Oil prices giveth and oil prices taketh away.

Occidental Petroleum reported an adjusted net loss of $136 million, or 15 cents per diluted share, for the first quarter on 10 May.

It is the sixth consecutive losing quarter for the US independent, which has struggled since acquiring Anadarko Petroleum in a $55 billion deal in mid-2019.

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Still, Occidental’s leadership is likely smiling today. Why? Because the price of West Texas Intermediate crude opened on 11 May at $65.23 per barrel, well above budgeted expectations. And free cash flow is precisely what Occidental needs, as it attempts to whittle down debt that exceeded $34 billion at the end of 2020.

When Occidental bought Anadarko, the expectation was the addition of Anadarko's assets in Mozambique and the Gulf of Mexico and Permian and Denver-Julesburg basins in the US would rapidly increase cash flow.

Revenue did go up for Occidental in 2019, increasing to $21.2 billion from $18.9 billion in 2018. But the company’s net debt exploded, from $7.2 billion to nearly $35.6 billion. Compounding Occidental’s issues was a drop in oil prices.

WTI closed at $65.96/b on 24 April, 2019, the day the merger was announced; it did not reach that level again until early March 2021.

After two years of low oil prices, conflicts with major shareholders and struggles to reduce debt, the travails of Occidental have fascinated many observers. But the question remains: is a company with such a debt load but owning excellent assets in trouble in today’s market?

“The obvious answer depends on oil prices,” KeyBanc analyst Leo Mariani said. “If prices stay in the mid-$60s, they can get out of the mess they’ve been in.”

Occidental has said its breakeven oil price is now less than $40 per barrel, meaning current prices would yield significant extra cash flow. That money, Mariani said, needs to be applied to debt.

“They can probably pay $5 billion a year in debt, to get that to $20 billion or less, but that’s another three years,” he said. “But that debt is going to hold down the equity until they pay it down.”

Morningstar analyst David Meats said Occidental has elevated leverage ratios, but is now generating more than $1 billion in excess cash quarterly. The biggest advantage working for the company is that it has very limited near-term maturities, which means more cash can be applied to the debt load.

“2024 is the first big maturity year with $4 billion coming due, but that’s still do-able just with operating cash,” he said.

Occidental may still be looking to sell some of their assets to speed up the debt reduction process. Pioneer Natural Resources chief executive Scott Sheffield recently said Occidental, a competitor in the Permian, has some of its assets in the play up for sale. Occidental did not respond to Upstream’s request for comment on the matter, but analysts believe Sheffield’s claim is likely true.

“They’ve said they’ve got multiple packages of assets they’re trying to sell, and it’s likely the largest producer in the Permian (Pioneer) would know,” Mariani said.

The reality appears to be that Occidental is not necessarily in dire straits due to its debt load, but, at the same time, is not as appealing a target for investors as other US independents.

Shares of Occidental stock, which were trading at better than $60 when the Anadarko deal was announced more than two years ago, were trading at $24.71 in early afternoon trading on the New York Stock Exchange on 11 May.

“They’re not in a mess, but are lacking the flexibility to focus on shareholder distributions like their peers are doing — especially Pioneer, Devon and EOG,” Meats said.

Mariani said Occidental would essentially be in a deep freeze until their debt was paid down.

“It’s going to take a while for this company to de-lever. Until they do that, they can’t grown production effectively; they can’t increase the dividend,” he said. “They’re just running in place.”