It's Raining Dividends

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Occidental Petroleum Corporation (NYSE: OXY) investors had a rough 2012, witnessing the stock's price go down by ~18%. This was mainly due to its disappointing sales performance against investor’s high expectations. However, this would be an interesting entry point for the new investors who are looking for a company with strong fundamentals and an attractive dividend growth. This company has always been consistent in its dividend growth, with an average increase of ~16% in the last ten years. On the same track, two of its major competitors, ConocoPhilips (NYSE: COP) and BP (NYSE: BP), also have maintained good dividend yields over the years.

Companies

Average Dividend Yield in last five years

Forward Annual Dividend Yield

Occidental Petroleum

1.85%

2.70%

BP plc

4.80%

5.0%

ConocoPhilips

3.64%

4.5%

Source: Yahoo! Finance

If asked to pick one of the three, I am more inclined towards Occidental Petroleum looking at its restructuring strategies, which will benefit the company in the near-term. In 2013, cost-reductions will be one of the most important factors to look for as a driving force of investor's optimism. Its cost-cutting plans are already ahead of schedule and I expect the benefits to be visible in the company's results in 2013.

Cost Optimization

The company plans to reduce its operating cost per barrel to ~$13/boe by the end of 2013 from the current level of ~$16/boe in its 3Q 2012. This would help the company to increase its margin per barrel and also enhance its profitability by ~$600 million per year beginning in 2013. Along with the operating costs, Occidental also lower the drilling costs by ~15% in the US. This would generate additional cost savings of ~$800 million per year. These savings would be a combined result of various moves by the company such as downsizing contractors, moderate hiring and expansion, boosting productivity by best measures, removing the unwanted operations, etc. Overall, I expect these efforts to increase the company's profits by ~$1 billion starting in the second half of 2013.

Competitors Betting on Divestures:

ConocoPhilips - The company started an assets disposition program in 2010 with the aim to divest assets worth ~$29 billion between 2010-2013. Under this program, ConocoPhilips announced its assets divestments in Africa. Last month it entered into an agreement to sell off its Nigerian business unit for ~$1.79 billion, and before that it agreed upon selling its Algerian unit for ~1.75 billion. Both the transactions are expected to close by mid-2013, and the proceeds would help the company capture new opportunities in the future. The company is on track to complete its asset disposition program in 2013, leaving it with a high-grade portfolio and ongoing selected capital investments. I expect ConocoPhilips to deliver growth of ~5% in volumes and margins on a long-term basis.

BP – BP has also divested assets worth ~$38 billion since 2010. Its main aim of this policy is to divest smaller and non-core assets so that the proceeds can be used for its major oil-spill settlement costs, and would not hit the company's cash balances directly. The latest among its divestment program is the sale of its ~34% stake in China's offshore gas field for ~$308 million in cash. This deal is expected to close in the second half of 2013 and these proceeds would be directly used to pay the compensation for its US Gulf oil spill disaster. However, for BP I feel divestments will not result in any near-term benefits. But it would certainly help the company to maintain its attractive dividends in the future, as the settlements costs will be met by divestments.

Rounding back to Occidental Petroleum, even in the long-run its strong portfolio of oil assets provides various opportunities. Along with its US operations in California, Permian and Bakken, its international operations in the Middle East in Oman, Qatar, and the UAE are also highly profitable. The company's natural gas project in Shah Gas Field in Abu Dhabi is right on track for its completion in 2014. On a less positive note, the company will continue to face higher capital investments in 2013. However, upon completion it is expected to generate an annual cash flow of ~$600 million.

To sum up, I believe there is an opportunity for the company's share to recover the lost momentum with its restructuring activities. I expect the cost-cutting efforts to enhance the bottom-line by the end of the first half of 2013, and also increase EPS by ~$0.80. This would be the right time for investors to accumulate shares, as it is a perfect stock with risk-reward balance and robust dividend growth.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure