A Carl Icahn Holding for income and growth investors

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<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Many investors follow Carl Icahn (trades. portfolio) to identify investment opportunities. The investor had a portfolio of over $ 20 billion at the end of 2019. Because of its activist strategy, the investing audience generally expects the guru to take critical positions in companies and then put pressure on management to get the most out of the company. “data-reactid =” 11 “> Many investors are following Carl Icahn (Trades, Portfolio) to identify investment opportunities. The investor had a portfolio with a value of over USD 20 billion at the end of 2019. Due to his activist strategy, the investing public was generally expects the guru to take crucial positions in companies and then put pressure on management to get the best out of the company.

Occidental Petroleum Corp (NYSE: OXY) is a company in which the guru invested aggressively in 2019, according to 13-F records. In fact, according to GuruFocus data, it is one of Icahn’s largest holdings.

Source: GuruFocus

Investors would have had a disappointing year in 2019 if they had followed the guru to Occidental earlier last year. The share price declined sharply and underperformed the broad market due to the disappointing financial results and perceived risk appetite of the Anadarko Petroleum acquisition completed last April. Immediately after the announcement of the acquisition, the stock fell as shown in the performance curve below.

Source: GuruFocus

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Carl Icahn (trades. portfolio) also criticized the Anadarko deal and described the transaction as “one of the worst deals” he has ever seen. This also had no positive impact on the performance of the shares. The legendary investor is a critic of the agreement that Occidental Management has entered into to also fund $ 10 billion from Warren Buffett (Trades, Portfolio), Berkshire Hathaway. Under the terms of the contract, Buffett would receive 100,000 shares of the accumulated perpetual preference share with an annual return of 8% and a value of $ 100,000 per share. In a letter to shareholders in July, Icahn commented on the deal as follows: “data-reactid =” 54 “> Carl Icahn (Trades, Portfolio) also criticized the Anadarko deal and led the transaction as” one of the worst deals ” The legendary investor is a critic of the agreement Occidental Management has entered into to receive $ 10 billion in funding from Warren Buffett (Trades, Portfolio) Berkshire Hathaway as According to the terms of the contract, Buffett would receive 100,000 accumulated preference shares with one annual return of 8% and valued at $ 100,000 apiece. In a letter to shareholders in July, Icahn made the following comments regarding this agreement:

Buffett figuratively took it (Vicki Hollub, CEO of Occidental Petroleum) the cleanest. The Buffett deal was like taking candy from a baby, and amazingly she even thanked him publicly for it! But you can’t blame Warren if Hollub were arrogant enough to negotiate a deal of this size with Buffett, although admittedly she has limited M&A and board experience to sign, you could in Warren’s defense, it was almost his fiduciary duty to Berkshire Hathaway to accept him. “

Wall Street analysts also questioned this move, and reputable institutions, including JPMorgan, downgraded Occidental after the transaction.

Source: Yahoo Finance

Despite all these dark clouds, there are also some silver streaks that I believe would help Occidental deliver attractive returns to investors in 2020 and beyond. Not surprisingly, analysts are back – many are now saying that the worst is over for the company and the future looks promising. This analysis examines Occidental’s prospects and whether investors could benefit from investing in its stocks.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The company profile“data-reactid =” 77 “>The company profile

Occidental deals with the acquisition, exploration and development of oil and gas deposits, primarily in the United States, but also at a number of international locations. The company operates in three business areas and provides various services under each of these:

oil and gas


Midstream and marketing

This is the core business. Occidental had a production capacity of 1.11 million barrels of oil at the end of the third quarter.

This segment includes the manufacture and marketing of chemical products. OxyChem owns and operates 24 manufacturing facilities.

This segment supports both the company’s oil and chemical businesses and third parties.

Source: Company news

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The debt relief process“data-reactid =” 87 “>The debt relief process

Massive debt on a balance sheet pushes investors away from a company. This became clear from the sell-off triggered last year when Occidental financed the Anadarko acquisition with an issue volume of $ 21.8 billion. At the end of the third quarter of 2019, the company had long-term debt of $ 48.3 billion.

Occidental had submitted a $ 9 billion capital investment plan for 2019 in the third quarter, but that would be cut to a maximum of $ 5.5 billion in 2020 to provide cash to meet debt repayment commitments and to support shareholder distributions release.

Source: Investor presentation

Even with this massive reduction in spending, the company will hardly have a cushion after providing capital for other sources. If Occidental generates cash flow from operating activities (at least USD 10 billion) in 2020 and provides USD 5.5 billion for investments, the company will only have USD 100 million left after USD 800 million and USD 3.6 billion respectively USD was distributed to preferred and common shareholders. Management is aware of this situation, however, and has implemented a plan to sell some of its non-core assets to raise cash. The company sold two such assets in 2019 and repaid $ 4.9 billion of its long-term debt, leaving no more maturities by 2020. This is a positive sign for investors as the company can now focus on implementing Anadarko integration and pursuing other growth opportunities without having to allocate time and resources to manage debt.

CEO Vicki Hollub commented in November 2019 as follows:

“Since the completion of the Anadarko acquisition, we have continued to make rapid progress to fully achieve our post-acquisition disposal and debt relief goals. In the third quarter, we sold our interest in Plains for a net proceeds of $ 650 million and the sale of ours Mozambique LNG completed With the completion of the divestments completed in May 2019, we have essentially reached the lower end of our post-tax divestment target of $ 10 billion to $ 15 billion. We used the proceeds of our closed divestments to reduce debt and we have already done so I’m very proud of the progress our teams have made over the past few months, we know we have more debt reduction work to do, and I’m looking forward to making this additional announcement upper end of our goal. “

The early success of the deleveraging process is a signal of what to expect in 2020. The balance sheet is expected to improve this year as management delivers on promises of higher profitability due to attractive oil prices, sustained global economic growth and Anadarko’s contribution.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Attractive dividend“data-reactid =” 113 “>Attractive dividend

With a market price of around USD 47.24 on Wednesday, the Occidental share offers a very attractive dividend of 6.7%. What is not so attractive is that the company sells much more than it deserves. For example, Occidental paid a dividend of $ 3.13 per share in the past twelve months, while earnings per share were significantly lower at $ 1.37 over that period. However, the ongoing asset sales program will increase the company’s cash flow, which is a good sign for investors. This reduction in business risk gives Occidental enough time to successfully integrate Anadarko and realize the expected sales and cost synergies. Taking these factors into account, it can be safely said that the company would not be forced to cut the dividend in the short term.

Devin McDermott, an analyst at Morgan Stanley, shares this view:

“We believe the dividend, which offers a premium 7% return, is safe and has room for long-term growth in most scenarios. While efforts to reduce leverage have made significant progress in reducing risk, Occidental is following suit free cash flow return twice as high as that of US E&P companies with a large market capitalization. “

McDermott expects the dividend yield to decrease to around 5% before the Anadarko deal by 2022, suggesting the stock will gain momentum and gain value over the next few years.

Occidental Petroleum has increased its dividend over the past 17 years. This is an amazing feat for an oil and integrated company as energy prices have fluctuated significantly over the past decade.

Source: GuruFocus

This underlines the shareholder-friendly management. In the third quarter, Cedric Burgher, Occidental’s CFO, confirmed this ongoing commitment:

“We have a capital budget for 2020 that we expect to fully optimize free cash flow and enable us to increase production in a capital-efficient manner while maintaining the security of our dividend. In the third quarter, we had 600 Million Dollar Cash Back to Shareholders Through Dividend. Protecting our dividend is a top priority and we look forward to continuing to return significant capital to our shareholders. “

This reassurance and the expected improvements in Occidental’s financial performance should help high-income investors make the planned investments.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Analysts notice the improvements“data-reactid =” 143 “>Analysts notice the improvements

Wall Street is beginning to appreciate the ongoing changes at Occidental Petroleum. Many analysts who followed the company have maintained their ratings in the past few months, while two only upgraded the stock last week. There have been no downgrades since August last year.

Source: Yahoo Finance

The average price target is $ 51.20, an increase of approximately 9% over the market price of approximately $ 47.10 on January 15.

Source: Tip Ranks

Based on a discounted cash flow calculation, the company has an intrinsic estimate of $ 61.00 per share, which is closer to the top end of analyst estimates.

2020 will be an important year for the company as expectations for improved performance are high.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Conclusion“data-reactid =” 182 “>Conclusion

In my opinion, Occidental seems like the right option to follow Icahn. The activist investor urged the company to rethink its capital allocation plan, and management responded by reducing planned investments and taking a second look at the company’s balance sheet health. These are good signs for investors. The debt relief program has shown initial success that could turn out to be a catalyst for an increase in the share price in 2020. Occidental Petroleum offers both earnings and growth opportunities for investors.

Disclosure: I don’t own any stocks mentioned in this article.

Read more here:

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  • Apple could increase its dividend in 2020
  • Income-oriented investors should look for opportunities outside of the U.S. in 2020

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<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This article first appeared on guru Focus,
“data-reactid =” 192 “> This article was first published on GuruFocus.


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