Occidental Petroleum Has Made the Wrong Move

Occidental Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="OXY" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] recently completed the acquisition of Anadarko, and going by the stock price reaction, it looks like investors are not very enchanted with this move. Occidental stock has been sliding since the end of April, when oil prices started tumbling. And with the oil price slide continuing, Occidental’s acquisition of Anadarko seems like a bad move as it will now be riddled with a white elephant in a weak oil pricing scenario.

Let’s take a look at Occidental’s latest results and see why the company’s move to acquire Anadarko doesn’t seem to be the right one in the current circumstances.

Occidental Is Already Struggling

Occidental Petroleum’s second-quarter financial performance was not great in light of the oil price weakness. The company’s core income for the second quarter of 2019 fell to $729 million from $848 million in the prior-year period. This was despite the fact that Occidental’s second-quarter worldwide oil production of 741,000 barrels per day shot up nicely from the year-ago period’s level of 639,000 barrels per day.

However, Occidental’s worldwide energy price realizations fell on a year-over-year basis. The company witnessed global oil price average of $58.91 per barrel, down from $63.12 per barrel in the year-ago period. So it wasn’t surprising to see the company’s bottom line take a dip despite the increase in production.

But there was another problem that Occidental had to contend with during the quarter. The company’s bottom line took a hit of $107 million on account of one-time transaction costs related to the Anadarko takeover.

So as costs mount and oil prices keep tumbling, don’t be surprised to see further weakness in Occidental’s bottom line. This is because the oil pricing environment is not very conducive right now and it is expected that prices will keep falling.

Weaker Oil Prices Are on the Way

It would make sense for investors to stay away from Occidental Petroleum as it will not be able to turn its fortunes around any time soon despite a mega acquisition.

Oil’s promising start to the year ended a few months ago and there seems to be no turnaround in the cards given the macroeconomic turmoil. Analysts at Fitch have given their oil price forecast a substantial downgrade of late. As reported by Rigzone:

“The analysts now expect prices to average $67 per barrel this year, $65 per barrel in 2020 and $61 per barrel in 2021. This compares to FSMR’s previous forecasts of $70 per barrel in 2019, $76 per barrel in 2020 and $80 per barrel in 2021.

“The revision reflects a deteriorating economic outlook and a sharper than expected slowdown in oil demand,” FSMR analysts stated in the report, which was sent to Rigzone on Tuesday.”

The forecasts clearly indicate that more oil price weakness could be on the way in the coming two years. If that indeed happens, then Occidental’s acquisition of Anadarko would not make any sense. A weak oil pricing scenario will force the company to reduce costs and control output, and defeating the purpose of acquiring Anadarko.

As such, it would make sense for investors to stay away from Occidental Petroleum as it will not be able to turn its fortunes around any time soon despite a mega acquisition.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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