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Production Growth Drives Dividend Increase in a Difficult Climate
Oil and gas producers have had a very difficult year, due to the steep declines in commodity prices. The hardest-hit group of oil stocks are the exploration and production firms, often called E&Ps. The E&P majors like Occidental Petroleum (OXY ) have suffered more than the integrated majors like Chevron (CVX ) or Royal Dutch Shell (RDS-B ), because integrated firms have balanced business models with large downstream and midstream segments that help offset mounting losses on the upstream exploration and production side of the business.
Occidental does have a midstream and chemicals business, but these are very small in comparison to its massive upstream business. That being said, Occidental has outperformed its E&P industry peers. Its share price has increased 6% over the past 12 months, and it also offers a hefty 4% dividend yield. This is a far better performance than many other exploration and production companies, some of which have filed for bankruptcy over the past year.
Occidental continues to generate enough cash flow to pay its dividend and even raise its dividend, as it did recently. The company raised its dividend by 1%. Its annualized forward payout rises to $3.04 per share, up from $3 per share previously. The next quarterly payout of $0.76 per share will be payable Oct. 14.
Occidental’s outperformance can be attributed to its decision to continue increasing production, in addition to its high-quality assets. Unlike many competing oil and gas companies, Occidental has continued to increase production, even at these low prices. This decision has negatively impacted margins, but it has nonetheless provided the company with valuable cash flow. Occidental increased total oil and gas production by 14% in 2015, to more than 650,000 barrels of oil equivalents per day. It has significantly increased production over the past five years.
A side benefit of the decision to ramp up production is that Occidental will also see a significant increase in cash flow if and when oil prices rise. Other companies that have cut production will miss out on the biggest recoveries once commodity prices rise again, since they will not have the capacity to take advantage.
Another operating advantage for Occidental is that it has a huge amount of reserves and a significant position in the premier oil-producing fields in the U.S., including the Permian Basin in which it is the largest operator and largest oil producer. Occidental has three decades of experience in the Permian Basin, one of the highest-quality oil fields in the country. It is also active in the Eagle Ford shale, another very strong field. These are the areas where it is increasing production; for example, last quarter, Occidental Petroleum raised its Permian production by 16% to 126,000 barrels of oil equivalents per day.
Since Feb., the price of oil has risen from a low of $27 per barrel in the U.S. to $43 per barrel. Additional gains could be in store if global oil-producing nations agree to freeze or cut production. One notable event that investors should monitor is the OPEC meeting taking place in Algeria on Sept. 26, at which it is expected the organization will consider measures to boost the price of oil, possibly including a freeze in output.
If OPEC does make a move to act on oil production, it is likely oil prices will rise, as OPEC is among the biggest oil-producing bodies in the world. Occidental Petroleum stands to benefit from this, because it relies on the price of the underlying commodity for profitability. E&P firms are engaged in discovering and drilling for oil, and need a high enough commodity price to cover the cost of production. Last quarter, Occidental averaged $45.59 per barrel of WTI crude last quarter, down 20% year-over-year.
Still the company generated $3.3 billion of net cash from operating activities last year, and utilized $2.2 billion to pay cash dividends to shareholders. The company has also maintained a strong balance sheet, as it ended last quarter with $3.8 billion of total cash.
Occidental has a long track record of growing cash flow and dividends, even though it operates in a highly cyclical industry. With the recent dividend raise, Occidental has delivered dividend increases in the past 14 years in a row. Over those 14 years, it raised its shareholder payout 15 times. From 2002, the company states it has raised its dividend by more than 500%. Occidental has paid uninterrupted quarterly dividends since 1975, a streak of more than 40 years.
This strong track record of payouts reflects Occidental’s shareholder-friendly management team and commitment to rewarding investors with cash returns through all phases of the oil and gas cycles. With a 4% dividend yield, which is double the average dividend yield in the S&P 500, Occidental is an attractive stock for dividend investors, with potential for growth as well.