Hindsight is easy, but you have to believe that, if she could go back in time to April of 2019, Oxy CEO Vicki Hollub might take a pass on that $55 billion acquisition of Anadarko Petroleum. To be fair, no one could have foreseen the advent of the COVID-19 pandemic at the time Oxy stole Anadarko out of from under Chevron
All of this comes up again this week as Oxy reported a huge loss of $8.4 billion for the second quarter of 2020, a loss that equates to $9.12 per share. The loss includes a write-down of its oil and gas assets of $6.2 billion by the company, which remains saddled with $36 billion in debt. “We continue to make progress on our debt structure and have significantly exceeded our cost savings targets while delivering operational excellence across our business,” Hollub said in a statement.
But at the same time, the company acknowledged that, while it is attempting to sell off non-core assets in order to reduce its debt load, it may not be able to execute those sales quickly enough to service the debt in a timely manner, especially after Total backed out of a deal to buy the company’s Ghana assets in May. That deal was to be a key part of Oxy’s efforts to raise $15 billion through divestitures to help repay investors who funded the Anadarko acquistion by the end of 2021.
The company has roughly $6.4 billion in debt coming due in 2021, with another $4.7 set to mature in 2022. As a stop-gap measure to raise cash in the midst of the price crash, Oxy issued $2 billion in bonds, all of which carries an interest rate of at least 8%. That’s a steep price to pay during a time of record-low lending rates.
Oxy’s management also acknowledged that its austerity efforts to contain costs will continue at least through the end of this year. In stark contrast to its plans for rapid production growth announced at the time of the Andarko deal last year, Oxy now plans to operate just one drilling rig in the Permian Basin for the remainder of 2020, and none in the DJ Basin, the other major shale play where Anadarko had a huge presence.
Lead Analyst at Sankey Research, Paul Sankey, had this to say about Oxy’s 2nd quarter results: “Good thing that Oxy reporting tonight ‘exceeded guidance and continued to deliver operational excellence’ otherwise they might have reported an even more epically abysmal result. Even with the aforementioned exceeding and excelling, the company reported a net loss attributable to shareholders for Q2 2020 of $8.4bn, or $9.12/share. Excluding writedowns (why? they happen on a recurring basis), the adjusted loss was $1.6bn, or $1.76 per diluted share.”
Of course, these 2nd quarter results just place Oxy somewhere in the mid-range of all of its fellow big U.S. shale producers, who have seen their business model collapse during 2020. Many observers blame that collapse on COVID-19, and there is no doubt that the pandemic has played a large role.
But the truth is that the real collapse of the business model came before the full impacts of COVID-19 materialized. That took place on March 4, when Russia temporarily backed out of the OPEC+ agreement to limit exports, initiating its two-month price war with Saudi Arabia. Because the reality is that the shale business model has since at least 2017 relied on the willingness of those two countries and other big oil nations to willingly limit their own production and exports in order to artificially prop up crude prices. As we discovered in March – and will no doubt discover again in the future – they’re not always willing to do that.
While Oxy’s management can be excused for not having the ability to foresee the advent of a global pandemic, it can be fully held responsible for seemingly overpaying for Anadarko while fully aware of the true, fragile nature of the shale business model. The fact that that model remains in place today means that Hollub and her team must now hope against hope that the OPEC+ deal remains intact until prices can recover to levels that enable their company to continue servicing its heavy debt load.
Hope is not a great business plan. Sometimes the best deals are the ones that don’t get made.