Key Points
Occidental reported an earnings beat last night.
The company paid down a huge portion of its debt in the first quarter.
Still, news of a potential end to the war and reopening of the Strait of Hormuz sent oil prices tumbling today, overshadowing the strong earnings beat.
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Shares of Occidental Petroleum (NYSE: OXY) fell hard on Wednesday, down 6.7% as of 1:30 p.m. EDT.
The U.S.-centric oil and gas major reported earnings last night that, at first glance, were solid. However, the more consequential factor in today's price action was a report that Iran is seriously considering a U.S. proposal to end the war and reopen the Strait of Hormuz.
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Occidental beats earnings, but geopolitics overwhelms
In the first quarter, Occidental delivered "mixed" results, with revenue falling 8.4% to $5.23 billion, missing expectations. On the other hand, the company's adjusted (non-GAAP) profits of $1.06 far exceeded expectations, beating the $0.59 consensus by a wide margin.
The discrepancy could stem from several factors. First, Occidental sold off its OxyChem business on Jan. 2, which accounts for the decline in revenue. Second, revenue may have missed a bit due to Occidental's partial oil-price hedges, which were apparently put on before the Iran war broke out. Early in the quarter, Occidental hedged 100 million barrels per day, setting a floor of $55 per barrel and a ceiling of $75.89. Occidental produced 1,426 million barrels of oil equivalent per day during the quarter, exceeding the high end of guidance, so the hedges accounted for only about 7% of production. Still, those poorly timed hedges may have limited the upside in revenue.
On the other hand, Occidental also appears to have done very well operationally, with production exceeding the high end of guidance despite capital spending being lower than last year. The greater efficiency likely carried over into the outsize profit beat, along with a massive debt paydown. Since the start of the year, Occidental has paid down $7.1 billion, thanks to the OxyChem sale and higher free cash flow. That materially lowered interest expense relative to last year.
But the profit beat was overshadowed by oil prices falling more than 12% at one point today, before recovering to a 7.2% decline as of this writing. Prices fell after Axios first reported Iran was considering the latest one-page peace proposal to end the war and reopen the Strait of Hormuz. That sent oil prices and the entire sector down in lockstep, showing that Occidental's results weren't the driving factor.
Image source: Getty Images.
The oil rally may not be over
It should be noted that nothing has been agreed to on the Iranian side, and prior reports of a potential deal have fallen through. Therefore, the high oil prices we see today could very well persist, or even rise further if hostilities restart.
In the meantime, Occidental is in a good position, as the current elevated oil price gives it a chance to pay down a significant portion of its debt. That should de-risk the company going forward, and potentially pave the way for more acquisitions, share repurchases, or dividend increases.
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Billy Duberstein and/or his clients have positions in Occidental Petroleum. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
