Early Tuesday morning, Occidental Petroleum (OXY) reported third-quarter results that showed revenues of $2.65 billion fell 15.0% year over year, roughly in line with consensus. It posted a loss per share of $0.15, which came in roughly $0.03 worse than consensus expectations.
While the company was able to execute on its production plans and exit additional non-core assets (more below) -- both of which demonstrate management's commitment to navigating a difficult macro -- lower-than-expected operating cash flow (due to a one-time charge) throughout the quarter, in addition to a top-dollar purchase of additional Permian assets last night, leave many questions hanging in the air. First, after the close on Monday, OXY announced roughly $2 billion of Permian resource acquisitions, funded fully by cash on hand, including producing and non- producing leasehold acreage, CO2 properties and related infrastructure in the Permian Basin. From a positive standpoint, the moves serve to further cement the company's already-dominant position in the most desirable production area within the United States. Occidental will be able to leverage its existing infrastructure in the region to get the most out of these new resources, benefiting from operational synergies and empirical knowledge.
Although we do not believe the market will frown upon the idea behind the investment, the costs for the resources seem high at first glance. OXY has always boasted the most pristine balance sheet among its peers, but a transaction of this magnitude does raise questions as to where the balance sheet will sit moving forward and whether the company has plans to announce any additional non-core asset sales to support the purchase. Given the premium associated with the deal, we are eager to hear more regarding the long-term value proposition associated with the move (conference call details below). We approve of deepening the resource inventory in the Permian, but our question is at what cost.
Importantly, specifically within the quarter, the company achieved the high end of production guidance, reaching 605,000 BOE per day, which came in higher than consensus estimates and proves the company continues to work towards maximum efficiency even in the tough global macro oil environment. United States and International production both came in slightly higher than consensus, powered by continued execution in the Permian and Al Hosn (Middle East). These two regions are expected to be key growth drivers for OXY moving forward, so we are pleased to see management continue to hit their targets.
OXY also ended the quarter with $3.2 billion in cash. We have always said that against the backdrop of a furious, beleaguered oil environment, cash is king. The company's current $3.2 billion cash balance not only reflects management's operational discipline (capex of $642 million came in below consensus of roughly $770 million), but also their flexibility moving forward, especially in safely paying out the dividend, which currently yields 4.1%. Notably, capex continues to track below the original full year budget of $3.0 billion. Adding to its disciplined approach, Occidental continued to reduce its exposure to non-core operations in the United States and the Middle East/North Africa region and completed its exit from Bahrain. That being said, we must take into account the recent $2 billion purchase of Permian Basin assets, which will be funded from this available cash on the balance sheet. While the dividend remains a focus of management and the company's remaining cash balance should be able to support the payout moving forward, the purchase raises enough questions as to how free cash flow will be impacted in future quarters, so management's commentary on the call will be watched very closely. This uncertainty, coupled with the lingering jitters across the energy sector as oil prices decline due to skepticism regarding the proposed OPEC deal, could cause investors to pull back in today's trading, at least before listening to the company's remarks on the conference call.
All in, we view the quarter as roughly in-line and we are encouraged by the continued progress in the highest-growth areas for Occidental. Capex discipline was also a positive, but will likely be overlooked by the asset purchases announced last night. Management have been smart in their investments and sales of non-core assets in the past, allowing the company to focus on delivering strong free cash flow, but we are on the sidelines for now until we see how the newly added resources impact results in upcoming quarters. Regardless, OXY shares remain largely hostage to the volatility in oil prices, but we are content to collect the consistent income stream via the dividend while we keep some exposure to oil as we wait for stabilization in the energy sector.
Conference call: 11 AM ET via 866- 871-6512 or http://edge.media- server.com/m/p/u859faeq/lan/en