company as the expectations of improved performance are high.
"canvas-us can-text Mb (0) – mt (0) – sm Mt (0.8em) – sm" type "text" content "Conclusion"data reactid =" 182 ">Conclusion
In my opinion, Icahn has been the right choice with Occidental. The activist pushed the company investor to reassess its capital allocation plan, and management responded by reducing the planned investments and adopting the second look at the company's balance sheet health. These are good signals for investors. The deleveraging program demonstrated early success indicators, which could act as a catalyst to drive higher share price in 2020. There are opportunities for income and growth investors with Occidental Petroleum.
Disclosure: I do not own any stocks mentioned in this section.
Read more here: t
- The Best Bank is Warren Buffett
- Apple could Increase its Dividend in 2020
- Income Investors should Look for Opportunities Outside the United States in 2020
Isn't Premium Ball of GuruFocus it? Sign up for a free 7 day trial here.
"canvas-us can-text-mb (1.0m) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " GuruFocus.
"data-reactid =" 192 "> This article was originally featured on GuruFocus.