Warren Buffett eats profits ahead of virus

Warren Buffett is credited with that old saying about receding tides and embarrassed skinny-dippers. In Occidental Petroleum Corp.’s case, the lack of swimwear is one problem, but so is the anchor tied around its ankle. Part of that anchor is the old sage himself.
Oxy, as it is known reported results for its first full quarter since acquiring Anadarko Petroleum Corp. In that bruising takeover battle against Chevron Corp., Berkshire Hathaway provided a crucial $10 billion check allowing Oxy to avoid a shareholder vote. It came at a steep cost of, among other goodies, an 8% preferred dividend. As it turns out, that was more than enough to swallow Oxy’s adjusted net income for the second half of 2019 before any of it could trickle down to the commoners.
Buffett didn’t get rich by giving stuff away, so the fact Oxy went to him in the first place signalled just how far it was stretching. Back then, things looked dicey already on the trade-war front. But in early 2020, Oxy finds that not only has the tide gone out, it has gone way out, similar to what happens just before a tsunami floods back in. The tsunami is the coronavirus crisis, swamping an already fragile oil and gas market.
A few numbers tell the story. Oil traded at almost $66 a barrel when Oxy entered the fray for Anadarko; it has since dropped to about $45. When Oxy CEO Vicki Hollub made her fateful flight to Omaha, Nebraska, the 10-year Treasury yield was just over 2.5%, Oxy’s stock yielded about 5.5%, and high-yielding energy bonds paid about 7.75%.
Now Treasuries yield less than 1.2%, so the spread Buffett earns from Oxy, about 5.5% when the deal was struck, is closing in on 7%. Oxy’s own dividend yield, which used to be lower than Buffett’s preferred, spiked as high as 10.7% on February 28, roughly where the energy high-yield index ended February 27. As of February 28 in New York, Oxy’s dividend yield was 10.2% and its stock was at its lowest level since early 2009.
The market is treating dividend like a distressed credit. Even using Oxy’s adjusted figure for cash from operations before extraordinary charges and working capital, free cash flow in the fourth quarter was less than $60 million, not enough to cover the $149 million paid out on preferreds, let alone the $700 million or so in common dividends.
As a result of the deal, Oxy’s interest and dividend obligations have risen from just under $750 million a quarter to more like $1.25 billion ($200 million of that is Buffett’s). Including guided capex, Oxy needs an Ebitda run-rate of about $2.6 billion a quarter to cover all this from cash flow.
The company’s well-timed hedging of 2020 production helps. And unit costs in the upstream business, especially in the US, have declined dramatically already since last summer, providing credibility on the synergies story. But chipping away at that debt may be a grueling process.
—Bloomberg