Occidental's Dividend Is Safe Even at $45 Oil, Analyst Calculates

Shares of the oil company have fallen 31% this year. The stock now yields 7.4%.

Shares of the oil company have fallen 31% this year. The stock now yields 7.4%.

Occidental Petroleum has been a problem child of the oil industry since its decision to buy Anadarko Petroleum earlier this year. At a time when energy investors want big dividends, it loaded up on debt and made a deal with Warren Buffett that will have it paying Berkshire Hathaway interest for years.

Shares dropped 2.1% on Tuesday morning to $42.56. They are down 31% in 2019.

But one analyst wrote on Tuesday that Occidental is in strong shape to continue paying its hefty dividend even if oil prices fall. The stock now yields 7.4%, and the company has raised its dividend for 17 years in a row.

Oil was struggling on Tuesday, with West Texas Intermediate futures slumping 3.1% to $53.39. But even if the price went to $45, Occidental would still be able to cover the dividend with free cash flow, wrote Raymond James analyst Pavel Molchanov. “Even with the oil market’s macro-related weakness this summer, at no point did oil prices approach a level where we ought to be worried about an Occidental dividend cut,” he wrote.

If oil moved in the other direction, Occidental would be sitting pretty. At $65, the company would likely produce enough free cash flow to cover the cost of its dividend twice, Molchanov estimated.

Occidental’s interest expenses have spiked with the Anadarko deal, approximately quintupling from $400 million in 2018 to an estimated $2 billion in 2020, Molchanov notes. Buffett’s preferred dividend will cost the company $800 million a year, and the common stock dividend costs $2.8 billion. Assuming it can cut capital spending to “maintenance levels”, the company’s cash flow should be able to cover all of those costs, if oil prices don’t fall below $45 for too long, Molchanov wrote.

The wild cards in this equation—which may be keeping investors away—are the company’s ability to sell assets, pay off debt and cut costs through “synergies” after the deal.

Those factors make Occidental a promising but still risky investment. It is clearly not for everyone. Many investors appear willing to accept the lower dividends at companies like Chevron (CVX), which yields 4%, in return for a larger and more stable balance sheet.

Write to Avi Salzman at

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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