Yahoo Finance Does Occidental Petroleum Corporation’s (NYSE:OXY) Debt Level Pose A Problem?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Occidental Petroleum Corporation (NYSE:OXY) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Occidental Petroleum’s financial liquidity and leverage to give you an idea of Occidental Petroleum’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into OXY here. View our latest analysis for Occidental Petroleum
Does OXY produce enough cash relative to debt?
OXY’s debt level has been constant at around US$9.83B over the previous year made up of current and long term debt. At this constant level of debt, OXY’s cash and short-term investments stands at US$1.67B , ready to deploy into the business. Additionally, OXY has generated cash from operations of US$5.00B during the same period of time, resulting in an operating cash to total debt ratio of 50.83%, meaning that OXY’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OXY’s case, it is able to generate 0.51x cash from its debt capital.
Can OXY meet its short-term obligations with the cash in hand?
Looking at OXY’s most recent US$7.40B liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does OXY face the risk of succumbing to its debt-load?
With debt reaching 49.75% of equity, OXY may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if OXY’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For OXY, the ratio of 6.52x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like OXY are considered a risk-averse investment.
Next Steps:
OXY’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around OXY’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure OXY has company-specific issues impacting its capital structure decisions. I suggest you continue to research Occidental Petroleum to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for OXY’s future growth? Take a look at our free research report of analyst consensus for OXY’s outlook.
Valuation: What is OXY worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether OXY is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
