I’m adding some energy industry exposure to the Dividend Growth tier of our model portfolio. Occidental Petroleum (OXY) is a large oil and gas company with a 3.7% yield, a 15-year history of dividend growth, and rapidly rising earnings, explains Chloe Lutts Jensen, income expert and editor of Cabot Dividend Investor.
Occidental is one of the largest “independent” oil and gas companies, but with a market cap of $64 billion, it’s only about a fifth the size of ExxonMobil (XOM). About a quarter of Occidental’s income comes from a chemical subsidiary, OxyChem, which makes PVC, chlorine and other products.
Another 10% or so of Occidental’s income comes from marketing and transporting hydrocarbons and other commodities. But Occidental’s largest business, generating about 60% of income, is oil and gas production.
The company is based in Houston, Texas, and about half of its oil and gas comes out of the Permian Basin, in West Texas and New Mexico. Wells in Oman, Qatar and the UAE account for another 45%, and the remainder comes from Colombia. The company also owns about 325,000 acres in the Permian that aren’t currently producing but would become economical to operate at higher oil prices.
Very low oil prices devastated Occidental’s earnings in recent years. After peaking at $8.16 per share in 2011, EPS declined in each of the next five years, finally falling into negative territory in 2016. Earnings started to recover last year, thanks to a 24% jump in revenues.
However, EPS for 2017 were still low—only $1.70 per share—so earnings are expected to more than double this year (the current consensus estimate is $4.61 per share, or about 171% higher than last year.) In 2019 earnings are expected to grow at a more moderate single-digit pace, although commodity price sensitivity means estimates are liable to change.
OXY has paid dividends consistently since 1982, and has increased the dividend every year since 2003. Since then, OXY has increased the dividend by an average of 13% per year each year, but the growth rate slowed to about 4% per year as earnings crumbled over the last five years.
With earnings now recovering, dividend growth should pick back up soon. Management also plans to resume its buyback program in the second half of 2018. The earnings rebound has also brought OXY’s payout ratio back down to 68.6%, and it will continue to fall as earnings improve over the second half of the year.
Analysts have been raising their revenue and earnings estimates for OXY aggressively since the first quarter earnings report — the consensus EPS estimate has increased by 42% over the past 60 days — which should fuel additional gains in the second half of the year.
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