When it comes to evaluating the risk of a company, one important factor to consider is its level of debt. Occidental Petroleum Corporation (NYSE:OXY) is a company that carries debt, but is it taking on too much risk?
Debt can become problematic for a company if it is unable to pay it off and ends up in a situation where lenders take control of the business. In some cases, companies may need to issue shares at low prices to raise capital, which can permanently dilute shareholders. However, it is also common for companies to manage their debt well and use it to their advantage.
As of June 2023, Occidental Petroleum had US$19.1 billion of debt, which is down from US$22.0 billion from the previous year. It also had US$486.0 million in cash, resulting in a net debt of US$18.6 billion. While Occidental Petroleum’s debt may seem high, it is important to consider its overall financial health.
Examining Occidental Petroleum’s balance sheet, the company had liabilities of US$7.15 billion due within 12 months and liabilities of US$34.6 billion due beyond 12 months. In comparison, it had cash of US$486.0 million and US$2.85 billion worth of receivables due within a year. This means that its liabilities exceed its cash and short-term receivables by US$38.4 billion.
Looking at debt relative to earnings, Occidental Petroleum’s net debt is only 1.1 times its EBITDA. Its EBIT comfortably covers its interest expense, being 10.9 times the size. Therefore, the company’s use of debt appears to be conservative and manageable.
However, it is worth noting that Occidental Petroleum experienced a 21% cut to its EBIT in the previous year. If this trend continues, the modesty of its debt load could become crucial for the company. The future profitability of the business will ultimately determine whether Occidental Petroleum can strengthen its balance sheet over time.
In terms of cash flow, Occidental Petroleum has generated free cash flow amounting to 96% of its EBIT over the last two years. This indicates that the company is in a strong position to pay down its debt.
Overall, while Occidental Petroleum’s debt levels should not be ignored, factors such as its conservative use of debt and strong cash flow generation provide some optimism. It is important for shareholders to consider the potential risks associated with debt, but also to look beyond the balance sheet for a comprehensive understanding of a company’s risk profile.
Definitions:
- Debt: Money that is borrowed and owed by a company.
- EBITDA: Earnings Before Interest, Tax, Depreciation, and Amortization. It measures a company’s operating performance before non-operating expenses.
- EBIT: Earnings Before Interest and Tax. It measures a company’s operating profitability.
- Net Debt: Total debt minus cash and cash equivalents. It provides a more accurate representation of a company’s indebtedness.
- Free Cash Flow: The cash generated by a company after accounting for capital expenditures and operating expenses.
- Balance Sheet: A financial statement that provides a snapshot of a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
Sources:
Occidental Petroleum Corporation financial statements
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.