The energy sector has been a disaster zone this year, as the coronavirus pandemic has decimated global oil demand. West Texas Intermediate, the benchmark U.S. crude, has plummeted nearly 70% to a recent $19.21 a barrel, while Brent, the most popular international benchmark, is down 60%, to $26.34. Most oil and gas producers, including the majors, will lose money in 2020 or barely eke out a profit, and most of those still paying dividends will have to borrow to cover the cost. As for energy stocks, they have made fools of their fans for nearly a decade, and now account for a measly 3% of the S&P 500 index (.SPX).
Yet, the members of Barron’s 2020 Energy Roundtable see glimmers of hope for this beleaguered sector—and long-suffering investors—even though things could get worse before they get better. The painful steps that energy companies are taking to reduce supply and conserve cash are likely to pay off in higher oil and gas prices over the next two years—and stronger operations and balance sheets for the industry’s survivors. Emblematic of recent moves, Royal Dutch Shell (RDS/B) slashed its quarterly dividend on Thursday by 66%, to 16 cents a share from 47 cents, its first cut since World War II. And on Friday, Exxon Mobil (XOM) reported its first quarterly loss in decades.
Our 2020 Roundtable panelists include Phil Gresh, an energy analyst at J.P. Morgan; Bernadette Johnson, vice president of strategic analytics at Enverus, a data and analytics provider to the energy industry; Patrick Kaser, a portfolio manager specializing in large-cap value stocks at Brandywine Global; and Robert Thummel, a senior portfolio manager at Tortoise, which invests in “midstream” companies focused on energy transportation, storage, and marketing. The consensus among the group is that oil prices could double in the next year or so, to about $50 for Brent, as the global economy reopens and crude supply and demand ease back into balance.
Barron’s conducted the 2020 Energy Roundtable in mid-April via Zoom, and followed up by phone with the panelists to get their read on ever-changing market conditions. Oil prices, for one, perked up last week, with June WTI futures jumping 25% on Thursday, while many energy stocks have rebounded by 40% or more from their late-March lows. Even so, our panelists consider stocks such as Chevron (CVX), ConocoPhillips (COP), Valero Energy (VLO), and Williams Cos. (WMB) compelling buys at current prices.
An edited version of the Roundtable follows.
Q: These are dark days in the oil patch, and for energy investors. Let’s cut to the chase: Is there any reason to continue investing in the sector?
A: Patrick Kaser: There is an assumption that anyone looking to invest in energy stocks, and oil stocks in particular, is an idiot. [Laughter] That assumption appears pretty reasonable—if you’re looking in the rearview mirror. What will it take for the group to do well? Over the long term, things will normalize. In January, the industry was on a path to a pretty good environment. Brent crude was trading in the $60s. Supply and demand looked reasonably balanced, and excess capacity was lower than it generally had been in the past 30 to 40 years. We think things will get back there, but the timing is uncertain. The stocks have been destroyed. There will be survivors that come out on the other side looking stronger. Their shares are pretty attractive right now.
Phil Gresh: If you rewind the clock to December, companies with the right cost structure could thrive in a $60 Brent environment. They could cover their dividends fully. Oil companies were buying back stock with excess cash flow. They could compete with the S&P 500 on a cash-flow-yield basis—and then the oil price had a tumultuous drop.
The math doesn’t work for oil companies at current prices. For companies to produce oil profitably, Brent needs to trade around $50. At some point, the price will recover, but wiping away 25% of global demand won’t help in the short term. We believed in early April that prices had near-term downside risks. However, with demand starting to improve and U.S. exploration and production companies now aggressively shutting production, we should be near the bottom on the oil price, absent a major Covid-19 relapse.
Kaser: Shale companies can’t make money at $50 Brent and $40 WTI. The majors generally need $50-plus Brent to cover their dividends. Sovereign states that rely on oil revenue can’t balance their budgets at $50 oil. Banks won’t be willing to lend to the industry, and private-equity buyers aren’t going to step back in.
Robert Thummel: I agree, but let’s not forget the macro perspective: Energy is essential. Although demand is down right now, the world is going to need more energy in the future. Low-cost energy will help to boost the global economy.
Bernadette Johnson: The market is efficient at pricing in risk. Oil prices have collapsed twice in the past six or seven years. That would tell investors there is a greater likelihood of that happening again. If you’re an operator, this means you might require a higher return than in the past because the risk is greater. If you’re an investor, you require a higher rate of return before you’re willing to invest. Thus, when demand comes back and oil prices recover, the commodity price might be a little higher than it otherwise would have been. Maybe crude goes to $60 or $65 a barrel, instead of $50 or $55, depending on how high you need it to be to get that marginal barrel produced. Today, prices are dropping to push barrels out. Longer term, the market will also work and pull investors back into the energy space.
The May futures contract for WTI crude turned negative in April, falling below minus $37 a barrel , as demand plummeted and storage capacity ran out. How alarmed should investors be by this historic selloff, and are negative prices likely to recur?
Kaser: Investors shouldn’t be particularly alarmed at WTI going negative, nor should they be shocked if it happens again. The reality is that storage is at a premium in Cushing, Okla., and even seemingly empty storage is contracted. While people were surprised by how far below zero prices went, that seemed to be an unusual set of circumstances with open interest [open futures contracts] and perhaps some unsophisticated investors who got stuck. Low prices, including negative prices, are a catalyst for necessary production shut-ins that are happening now as production is brought down to reflect the absence of places to put it.
Gresh: Negative oil prices were an anomaly—a function of a timing mismatch between the pace of demand reduction and that of supply reduction, as well as WTI contract idiosyncrasies that reportedly caught an industry exchange-traded fund [ U.S. Oil /USO] offsides. Both issues are in the process of being resolved, with demand improving, supply shrinking, and a well-publicized change in the contract duration of this ETF’s holdings.
Thummel: I don’t think prices go negative again, as financial contract holders have learned their lesson: Don’t hold financial contracts that you can’t honor as expiration approaches. Investors should keep an eye on open interest levels of front-month [June] oil contracts as we approach expiration on May 19. There will be limited-to-no storage capacity available at the delivery point for the WTI oil-futures contract [Cushing] on May 19, so holders of financial contracts will need to sell prior to expiration.
If open interest remains high as we approach expiration, then negative oil prices are possible again for a day or so. But this is all technical.
Q: Will the recent deal between Russia and OPEC+ to cut production by nearly 10 million barrels a day, starting this month, help to rebalance the market?
A: Johnson: For the near term, it’s too little, too late. The cuts agreed to are starting from a base level in October 2018, when OPEC was producing at a higher level, so the effective cut is more like 7.1 million barrels. To us, the cuts negotiated for the second half of the year and extending through April 2022 are perhaps more meaningful. If you look at the forward strip [denoting the trading of monthly futures contracts], prices rose after the deal was announced. The industry is banking on the agreed-upon cuts to help speed the recovery in prices.
Kaser: I agree that the deal won’t bolster crude prices in the near term, and I’m OK with that. Some companies will disappear, and that will help get the market back into balance, setting us up for higher prices.
Gresh: We have seen a handful of bankruptcies in the U.S. oil industry, and we will see more. We could also see more consolidation by disciplined producers over time.
Johnson: We haven’t yet talked about natural gas. The longer you knock out crude drilling, and the associated gas that would have been produced, the better it is for gas prices. Demand destruction for gas-fired power has been running around 10% to 15% in the NYISO [New York Independent System Operator market], and less elsewhere. Industrial demand for gas hasn’t fallen off a cliff, and residential demand is still intact. Even liquefied-natural-gas exports are holding up pretty well. We expect gas prices to rise later this year. Gas-directed drillers in the northeastern U.S. that cut capital spending could announce they are starting to spend again.
Q: Let’s go around the room, or in this case, Zoom, and get your oil and gas forecasts for year-end 2020 and year-end 2021.
A: Gresh: Brent crude will struggle to get to $40 a barrel by the end of this year. I think it will be in the $30s. But if you look out two to three years, the price has to be closer to $50 a barrel for the math to work. I expect that demand eventually will recover.
Thummel: I expect WTI to reach $35 a barrel [equivalent to $40 Brent] by the end of the year, and natural gas to trade at $3 per thousand cubic feet. Next year, crude could be back in the $50s, and domestic gas could stay in a range of $2.50 to $3 per MCF.
Johnson: WTI most likely will be around $35 at the end of 2020, and Brent will be $40-ish. We expect natural gas to trade around $4 per MCF when winter kicks in, around November. We look for an average gas price of $4 in 2021, which will support drilling. Brent crude could rise to around $55 a barrel in 2021 heading into 2022, and reach a longer-term equilibrium of $65 in late 2022 into 2023. Again, if producers needed a 15% minimum rate of return in the past to drill a well, they will probably need 20% in the future.
Kaser: A somewhat higher gas price seems reasonable by year end. I am a bit more bearish on Brent for this year, and bullish longer term. My best guess would be $35 a barrel by the end of 2020. But given the carnage we’re going to see in corporate capital expenditure and maintenance spending, plus shut-ins and production declines, Brent could trade up to the upper $60s in 24 months.
Many energy stocks are up 40% to 50% from their March lows, although they are down sharply for the year. What oil price are the majors reflecting?
Gresh: On average, the stocks are pricing in more than $50 Brent on a longer-term normalized basis, particularly given the amount of debt we see being added to balance sheets during the downturn.
Can these companies squeeze their costs enough to lower the point at which they break even, based on prevailing oil prices?
Gresh: In 2014, before oil prices collapsed from $100 to $50 a barrel, the dividend-coverage break-even for many companies was around $100 a barrel. Then, they retooled and got their break-evens down to $50, on average. Recently, break-evens have come down a little more, but companies don’t have the same level of flexibility that they had when the oil price fell to $50 from $100. A lot of the actions being taken today are more transitory in nature. They can push out capital spending for six or nine months, but it is difficult to get their break-evens down from $50 a barrel to, say, $30.
Johnson: Shale producers can cut costs only so much before they can’t stay in business. In this environment, it is hard for them to get more efficient.
Q: How are the companies you follow responding to the industry’s current crisis?
A: Gresh: Chevron cut its annual capital budget by 20%, to $16 billion from $20 billion. [The company said on Friday that it would cut its capex guidance by up to another $2 billion, to $14 billion.] Exxon Mobil, which had been spending to grow, reduced its annual budget to $23 billion from $33 billion. Both have reduced operating costs.
Thummel: Spending cuts by E&P companies have cascaded down to the midstream area, on which we focus. Some E&P companies have cut spending by 50%; among midstream companies, cuts have been around 30% to 40%. Plains All American Pipeline (PAA) recently announced a 30% reduction in capital spending. Several pipeline projects in the Permian Basin have been delayed because production will be lower than expected this year. Reducing capital and operating expenses is one way the sector will heal. If companies can preserve their dividends, however, they should do so.
Q: That has gotten harder of late across the energy sector. Consider Shell’s announcement.
A: Thummel: We have seen a significant number of dividend cuts among more-commodity-sensitive midstream companies, chiefly those in the gathering and processing business. Dividends of the large integrated midstream companies are more secure. They came into the crisis with lower debt loads and higher dividend-coverage ratios, and generated a significant amount of cash above and beyond dividend payments. Several have dividend yields of around 9.5% or 10% that look secure.
Kaser: The market is telling us there are concerns about the safety of energy dividends. Companies such as BP (BP) and Royal Dutch Shell yield north of 10%. That isn’t a vote of confidence. Canadian Natural Resources (CNQ) yields 8.6% [the yield has since fallen to about 7%]. What happens to the dividends depends on the duration of low energy prices. Most of the majors, including Chevron and ConocoPhillips (COP), could wait a meaningful number of quarters before cutting their payouts. Exxon probably should cut, but won’t.
Gresh: On the U.S. side, at $40 Brent in 2020, we estimate that Exxon Mobil would be generating negative $2 billion of free cash flow before its $15 billion dividend obligation. The company recently issued $18 billion of debt, which could cover this shortfall, but one could definitely question how long it makes sense to do so.
Q: Did Exxon blunder by spending so much money in the past few years on potential growth?
A: Gresh: The challenge for Exxon is that the financial outcomes in both of their downstream, or refining and chemicals, businesses in the past two years have been nowhere what they forecast as “normalized” in prior analyst days. These businesses had been huge cash-flow contributors that helped fund the majority of dividends. For example, as recently as 2017, they generated more than $9 billion of net income, but in 2020 we estimate they will generate less than $1 billion of net income, as they are experiencing a synchronized downturn.
Q: Is there a chance that the energy sector will never get back to “normal?”
A: Kaser: There is always a chance that we never get back to normal, especially give the amount of capital that E&P companies have destroyed over time. Geopolitical turmoil is a possibility, as well, especially in the Middle East. And a technological breakthrough that changes the longer-term dynamic in favor of electric and autonomous vehicles could be a black-swan event.
Thummel: Energy companies were trying to be more disciplined in recent years and lure investors. They were starting to generate free cash flow and raise their dividends. A lot of companies were using their free cash to buy back stock. If the survivors remain disciplined, that could attract investors, once free-cash-flow yields become more competitive with those in other sectors of the S&P 500.
Kaser: I started the year incredibly bullish on the energy sector. We had one of the biggest overweights in energy stocks that you’re going to see in the value-investing space. There is an old saying among value investors: Something isn’t cheap until everyone else hates it, but it isn’t really cheap until you hate it yourself. That’s where energy stocks are now. The group has underperformed for eight of the past nine years. It is hard for investment sentiment to get more negative. That suggests potential upside.
Johnson: The world is still highly reliant on hydrocarbons. Renewable-energy sources are growing, but long-term demand for oil and natural gas is growing faster in percentage terms. We get a lot of questions about whether the shale-oil industry is dead. But unconventionals [energy extracted in nontraditional ways] are an important part of the global crude supply. Before the coronavirus pandemic, we were projecting a shortfall of crude by 2023, given that the industry was on track to make one major new crude discovery every five years. The last big one was in Guyana in 2015. Now it has missed an investment cycle. When demand recovers, there will be a need for the type and quality of crude used in refined products. Shale producers are nimble; they can add rigs quickly and bring a well online in three months or less. Yes, there will be more bankruptcies, but shale isn’t dead.
Q: Governments seem to be getting more involved in dictating energy policy, even in the U.S. Will government involvement become a larger feature of the market in the future?
A: Kaser: The federal government can’t do much to curtail energy production, although there is some precedent for the Texas Railroad Commission , which regulates the state’s energy industry, to prorate production.
Q: Time to move on to your favorite stocks. Patrick, you sold your oil-services stocks, but you’re sticking with some of the majors. What is the bull case for the major integrated companies?
A: Kaser: We came into the year with a meaningful weighting in oil services. We exited the group in late February, having failed to imagine what the virus’ spread from China to South Korea and beyond would mean for oil demand globally. Demand had been expected to grow by a million barrels this year, and suddenly it was instead reduced by 1.3 million. We sold our airline and cruise stocks then, as well, but we are still overweight energy producers.
It is naive for a value investor to think in a multiyear time frame, but having a longer-term perspective is one of the sins I’ve been inflicted with in my life. I expect a lot of the producers to come out stronger on the other side. We’re looking for companies that will produce attractive free cash flow if Brent gets back to the $50-to-$60-a-barrel range, have good management teams, don’t need to spend on unfinished projects, or don’t need to replace assets constantly.
Canadian Natural Resources is one of our favorite names. Operating results are going to be ugly for the next six months, but Canadian Natural has low costs, long-lived assets, and one of the best management teams in the business. We often ask management teams, if you could run another company, which would you pick? In energy, they name Canadian Natural. From an ESG [environmental, social, and corporate governance] perspective, which matters to a number of our stakeholders, Canadian oil-sands extraction has improved environmentally in the past 10 years. It isn’t on the leading edge of environmental friendliness, but it is no longer a nightmare. Canadian Natural does a good job from a social and governance perspective, relative to many peers.
The stock is trading around $13 [it has since rallied, to a recent $16.70], and it bottomed in the high $6 area. The price could double in two or three years, and even triple under some scenarios.
Q: What else do you like?
A: Kaser: BP also fits these characteristics. In some ways, it was beneficial that BP was forced to limit its spending after its disastrous Macondo spill in the Gulf of Mexico in 2010. It didn’t do a lot of dumb things for a number of years. Most of its subsequent projects have come in under budget. The company reduced its capex this year by more than we would have imagined. BP has a diverse business, from gas exposure to geographies, and its trading, chemicals, and refining operations offer some offset to the rest of the business. It doesn’t have a lot of big projects on the horizon, and it has a pretty attractive break-even relative to peers. And, the company can cover its dividend. BP offers more stability than some other big oil companies, and in a wider range of industry environments.
BP is also thinking about the long-term transition away from fossil fuels, which could help it attract investors. This is generally true of the European energy companies; partly because of their shareholder base, they have a bit more flexibility philosophically to think about where they might end up in 10 to 20 years. As shareholders, we want to see economic returns, but from an ESG perspective, BP is in the upper half of the group. Outside of Macondo—a big outside—BP has one of the industry’s better environmental records. BP’s American depositary receipts are trading for $24. The stock could double in two or three years.
Q: What could BP earn in a more normalized environment?
A: Kaser: BP could earn $4 a share in a really good scenario, but that involves layering on many assumptions. Last year, it earned $2.95. BP and Canadian Natural Resources are our biggest energy positions, by far. We have smaller positions in ConocoPhillips and Chevron. The theme here is companies that can generate free cash flow at lower oil prices than many of their peers. We just sold our stake in Royal Dutch Shell after reviewing the company’s cash flow and dividend security with some updated assumptions.
Q: What would reignite your interest in oil-services stocks?
A: Kaser: Time is the biggest issue. Things will get worse before they get better. Oil-services stocks were pricing in hopes of improved drilling activity, but everything is going in the wrong direction for them. If the stocks were trading at hugely distressed levels, that would be an important variable, but is Schlumberger (SLB) a no-brainer at $16 a share? Not for us. If oil demand looked to be recovering in a sharp V, the stocks might be more interesting.
Q: Phil, you’re a fan of the majors and refiners. Which names do you like?
A: Gresh: If I had to choose between the refiners and the majors, I would choose the refiners. The refiners look cheaper than the majors. Valero and Phillips 66 (PSX) are both trading at about a 10% free-cash-flow yield based on our 2022 normalized expectations, with less than two times net debt to Ebitda [earnings before interest, taxes, depreciation, and amortization] on this basis. The majors trade around a 6% free-cash-flow yield, with similar leverage, using $50-a-barrel Brent in 2022.
Valero is a best-in-class pure-play refiner. It offers a good combination of balance-sheet defense and cash-flow-generation offense. Physically, it has a greater percentage of capacity than other U.S. refiners on the Gulf of Mexico coast. If you think about where crude is being stockpiled, the U.S. Gulf Coast is well positioned to take advantage of price dislocations.
We think of Phillips as more of an integrated company, but without direct exposure to upstream [oil and gas extraction] activities. It has solid assets across refining and marketing, midstream, and chemicals.
Q: What sort of earnings do you see for these companies?
A: Gresh: Assuming a more normalized environment, Valero could earn $5.50 a share in 2022. At a recent $64 a share, it is trading for less than 12 times normalized earnings. Phillips 66 was recently trading around $72. We estimate 2022 earnings of $6.25 a share, so the price/earnings multiple is also under 12 times. Both stocks screen attractively relative to almost any upstream company on free-cash-flow yield and balance sheets.
Q: Will Valero and Phillips lose money this year?
A: Gresh: I expect Valero to lose $2 a share this year because it is cutting capacity utilization to closer to 80% from a more normal 95%, owing to Covid-19 demand impacts. Crack spreads [the difference between the price of crude and the prices of refined products] are going to be very weak in the second quarter. My 2022 estimate is similar to 2019’s earnings of $5.46 a share. If there is one company in refining, and possibly the entire energy sector, that might stay profitable this year, it would be Phillips 66. We see it earning $1.45 a share, albeit down from $8 last year.
Among producers, Canadian Natural Resources is the cheapest name in a $50-Brent world. It has a bit more balance-sheet leverage to work through, so you need a higher risk tolerance than for some other names.
Among the majors, I prefer Chevron to Exxon. On the E&P side, I like ConocoPhillips. But again, I prefer the refiners from a valuation perspective. For oil to work, refining has to work. If demand improves, refiners will benefit first. They have done a better job than producers of trying to prevent an inventory buildup. The U.S. refiners have impressed with industry discipline thus far, building less product inventory than we expected.
Q: What are your earnings estimates for Chevron?
A: Gresh: We expect Chevron to lose a dollar a share this year, and earn about $3.10 in 2022. If oil returns to $60 a barrel or more, it could earn $5.50 to $5.75. The free-cash-flow yield in a $50-oil world would be roughly 6%, competitive with the overall market. In a world of $60 oil prices, that yield would be closer to 8%. With oil at $50, the balance sheet would be levered 1.5 times, which is top-tier in the oil majors.
Q: What would get you interested in Exxon Mobil’s shares?
A: Gresh: I’d like to have more confidence in the downstream and chemicals businesses, which used to differentiate Exxon Mobil from competitors. The fact that normalized earnings power for those two businesses is lower than in the past has capped my upside view of the stock. Part of Exxon’s challenge is that a lot of its downstream and chemicals operations are in international markets, where profitability has been much worse than in the U.S. That is a structural challenge for Exxon, relative to the independent U.S. refiners.
Second, I’d like to have more confidence in the company’s defensive characteristics. Exxon used to be the most defensive company in the sector, whether judging by its break-even or its balance sheet. But it has taken on a fair amount of debt over the past few years. There are ways to reduce debt: For example, Exxon has an announced asset-sale program that would be fairly aggressive, but that would be difficult in the current oil-price environment. The other lever to pull would be cutting the dividend. If the oil-price downturn prolongs into 2021, we wouldn’t rule that out.
Q: Rob, master limited partnerships have been decimated this year, resulting in supersize losses for some Tortoise funds, particularly closed-end funds such as Tortoise Energy Infrastructure and Tortoise Midstream Energy, which were forced to sell assets to pay down debt. What happened, and is there a future for these sorts of vehicles?
A: Thummel: Tortoise launched closed-end funds focused on investing in MLPs in 2004. Tortoise MLP funds such as (TYG) and (NTG) have maintained leverage levels around 30% of total assets over the life of the funds. These closed-end funds are governed by the 1940 Act that requires certain amounts of asset coverage, relative to leverage. If they can’t maintain the required asset coverage, one option is to sell assets.
Our funds, and some others, were forced to sell midstream stocks, including MLPs, as asset prices plummeted. Lower leverage levels for closed-end funds is probably the wave of the future. We also manage an open-end fund, Tortoise MLP and Pipeline Fund (TORTX), that doesn’t employ leverage.
As for bringing investors back, the midstream business—transporting oil and gas from where it is produced to where it’s consumed—is essential. The large, integrated midstream companies, such as Williams Cos ., will be able to continue paying their dividends from cash flow, without becoming too leveraged.
Williams generates much of its Ebitda from transporting natural gas and natural-gas-related products. The stock yields around 9%. Cash flow will come down this year, but by far less, percentage-wise, than the stock has fallen. [Williams shares are down about 17% year to date, to a recent $19.37.] Williams owns and operates some of America’s most critical natural-gas energy infrastructure assets, including the Transcontinental Gas Pipe Line, or Transco.
Cheniere Energy (LNG) is another natural-gas-related company we like.
Q: What is the attraction?
A: Thummel: The stock has been beaten up because investors have been concerned about continued global demand for liquefied natural gas. It is important that countries around the world, particularly China and India, use less coal and more natural gas to reduce carbon-dioxide emissions. That is happening in the U.S. Other countries are buying more LNG from the U.S.; Cheniere will benefit from this.
Among MLPs, Enterprise Products Partners (EPD) is a large, diversified midstream company that owns natural-gas assets and crude-oil and natural-gas-liquids infrastructure. The stock yields 10%.
The management team has been in place for decades. We have been invested in Enterprise for more than 15 years, and it has increased the dividend, or distribution, annually for at least 15 years. Leverage is low. Enterprise, too, will see declining demand in 2020, but is well positioned to participate when demand increases. And, it has adequate dividend coverage.
We also like Magellan Midstream Partners (MMP) which transports gasoline, crude oil, and jet fuel. As the economy recovers and consumers get back to work, there will be more demand for all energy commodities, and specifically gasoline. Diesel demand has remained fairly strong. Our stress tests indicate that Magellan’s dividend is secure, and its yield, around 10%, could be compelling to investors.
Q: Occidental Petroleum has been a controversial stock since the company’s costly acquisition of Anadarko last year. Phil, what is your view on Occidental?
A: Gresh: We have rated the stock Underweight since August, when the Anadarko deal closed. Back then, it traded for $45. Today, it trades for $15. Our price target is $5. Occidental (OXY) took on a lot of debt to do that deal, and issued $10 billion of preferred stock to Warren Buffett . The debt was downgraded to junk status recently by several credit-rating agencies, so that could create refinancing risk.
Occidental has $11 billion to $12 billion of debt coming due in 2021 and ’22. It financed the debt at 3% to 4%, but might have to pay 10% to 12% to refinance it, according to some high-yield analysts. The company has slashed its operating and capital spending, but production could fall by double digits in 2021, which means less cash flow to pay down debt in the future. Asset sales are one lever the company is hoping to pull, but we’re waiting to see how things play out with the refinancing.
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