OXY Q3 2024 Earnings Preview: How Will the CrownRock Acquisition Reshape Performance? | Moomoo Research

OOXY.US expects to release its third quarter 2024 financial report after the market closes on November 12, 2024, Eastern Time. As a leading global energy company, OXY's performance in the oil and gas industry has been highly anticipated. In 2024, OXY further consolidated its position in the Permian Basin through a series of strategic measures, such as the $12 billion acquisition of CrownRock with debt, but bold moves also brought financial challenges, especially against the backdrop of current oil price fluctuations and high debt.

With the release of this financial report, the market may focus on the impact of the acquisition of CrownRock on OXY's performance. The acquisition not only significantly increased OXY's asset size, but also brought significant synergy effects, which are expected to improve the company's overall revenue level. However, the high debt and depreciation amortization expenses brought by the acquisition also put higher requirements on the company's financial situation.

According to Bloomberg's unanimous expectations, Occidental Petroleum is expected to:

– Revenue was $7.234 billion, up 1.06% YoY and 6.11% MoM;

– Adjusted Net Profit was $758 million, down 33.16% YoY and 23.67% MoM.

Currently, Occidental Petroleum's business covers three core sectors.

1. Oil & gas

Oil and gas is Occidental Petroleum's core business and the company's main source of revenue, accounting for about 80% . The company has abundant oil and gas resources in multiple regions around the world, especially in the Permian Basin in the US, the Gulf of Mexico, and the Middle East and North Africa.

Occidental Petroleum spent $12 billion in August to acquire CrownRock to expand its business in its largest oil field and strengthen its business layout in the Midland Basin. CrownRock has over 94,000 acres of high-quality assets and infrastructure. Occidental Petroleum's acquisition of its assets in the Midland Basin is a major strategic move that not only increases the company's asset size, but also brings significant synergy effects and helps improve overall profitability.

2. Chemistry: The Chemicals business unit (OxyChem) specializes in the production and sale of basic and specialty chemicals, with multiple production bases worldwide, and products are widely used in industrial, construction, agricultural and other fields.

3. Midstream and Marketing: The Midstream and Marketing business unit is responsible for the transportation, storage, processing and sale of oil and gas, which provides the company with stable cash flow and enhances its control and flexibility throughout the energy supply chain.

Figure: OXY's revenue by business department (unit: million US dollars)

Source: Bloomberg

In addition to pursuing growth in its lucrative oil and gas business, Occidental Petroleum is aggressively expanding its business areas, particularly in its carbon capture and chemical businesses . The company's $600 million STRATOS carbon capture plant will be operational by the end of this year, with plans to achieve $1 billion in non-oil revenue by 2026, further enhancing the diversity and resilience of its business.

OXY, which was already burdened with huge debt, caused a stir after announcing its plan to acquire CrownRock for $12 billion. Although this bold move is expected to promote the company's rapid growth, it also puts greater pressure on its already tight financial situation.

The acquisition of CrownRock is an important step in OXY's strategic layout. The company expects that with WTI crude oil prices remaining at $70/barrel, this transaction will contribute about $1 billion of free cash flow to the company in the first year. Not only is it expected to immediately improve the company's cash flow level, but it will also provide important financial support for future development. However, this transaction also increases the company's debt burden, making debt management the top priority at present. To cope with debt pressure, OXY has formulated an ambitious "deleveraging risk" plan, committing to repay at least $4.50 billion of debt within 12 months after the acquisition is completed, and plans to raise $4.50 billion to $6 billion through asset sales within 18 months.

In fact, OXY has achieved certain results in debt management: as of the end of the third quarter of 2024, the company expects to have achieved a debt reduction of about $3.80 billion , achieving 85% of its short-term goal. This is mainly due to multiple Asset Strips, including the Barilla Draw project and the sale of ordinary units by Western Midstream Partners, totaling about $1.50 billion. However, OXY's financial pressure is still huge: it is expected that by the end of the third quarter, the company still carries a total debt of $26.89 billion The high debt limits the company's financial flexibility and may affect its investment ability in other areas and its ability to respond to market fluctuations.

OXY's strategy of relying on Asset Stripping and operating cash flow to manage debt, while effective, is a double-edged sword. For example, the planned 15,000 barrels of oil equivalent per day Asset Stripping may affect the company's revenue base and long-term capacity.

Given that the oil and gas business accounts for as much as 80% of Occidental Petroleum's revenue, with oil revenue accounting for over 85% of the business's total revenue, the acquisition of CrownRock will further consolidate OXY's position in the Permian Basin and have an impact on the revenue and expenses of the oil business. Next, we will focus on analyzing the performance of the oil business in the third quarter of 2024.

1. From the perspective of production, Occidental Petroleum's production reached a four-year high in the second quarter of 2024, with a daily production of 1.3888 million barrels of oil equivalent. This strong operational performance exceeded the company's own production guidance, indicating that it has a strong operational framework and the ability to significantly manage and develop assets. In Q3, the agreement to acquire CrownRock is expected to continue to increase daily oil production by 170,000 barrels of oil equivalent According to Bloomberg's consensus expectations, it is expected that OXY's daily production in the third quarter of 2024 will increase by 13.65% year-on-year to 1.438 million barrels of oil equivalent per day, reaching a new high .

2. From the perspective of oil prices, the revenue growth of Occidental Petroleum is closely related to the fluctuation of US oil prices . The low oil price environment will bring huge profit resistance and stock price pressure to OXY and the entire industry, seriously damaging the profitability of Occidental Petroleum. In Q3 of 2024, the price of US WTI crude oil fluctuated in the range of $65-80 per barrel, showing a fluctuating downward trend. Correspondingly, OXY crude oil price is expected to fall from Q2's 79.89USD/BBL to 75.45USD/BBL, a decrease of 5.56% compared to the previous period.

Therefore, OXY's revenue in Q3 2024 is expected to increase slightly compared to Q2. Although the company has achieved significant growth in production, the decline in oil prices will partially offset the positive impact of this growth.

According to Bloomberg's consensus forecast, Occidental Petroleum's 24Q3 daily operating expenses will increase from $5.486 billion in Q2 to $6.09 billion, an increase of 11.01% quarter-on-quarter. The increase in expenses is mainly due to depreciation amortization, which will increase from $1.573 billion in Q2 to $2.03 billion, an increase of 29.05% quarter-on-quarter. The acquisition of CrownRock's assets in the Midland Basin will result in a significant increase in OXY depreciation amortization expenses.

From the perspective of unit operating costs, compared with other oil companies, OXY's production costs are lower , even if facing the risk of a sharp drop in oil prices, it will have better risk resistance:

1. 24Q2, Occidental Petroleum's lease operating expenses per barrel of oil equivalent were $13.84, a decrease of $0.36 from Q1, and are expected to continue to decrease to $9.87 in 24Q3. The ability to reduce lease operating costs indicates that the company's solid operating and cost control strategies may continue to bring direct cost savings and improve overall profit margins.

2. Occidental Petroleum's achievements in reducing exploration costs are also commendable: In 2023, Occidental Petroleum's exploration cost per barrel of oil equivalent was $0.99, and it is expected to decrease to $0.66 by 2024. Reflected in 24Q3, it is expected that the exploration cost per barrel of oil equivalent will decrease by 43.86% YoY and 13.91% MoM to $0.62. By adopting advanced exploration technology, optimizing exploration strategies, improving drilling efficiency, and strengthening project management, OXY is increasing production in a more cost-effective way.

In terms of cost control, OXY has performed well , and it is expected that in Q3 it will continue to reduce lease operating expenses and exploration expenses, further improving its ability to resist risks in a low oil price environment.

Therefore, although OXY's production in Q3 is expected to increase significantly compared to Q2, due to the decline in oil prices and the significant increase in depreciation amortization expenses after the acquisition of CrownRock, Net Profit will be greatly affected. It is expected that OXY 24Q3 revenue will be $7.234 billion, an increase of 6.11% compared to the previous period; adjusted Net Profit will be $758 million, a decrease of 23.67% compared to the previous period. However, Occidental Petroleum is still striving to maintain its profitability in a low oil price environment through effective cost control measures, such as reducing lease operating expenses and exploration expenses.

Occidental Petroleum has demonstrated strong operational capabilities, maintaining its competitiveness in the industry through strategic acquisitions such as CrownRock, improving production efficiency, and reducing costs. OXY has also made significant progress in debt management and financial optimization, laying a solid foundation for future growth. Despite the challenges of falling oil prices and high debt, OXY is expected to maintain relatively stable revenue performance in the third quarter of 2024 .

However, Occidental Petroleum also faces many challenges. The lower dividend yield (1.57% as of November 12) means that the investment return cycle is longer, and the optimization of debt acquisition strategy and debt structure still needs to be further improved. Despite this, Buffett still chooses to continue to increase his holdings in Occidental Petroleum, perhaps he has noticed the long-term development potential of OXY. If Buffett decides to further increase his holdings, or even acquire Occidental Petroleum, it will have a significant impact on the company's future development.