Occidental Petroleum is to cut its dividend by almost 90 per cent, in one of the most drastic reactions yet seen in the energy sector to the collapse in oil prices and equity valuations this week.
It is the first time the company has cut its payout since 1991, a dramatic move aimed at saving it from incurring further trouble and preparing it for a prolonged price slump.
“Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” said Vicki Hollub, Occidental’s chief executive.
“These actions lower our cash flow break-even level to the low $30s WTI (West Texas Intermediate), excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment.”
Dividend payments will fall in June to $0.11 per share from $0.79, the company said. Talk of the move circulated ahead of the announcement, prompting a temporary suspension of trading in the company’s shares on the New York Stock Exchange.
Occidental also announced it would cut capital spending aggressively in 2020 to between $3.5bn and $3.7bn from a planned $5.2bn to $5.4bn and would implement additional operating and corporate cost reductions.
Occidental’s stock and bond prices have capitulated in recent trading sessions. The company’s stock price fell 50 per cent on Monday, inching back on Tuesday before trading was halted. Shares resumed trading at $13.29, up 6 per cent after the dividend cut announcement.
Warren Buffett, who was given preferred shares last year as part of a $10bn deal to help Occidental finance the takeover of Anadarko, will not be affected by the dividend cut, said people familiar with the matter. As part of the financing arrangement, Mr Buffett was guaranteed that his shares would receive an 8 per cent dividend, and a warrant to buy up to 80m shares of common stock, about 11 per cent of its equity.
Occidental bought Anadarko last year in a deal worth $55bn after a bitter takeover battle with much larger rival Chevron. But investors have punished the company for an acquisition that sharply raised its leverage in a bet on rising oil prices.
Occidental’s market capitalisation has fallen from about $42bn on the day of its takeover of Anadarko last August to roughly $12bn now.
The dividend cut will sting investors who were reassured by Occidental’s leadership that the payouts remained sacrosanct.
Ms Hollub told analysts in a recent earnings call that her company’s dividend was “one of the defining characteristics of our company”, adding that returning cash to shareholders through its sector-leading dividend was “an integral part of our philosophy”.
But the crash in oil prices following the collapse of the Russia-Saudi oil-output pact last week has sent tremors throughout the US oil patch, worsening the crisis for a sector already wilting under investor pressure and the coronavirus-led slump in global oil demand.
Occidental’s dividend decision followed announcements from leading US shale independents Diamondback Energy and Parsley Energy that they would be paring back their drilling commitments and rig counts in the Permian, the US’s most prolific shale field.
Chevron recently unveiled plans to sharply increase its US shale oil production, but said in a statement that it was now “reviewing alternatives to reduce capital expenditures” and was targeting $2bn “in improvement”.
Analysts expect other companies swiftly to cut their spending plans in the face of the plunging oil price. Artem Abramov, head of shale research at Rystad Energy, said at current prices capex in the US shale sector would fall 70% to about $30bn next year.
Occidental did not respond to requests for comment.
The company’s bonds plummeted on Monday, another reflection of investors’ waning confidence in the company. A $750m bond maturing in 2049 fell from 88 cents on the dollar to just 64 cents, before staging a muted recovery on Tuesday, rising to 72 cents on the dollar.
“It was stunning,” said Christopher Yanney, co-founder of CKC Capital in New York. “We have never seen anything like that ever . . . I’d think they would stay investment grade but you just cannot say in this environment any more.”
Charts by Richard Henderson in New York
Get alerts on Occidental Petroleum Corp when a new story is published