Case Study: What Credible analysts are saying on Occidental Petroleum (OXY) stock
Key Points
Occidental Petroleum (OXY) shares were flat this week; however, they’re up by nearly 17% during the last month. On a year-to-date basis, Occidental shares are up by 139.31%, making the stock a major out-performer during a year when the S&P 500 is down nearly 17%.
Warren Buffett’s Berkshire Hathaway continues to accumulate OXY shares, driving up its valuation.
OXY posted Q3 results this week, beating Wall Street’s consensus on the top-line, but missing on the bottom-line by $0.01/share.
73% of recent articles published by credible authors were “Bullish”. Only 4 out of 8 credible Wall Street analysts believe shares are headed higher. The average price target being applied to Occidental shares by credible analysts is $77.35, which implies upside potential of approximately 3.9% relative to OXY’s current share price of $74.33.
Performance
Event & Impact
Noteworthy News:
Nobias insights
The energy sector continues to be the major out-performer during 2022. Although the S&P 500 rallied more than 5% this week, the major index is still down nearly 17% on the year and the energy sector is the only sector showing positive performance.
Energy stocks are up by 69.38% on the year, outpacing all other areas of the market by a wide margin. And within the energy space, Occidental Petroleum (OXY) has been one of the biggest winners for investors this year, up 139.31% on a year-to-date basis.
OXY shares were flat this week; however, over the last month they’ve risen by 16.8%. The company posted third quarter earnings this week and with those results in mind, we’re seeing a mixed bag when it comes to future expectations between the credible author and analyst communities.
OCY Nov 2022
Bearish Nobias credible authors:
Fun Trading, a Nobias 4-star rated author, published an article at Seeking Alpha this week titled, “Occidental Petroleum: Strong Quarter But Not Strong Enough”. The author put a spotlight on OXY’s strong trailing twelve month performance, writing, “Occidental Petroleum is up 122% on a one-year basis.” They continued, “The excellent recovery was led by higher commodity prices reaching over $94 per barrel and Buffett's renewed interest in Berkshire Hathaway (BRK.A, BRK.B), increasing its stake in the company to 20.7% after buying nearly 6 million shares in September.”
Looking at the company’s quarterly results, Fun Trading said, “Occidental Petroleum reported third-quarter 2022 adjusted earnings of $2.44 per share, falling short of analysts' expectations but well over the $0.87 per share made last year.” They stated, “The increase can be attributed to operating efficiencies and significantly higher commodity prices.”
Looking at the company’s top-line, Fun Trading said, “Total revenues were $9.501 billion, which was better than expectations.” The author continued, highlighting Occidental’s segment revenue, stating:
Oil and Gas revenues were $7,098 million, up 43.3% from 3Q21.
Chemical revenues were $1,691 million, up 21.1% from 3Q21.
Midstream & Marketing revenues were $1,005 million, up 43.2% from last year.
Fun Trading also highlighted a quote from Occidental’s CEO, CEO Vicki Hollub, from the quarterly in the conference call: “We delivered another strong quarter operationally and financially, enabling us to further advance our shareholder return framework as we made meaningful progress toward completing our $3 billion share repurchase program. We achieved our goal of reducing the face value of our debt to the high-teens and plan to continue repaying debt through the remainder of this year before allocating a higher percentage of cash flow to shareholder returns next year.”
And yet, even with OXY’s fundamental growth and management’s increased shareholder return program in mind, Fun Trading remains concerned about the stock’s relative value. They wrote, “Buffett's buying spree has propelled the stock price artificially to new highs, pushing the stock to a much higher valuation than is fair if we compare it to a few other strong companies in this industry.”
“Still,” Fun Trading concluded, “I see it as an inflated level that could be a substantial negative if the world economy falters due to over-reasonable commodity prices, weakening world stability where emerging countries bear the brunt of the pain.”
Two things that could justify a premium valuation are an improving balance sheet and unique long-term growth prospects. In a recent article that he published at the Motley Fool on Occidental, Tyler Crowe, a Nobias 4-star rated author, highlighted both of these aspects.
Crowe began his piece off on a bullish note, writing, “Occidental's oil and gas business is looking better by the day.” He continued, “ After taking a risky bet in 2019 to acquire Anadarko Petroleum, which required a lot of debt and special financing from Berkshire Hathaway, the recent period of high oil prices has helped to improve its financials drastically. According to management, its current operations can support its current dividend as long as domestic oil prices remain above $40, and it has been putting much of its excess cash toward debt reduction.”
Regarding Occidental’s balance sheet, Crowe said, “Its debt load peaked in the second quarter of 2020 at $37.4 billion, and has since been reduced to $20.2 billion for a debt-to-capital ratio of 43%.” But, echoing the Vicki Hollub statement highlighted by Fun Trading, Crowe wrote, “Management believes it no longer needs to pay down debt immediately and will pay down debt as it matures. In the interim, it plans to buy back stock. In the most recent quarter, it repurchased about $1.1 billion worth of shares.”
With regard to long-term growth prospects, Crowe mentioned that, “The company's investor presentations highlight a plan to use its current oil and gas operations as a cash-generating engine to incubate its carbon capture and sequestration plans.” He continued, “Occidental is uniquely positioned in this business because it has extensive assets and expertise in what is known as Enhanced Oil Recovery (EOR). EOR is a type of oil production that involves injecting CO2 into older oil and gas wells to repressurize the reservoir and extract more oil.”
Crowe said, “Management believes that it can use these assets as a way to capture and transport CO2 to injection sites or to facilities that can create products from the captured carbon.” But, he notes that there is a potential issue for investors here.
Crowe says, “The challenge to this whole plan is that it is based largely on a carbon market that does not yet exist.” He continued, “Much of the rationale for these facilities is based on Article 6 of the Paris Climate accords, which outlines a plan to develop a global market such that we can assign a dollar value to carbon emissions.”
With this uncertainty in mind, Crowe concluded, “Even though Occidental has the Buffett stamp of approval, I would be more comfortable knowing that a carbon trading market is established before buying this stock.”
Bullish Nobias credible authors:
While these two credible authors published cautious Occidental reports recently, Growth at a Good Price, a Nobias 4-star rated author, published a bullish post-earnings report at Seeking Alpha this week. Growth at a Good Price also highlighted OXY’s valuation, stating: “Before today’s earnings release came out, OXY traded at:
9.96 times adjusted earnings.
2 times sales.
3.9 times book value.
4.8 times operating cash flow.”
However, unlike Fun Trading, Growth at a Good Price likes the stock’s price, stating, “The bottom line on Occidental Petroleum is that it’s a thriving oil company that just put out solid earnings. It’s cheap, it’s growing fast, and it’s paying off its debt.”
Regarding earnings-per-share growth, the author said, “As I wrote previously, OXY is in a great position to grow its earnings and cash flows from here. Due to the ongoing debt reduction, it can increase its earnings even without rising oil prices. So, it’s safe to assume that there will be some year-over-year growth going forward. However, for the sake of conservatism, I will assume it’s only 10% per year.”
“Now,” the author said, “if we assume 0% growth, we can come up with a terminal value estimate for OXY. Using an 10% discount rate, the last 12 months’ cash flows are worth $130.09.” They continued, “If we assume 10% CAGR growth over 5 years and no growth after that, we get a $196 price target.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
“That’s a truly enormous amount of upside to today’s prices,” Growth at a Good Price wrote. “But of course,” they continued, “this estimate involves a future growth projection that may not correspond to what unfolds.” “Nevertheless,” they concluded, “even with 0% growth, OXY has upside. So, despite all of the gains it has already made, the stock looks appealing.”
Summing up their bullish report, Growth at a Good Price stated, “This stock has been among the S&P 500’s best performers this year for a reason. Few companies have turned their fortunes around quite like OXY has since 2020. Yes, the company is subject to certain risk factors. But on the whole, the risks inherent in buying OXY are risks I’m comfortable taking. If you’re a risk-averse investor who is uncomfortable with volatility, then oil stocks might not be for you. For those willing to bet on the future of a very strong company, Occidental Petroleum Corporation is a worthy pick.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, it appears that most of the credible authors covering OXY shares agree with Growth at a Good Price’s assessment; 73% of recent articles published by credible analysts have expressed a “Bullish” bias. However, credible Wall Street analysts aren’t quite as enamored with OXY shares. Only 4 out of the 8 credible analysts that Nobias tracks believe that OXY shares should increase in value. Right now, the average price target being applied to OXY by credible analysts is $77.25 which implies a 3.9% upside potential from today’s $74.33 share price.
Disclosure: Nicholas Ward has no OXY position. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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