Occidental Stock Is Still Quite Undervalued

seekingalpha04-23

Occidental Petroleum's latest financial results showed a decline in revenue and earnings due to lower commodity prices. But the stock is recovering. More to come, in my view.Occidental's acquisition ...

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More to come, in my view.Occidental's acquisition ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685310-occidental-stock-is-still-quite-undervalued\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Occidental Stock Is Still Quite Undervalued</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nOccidental Stock Is Still Quite Undervalued\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-23 23:35 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4685310-occidental-stock-is-still-quite-undervalued><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Occidental Petroleum's latest financial results showed a decline in revenue and earnings due to lower commodity prices. But the stock is recovering. More to come, in my view.Occidental's acquisition ...</p>\n\n<a href=\"https://seekingalpha.com/article/4685310-occidental-stock-is-still-quite-undervalued\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SG9999015341.SGD","symbol_name":"United Income Focus Trust Acc SGD-H","start_time":0,"source_url":"https://seekingalpha.com/article/4685310-occidental-stock-is-still-quite-undervalued","article_id":"2429211149","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1220229790/image_1220229790.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2429211149","pubTimestamp":1713886515,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Is it worth taking a bullish perspective on the company again?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"SG9999015341.SGD":"United Income Focus Trust Acc SGD-H","LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","LU0985489474.SGD":"First Eagle Amundi International AHS-C SGD-H","LU0300736062.USD":"FRANKLIN NATURAL RESOURCES \"A\" (USD) ACC","LU0122376428.USD":"贝莱德世界能源基金A2","IVV":"标普500指数ETF","LU0878866978.SGD":"First Eagle Amundi International AHS-QD SGD-H","SPY.AU":"SPDR® S&P 500® ETF Trust","SSO":"两倍做多标普500ETF","LU0795875169.SGD":"JPMorgan Investment Funds - Global Income A (div) SGD-H","LU0256863811.USD":"ALLIANZ US EQUITY \"A\" INC","OXY":"西方石油","WACC":"WestAmerica Corp.","LU1496350171.SGD":"FRANKLIN DIVERSIFIED BALANCED \"A\" (SGDHDG) ACC","LU1732799900.SGD":"JPMorgan Investment Funds - Global Income A (irc) SGD-H","LU0433182093.SGD":"First Eagle Amundi International AS-C SGD","SU":"森科能源","SDS":"两倍做空标普500ETF","SG9999014575.USD":"UOB UNITED INCOME FOCUS TRUST FUND (USDHDG) INC","SH":"标普500反向ETF","LU0068578508.USD":"First Eagle Amundi International Cl AU-C USD","LU1839511570.USD":"WELLS FARGO GLOBAL FACTOR ENHANCED EQUITY \"I\" (USD) ACC","SPXU":"三倍做空标普500ETF","LU0792757196.USD":"TEMPLETON SHARIAH GLOBAL EQUITY FUND \"A\" (USD) ACC","XLE":"SPDR能源指数ETF","LU1732800096.USD":"摩根大通环球收益基金A (irc)","BK4201":"综合性石油与天然气企业","BK4516":"特朗普概念","IE00B1XK9C88.USD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A\" (USD) ACC","UPRO":"三倍做多标普500ETF","SPY":"标普500ETF","LU1280957306.USD":"THREADNEEDLE (LUX) US CONTRARIAN CORE EQUITIES \"AUP\" (USD) INC","LU0868494617.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) ACC","IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","BK4534":"瑞士信贷持仓","LU0320765646.SGD":"FTIF - Franklin Income A MDIS SGD-H1",".SPX":"S&P 500 Index","OEX":"标普100","SG9999014559.SGD":"United Income Focus Trust Dis SGD","BK4566":"资本集团","XOM":"埃克森美孚","OEF":"标普100指数ETF-iShares","CVX":"雪佛龙","LU1066051498.USD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM2\" (USD) INC","LU1066053197.SGD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM3\" (SGDHDG) INC","SG9999014567.USD":"UOB UNITED INCOME FOCUS TRUST FUND (USD) ACC","BK4559":"巴菲特持仓","LU0266512127.USD":"摩根大通环球自然资源 A(acc)","BK4550":"红杉资本持仓"},"translate_title":"西方石油公司的股票仍然被低估","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SPY.AU":1,"OXY":1,"SPY":1,"CVX":1,"SU":1,"WACC":1,"XLE":1,"XOM":1,"OEF":0.6,"OEX":0.6,"SDS":0.6,"SH":0.6,"SPXU":0.6,"SSO":0.6,"UPRO":0.6,"ESmain":0.6,"IVV":0.6,".SPX":0.6},"content_text":"Occidental Petroleum's latest financial results showed a decline in revenue and earnings due to lower commodity prices. But the stock is recovering. More to come, in my view.Occidental's acquisition of CrownRock is expected to boost its FCF. OXY aims to repay ~$4.5 billion of debt within the 1st year of closing the transaction.Once Occidental Petroleum reaches a $15 billion principal debt level, management intends to start a sustainable share repurchase program.I estimate OXY's growth potential in the form of a range. $80-96 is my price objective, which means an upside potential of 20-44% from the current market price.   mysticenergy Introduction Over the past year, Occidental Petroleum Corporation (NYSE:OXY) stock started to trade in the positive zone relatively recently (on a total return basis), but it still lags the main benchmark, the Energy Select Sector SPDR® Fund ETF (XLE). However, when looking at YTD momentum, OXY beats the SPDR® S&P 500 ETF Trust (SPY) by a wide margin, although it still lags XLE: YCharts, author's notes Apparently, the recent strength of OXY is mainly due to the strength of crude oil, whose prices only began to recover at the beginning of 2024: Seeking Alpha, Brent futures Three months have passed since my last update on OXY - my bullish call finally started to bear fruit, coinciding with the strength of the underlying's price action. Seeking Alpha, my coverage of OXY But how much growth potential does OXY have now? Is it worth taking a bullish perspective on the company again? Let's find out together. Latest Financials And Developments While OXY significantly outperformed consensus estimates in the final quarter of last year, the company's recent results and apparent management commentary have led the vast majority of Wall Street analysts to lower their forecasts for Occidental's future sales and profits: Seeking Alpha, OXY's Earnings, the author's notes Let's take a look at the performance of OXY's business segments and try to understand how bad (or good) everything is. In Q4 2023, Occidental's revenue fell 13% YoY but beat the consensus forecast. The firm reported adjusted EPS of $0.74 per share, down from $1.61 per share in the prior-year period. The Oil & Gas division's pre-tax net income decreased from $2.466 billion to $1.572 billion, mainly due to lower commodity prices, although average daily production increased by 1% to 1,234 thousand barrels of oil equivalent per day (mboe/d). The Chemicals segment (OxyChem) reported a 45% decline in EBT, mainly due to lower polyvinyl and caustic soda prices, lower volumes, and higher operating and raw material costs. So since these 2 segments account for ~94% of the whole revenue (based on FY2023 results), this decline in sales and EPS can be explained primarily by lower realized commodity prices for crude oil (-6%), natural gas liquids (-21%) and natural gas (-50%) - increased production and higher lease operating expenses couldn't offset it. In contrast, the Midstream and Marketing segment reported Q4 EBIT of ~$182 million, a significant improvement over the prior year quarter due to higher gas margins and improved sulfur prices. In addition, Occidental announced its intention to acquire the oil and gas producer CrownRock L.P. for around $12.0 billion. The purchase is to be financed through a combination of new debt, and the issuance of common stock. The transaction should close in 2H 2024 (subject to regulatory approvals). OXY's recent IR materials As you can see from the slide above, the proposed acquisition of CrownRock is expected to add ~170 mboed of high-margin, lower-decline unconventional production from the Midland Basin, along with 1,700 new undeveloped locations. So based on that, this M&A deal appears to align seamlessly with Occidental's strategic objectives as it's poised to enhance and complement OXY's shale-rich portfolio, particularly in the Permian and Midland basins. The completed deal could significantly boost FCF, with an estimated $1 billion generated in the 1st year post-transaction close (based on a $70 per barrel WTI assumption). Just to add color, for the whole financial year of 2023, OXY generated ~$5.5 billion in free cash flow, enabling it to pay dividends ($1.4 billion), repurchase common shares (29.1 million shares or $1.8 billion), and invest back into the business (FY2023 CAPEX amounted to $6.27 billion). Therefore, by paying only pay 12x FCF for supposedly high-quality assets, OXY's FCF could grow by about 18.2% even if oil prices are much lower than today (-13.5%). At the same time, I think OXY has timed it well and underpaid for CrownRock: OXY itself and its peer Chevron (CVX) are trading much higher than the multiples at which CrownRock can be valued today - so from a valuation analysis perspective, this deal is already profitable for OXY, as far as I can see it. YCharts, author's notes As we can get from the recent management's earnings commentary, Occidental aims to repay ~$4.5 billion of debt within the 1st year of closing the CrownRock transaction - this repayment plan will be facilitated by proceeds from asset sales, targeting a total of $4.5-6.0 billion. Looking further ahead, management views a $15 billion principal debt level as ideal for the company, anticipating improved leverage metrics post-transaction due to higher FCF and EBITDA contributions from CrownRock. According to Seeking Alpha data, OXY's total debt today is ~$21 billion if we include the operating leases in our calculation (they still represent financial commitments that OXY must meet). So upon reaching that target debt level of $15 billion, management plans to initiate a sustainable share repurchase program. With Occidental's Permian unconventional assets with a breakeven inventory below $40 per barrel, I think that even despite market fluctuations, the company's business should stay resilient enough to buy back more and more stock from the market in the future. The management also sees potential regarding Low Carbon Ventures (LCV) and OxyChem, noting competitive advantages, and potential cash flow uplift, particularly with the expiration of certain Midstream contracts in 2025 and the completion of the Battleground Expansion in 2026. OXY's recent IR materials, the author's notes On the whole, I like what I see in OXY's financials. Yes, they are largely dependent on the future direction of crude oil prices, but according to EIA forecasts, we shouldn't see wild swings in 2024 and 2025 - average prices will likely slowly decline, which I think provides an opportunity for OXY's strategic moves to offset this potential negative impact.  We forecast the Brent crude oil price will decrease year-over-year from an average $90/b in 4Q24 to an average $86/b in 4Q25, with annual averages of $89/b in 2024 and $87/b in 2025. Source: EIA, emphasis added by the author  Much will now depend on how far the company's valuation has moved up since the stock's recent recovery. OXY's Valuation Update According to the Seeking Alpha Quant System, OXY is currently rated \"D-\", with most valuation multiples showing a premium of 30-60% to the sector median: Seeking Alpha, OXY's Valuation Grades However, in terms of FCF yield, it cannot be said that OXY is trading at a very high price: Yes, compared to late January when I saw an FCF yield of 12.25%, OXY's FCF yield has gotten smaller due to the price appreciation, but it's still higher than Exxon Mobil's (XOM) or even Suncor Energy's (SU) - although the historical spread between them has narrowed slightly. Data by YCharts So if we take into account the growth prospects of Occidental's FCF thanks to the CrownRock deal, we can expect the stock to continue its rally, provided the current FCF yield is maintained. If we expect at least a small multiple expansion - a quite possible scenario if the oil price remains above $80 per barrel in the medium term - then I assume that even with today's consensus EBITDA forecasts for next year, OXY's stock price target can be safely set above $95 based on my calculations: YCharts, author's notes The analysts at BofA come to less optimistic conclusions, but at the same time assume relatively moderate inputs:  Our price objective of $80/sh assumes $75 Brent and $70 WTI long-term. We assume long-term HH natural gas of $4.00. We apply a long-term (post-tax) weighted average cost of capital (WACC) of 7.9%, which is based on the BofA strategy team's assumed risk premium and a five-year monthly beta. Source: BofA [proprietary source]  In my opinion, the truth should be somewhere in the middle, so this time I estimate OXY's growth potential in the form of a range: $80-96 is my price objective, which means an upside potential of 20-44% from the current market price. Based on that, I'm reiterating my previous \"Buy\" rating today. Risks To Consider The risk factors that investors should carefully consider before buying Occidental Petroleum stock are not significantly different from those I listed in my previous article. First off, it's the company's vulnerability to fluctuations in oil prices. That's logical - since OXY is closely tied to the oil & gas industry, changes in commodity prices can lead to big swings in stock prices, impacting earnings and cash flow. Moreover, Occidental is exposed to global economic conditions and interest rates. Economic downturns or sustained high-interest rates could affect demand for oil and gas, impacting the company's revenue. Also, Occidental's recent focus on high-return core areas like the Permian Basin and parts of the Middle East, following asset sales, shows a strategic shift - while this can boost returns, it also exposes the company to regional geopolitical uncertainties, regulatory changes, and potential disruptions. In addition to that, the debt profile is going to be elevated for some time, bringing more risks to the table. The valuation calculations I made above (and BofA's) may prove to be too optimistic, and OXY's EV/EBITDA may fall even further. No one can know in advance how large and long-lasting the valuation discount will be. The Bottom Line Despite the significant risks surrounding the company, I still like Occidental - over time I'm beginning to better understand why Warren Buffett chose this company to allocate to oil. The management seems very effective to me, and the initiatives to increase FCF couldn't have come at a better time. Also, internally, I don't share the position of those who believe in the \"imminent demise of oil\" - they have been talking and writing about it for several years now, but if you look at the annual increase in oil production and consumption, you understand one important thing: oil is basically the only more or less \"understandable\" commodity for developing economies' continued growth. The tailwinds for OXY and its peers look quite substantial, and the bullish cycle is likely to be with us for a while. Given the company's current undervaluation of 20-44% (depending on the scenario), I recommend buying OXY at the current price level.  Thanks for reading!","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429211149"}