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A Cash Strapped World

Everyone seems to need cash these days. People without any cash are resorting to bartering for goods swapping eggs for toilet paper.  Corporations are in an equally precarious position drawing down their credit lines and issuing new bonds. In this scramble for cash their will be a reckoning between haves and have-nots. Companies that are highly leveraged may not have access to the capital they need to weather the storm. Additionally, even companies with investment grade ratings are being forced to raise capital at a premium in this low-liquidity environment. For example, Exxon with a Aaa/AA credit rating issued its debt at a premium to lower-grade companies. With the Oil industry in dire straits their access to capital will come with a large premium. So which companies look well positioned for the storm. Comparing Exxon, a well capitalized company, with Occidental, a highly leveraged corporation.

The first question to ask in the time of Coronavirus is will they have enough cash to cover their losses amid lower demand, and how strong does their balance sheet look. For oil companies specifically, the question is even more acute. Oil has reached an unprecedented price which is not sustainable to many of the market participants in America. Occidental has an asset to liability ratio of 1.4, whereas Exxon as a ratio close to 2. This is one of the fundamental reasons Exxon has ample access to liquidity. With an asset to liability that is low, Occidental will not be able to raise cash at a decent price. There are long-term ramifications to raising capital at expensive levels. The high yields Occidental must offer on its new issues, the interest it pays will weigh down earning for years.

Before Exxon raised new cash, Occidental and Exxon has similar cash positions. However, Exxon is much better situated now then Occidental is for a protracted period of low oil prices. In the fourth quarter Occidental had a profit margin of -2.94% compared with Exxon’s profit margin of 3.82%. With such a huge difference in profit margin before the massive price slump, Occidental will be on the brink of collapse.

The fortitudes of these companies are incomparable. Exxon is much better suited to survive the Coronavirus pandemic and emerge as a more dominant company, than Occidental. Occidental is on the brink of collapse and it’s viability unclear. Perhaps, I’m over dramatic with regards to Occidental’s survival chances, but if you were to bet on oil rebounding do not buy Occidental.

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