Occidental Petroleum Corporation’s (NYSE:OXY) 5% dividend yield suggests the market does not believe the current payout. This is likely a combination of a lack of oil price conviction, or a focus on higher growth pure play Permian names which have more per share exposure to improvement in the basin. However, there is one key slide in the Occidental Petroleum 1Q deck. The capital required to deliver a barrel of new production has another 30% to fall from 2017 levels. Yes, capital productivity could improve a further 30%. At the same time, Occidental Petroleum's cash flow margins should rise as high margin shale production rises in the mix, and free cashflow should rise from Occidental Petroleum's non-shale assets. The net effect is that Occidental Petroleum aim to pay the 5% dividend and grow 5-8% at $50/bbl WTI. Credit Suisse’s capital productivity model is more conservative than this chart. It assumes operational productivity gains are offset by cost inflation. However, even in this scenario the firm can see a path to growing headline volumes and paying the dividend at $50/sh. The key delta between its views seems to be the potential to high-grade into the most productive areas of Occidental Petroleum's Delaware and the ability to control costs through the operational efficiency of shifting to sectional development of Occidental Petroleum's concentrated positions in the Greater Sand Dunes and Barilla Draw area. Occidental Petroleum's build out of logistics hubs and rail synergies with Occidental PetroleumChem also play an important role. There ARE significant capital benefits from scale. For perspective, the 30% decline in capital productivity would equate to a $600m saving in annual capex versus 2019 consensus, i.e., it would lower the breakeven of dividend cover by $6/bbl.
The firm makes minor changes to its drilling program and at the same time lower Permian Resource cash operating costs. Cash flow increases by 3% on average across 2018-20, and capex is 2% lower owing to Occidental Petroleum’s lowering capital intensity. The firm raises EPS in 2017-19 to $0.90, $1.78 & $1.90 and its TP to $80/sh. Risks to its TP would be lower commodity prices.