Oxy's Slashed Dividend Is Now Just Half of Warren Buffett's Payout

(Bloomberg Opinion) -- A couple of weeks ago (remember that, oil investors?), Vicki Hollub, CEO of Occidental Petroleum Corp., called its dividend “one of the defining characteristics of our company.” Indeed it is.

Oxy’s decision to cut that dividend, something it avoided doing in two previous oil crashes, is on one hand simply all the company could do at this point. As I wrote here, the dividend yield already traded like a distressed credit, and Oxy wasn’t covering its payments from operating cash flow even before oil prices plummeted this week. Oxy’s bonds tanked on Monday. The new dividend, along with the cut to the capital expenditure budget, conserves $4.1 billion of cash, annualized, equivalent to 12% of Oxy’s net debt.

This is what any sensible management team should do when the oil market falls apart. But none of this happened in a vacuum. All the way back in May of last year, I warned Oxy’s decision to stretch itself to beat Chevron Corp. in a bid battle for Anadarko Petroleum Corp. left it vulnerable in an industry not exactly famed for its stability. This is just damage control on a grand scale.

Imagine if that deal had not happened. Would Oxy’s investors be suffering amid the turmoil? Yes. But the prior strategy — focused on low leverage, high-performance drilling and solid payouts — would most likely have let Oxy muddle through and even capitalize on some of the inevitable blood-letting about to rip through the industry. In other words, it might have been viewed more as a potential consolidator than victim.

Market crashes often have a deal or two associated with them that eventually come to be seen as exemplifying hubris before the fall. Oxy’s pyrrhic victory with Anadarko will surely join that select club.

Yet the most salient fact pertaining to Oxy’s 86% dividend cut is this: At about $98 million, the quarterly payout to common shareholders is now less than half the check that gets sent to one Warren Buffett.

To recap, Oxy issued $10 billion of preferred stock to Berkshire Hathaway Inc. to finance the Anadarko bid. It was crucial to winning the battle because the higher cash component reduced the amount of stock Oxy had to issue, thereby letting it avoid putting the deal to a shareholder vote. The cost? Among other things, an 8% coupon, or $200 million per quarter.

In other words, Oxy’s shareholders will now be paid only half the amount going to service an obligation that denied them the opportunity to vote on a deal that left the company exposed to precisely this situation. Even after Tuesday’s relief rally, 10% as of writing this, Oxy’s market cap of about $12 billion is roughly half of where Anadarko alone traded — before the bidding even began. Worse, that $10 billion preferred acts as a poison pill in case anyone (Chevron?) was considering swooping in.

So Oxy’s dividend defines the company, its predicament, and the management and board who made the decisions that left it so vulnerable. Investors must now ask who ends up defining where Oxy goes from here.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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