Occidental Uses Record Free Cash Flow to Focus On Debt
Management will continue to dedicate cash to deleveraging until gross debt reaches the high teens from $26 billion today.
We have nudged our fair value estimate to $44 from $45 after incorporating Occidental's OXY first-quarter financial and operating results. The difference was primarily driven by a slight decline in the near-term outlook for crude prices since our April 11 update. There is no change to our midcycle forecasts of $60/mcf for Brent and $3.30/mcf for U.S. natural gas. Like other E&Ps, the firm was a strong beneficiary of elevated commodity prices during the first quarter. In Occidental's case, that includes caustic soda and PVC for its chemicals business, as well as oil and gas. The firm generated record free cash flows, enabling it to make further progress in improving the balance sheet. It retired approximately $3.3 billion of debt in the first quarter and is on track to achieve its near-term $5 billion debt reduction target (most likely in the second quarter). When that box is checked, the firm will then prioritize its $3 billion share repurchase program, but management still has its eye on returning to investment grade and will continue to dedicate cash to deleveraging until gross debt reaches the high teens from $26 billion today. After that, the firm anticipates merely retiring debt as it matures, leaving it with more flexibility to return cash to shareholders.