To The Moon

$Occidental(OXY)$

We've recently experienced one of the worst 90-day periods in the S&P in quite some time, and during this span, Accidental Petroleum has dropped around 8%. While other companies in the same sector have shown slightly different performance, many, including the Mag 7, are having a rough time this year. Accidental Petroleum itself is down 3% year-to-date, which is in contrast to many others in the industry, who are performing positively. The S&P is also down about 3% year-to-date and has fallen roughly 25% over the past 12 months. Over the last 10 years, Accidental Petroleum has significantly underperformed the S&P, with a loss of 34%. This means a $10,000 investment 10 years ago would be worth around $6,500 today—less than your initial investment. Currently, the stock is near its 52-week low, and while both Seeking Alpha and Quant have given it a "buy" rating, Wall Street considers it a "hold." The dividend yield is sitting at about 2%.

Earning Overview

For those unfamiliar with the company, Accidental Petroleum is an energy firm involved in oil and gas exploration, production, and chemical manufacturing. It operates in the U.S., the Middle East, and Latin America, producing crude oil, natural gas, and petrochemicals. The company also invests in carbon capture and storage technologies to reduce emissions. Its chemical segment manufactures basic chemicals for industries like construction and agriculture. Warren Buffett has been consistently purchasing shares of Accidental Petroleum, including a notable period last year when he bought stock for nine consecutive days, raising his stake in the company. Even in December, when the stock was down about 30% from its highs, Buffett continued to buy. In the most recent quarter, he purchased around 9 million shares—adding 7.3 million in Q2 and 4.3 million in Q1.

Fundamental Analysis

Looking at Accidental Petroleum's sales growth, we see a mixed picture. Over the past decade, their top-line revenue has decreased in five of those years, with negative growth of 23% in 2023 and a projected 5% decline in 2024. On a more positive note, profitability is strong, with a gross margin of 63%, above the sector’s average of 46%, and slightly higher than their 5-year average of 61%. The company’s bottom line margin stands at 12%, which is also above the sector (9%) and their own 5-year average (-4%). Additionally, cash generated from operations is robust at $11.4 billion, far exceeding the sector’s $584 million and their own 5-year average of $10.5 billion.

Institutional Confidence and Buying Activity

Institutional investors also show confidence in the company, with about 89% ownership. Over the past year, they’ve sold around $1.73 billion but have bought $3.1 billion worth, buying three times as much as they sold in the most recent quarter. Although Buffett is currently at a loss, institutions seem quite bullish, especially for 2024.

Guidance

Inconsistency and Margin Performance Despite these strong figures, the company’s performance remains inconsistent, particularly due to the cyclicality of the industry. Notably, Accidental Petroleum has not achieved a positive operating margin every year, which is something we expect to see for oil producers. Free cash flow is better, with a solid 16% on a trailing 12-month basis, though there's still no consistency in most years. The dividend growth rate stands at 9.1%, though over the last five years, it has decreased by 22.5%. Over the past 20 years, the dividend has grown at an average rate of 2.4%, which is below the inflation rate of 4%. It's also worth noting that they've only been consistently increasing dividends for the past three years.

Share Dilution and Return on Invested Capital (ROIC) Instead of returning excess cash to investors through share buybacks, Accidental Petroleum has actually diluted shareholders by increasing the share count from 766 million in 2015 to 967 million today. This is an important factor to consider for potential investors. As for return on invested capital (ROIC), while there has been no consistency, the company has achieved an ROIC of around 8% over the past four years, which meets the industry’s minimum threshold.

Free Cash Flow

Declining Cash Position and Growing Debt

We've observed that Accidental Petroleum’s cash position has been decreasing over the last 10 years, dropping from $3.2 billion in 2015 to $2.1 billion today. However, it's important not to view this number in isolation. When compared to the company's total debt, we see a more concerning trend. Over the same period, their total debt has increased significantly, rising from $8.3 billion in 2015 to $27 billion today. This shift highlights the need for further scrutiny, which is why we incorporate a margin of safety in our own valuation model moving forward.

Technical Analysis

Risks and Challenges

Revenue and Profit Inconsistencies We also examined the company’s revenue growth, which, despite the cyclical nature of the industry, has shown progress. In 2015, revenue was $12.5 billion, and it has nearly doubled, reaching $27 billion in the most recent annual accounts (December 2024). However, the bottom line tells a different story. Net income has been inconsistent, with notable losses, such as a $7.8 billion net loss in 2015, and a $3.1 billion loss in the most recent year. This highlights the cyclical nature of the business, reflected in fluctuating profits and losses. Additionally, the company’s financial health, including cash versus total debt, is something worth considering.

Cyclical Earnings and Future Projections Accidental Petroleum’s earnings have shown significant cyclicality, with only two of the next four quarters expected to show growth. That said, they have outperformed expectations for the past four quarters, achieving growth in all of them. Based on an EPS of $3.50, the forward valuation stands at 13.7. Growth is rated at a B-, with a negative 5% growth rate this year. This is well below both the sector's low single digits and their own 5-year average of 12%. Going forward, growth is expected to be nearly flat, aligning with both the sector and their historical growth rate. However, EPS is projected to grow by 13% over the next 3 to 5 years, outpacing the sector's expected 8.5% and a significant improvement from their historical growth rate of -1%.

Net Debt and EBITDa Finally, we evaluate the company's net debt to EBITDart ratio, which indicates the number of years it would take for the company to pay off all its debt. For the industry, we aim for a ratio below 1.5, and Accidental Petroleum is just above that on a trailing 12-month basis. While not overly concerning, this is something we’ll need to monitor closely each quarter to ensure that there is sufficient room for dividend safety.

Valuation

Looking at the forward valuation, the company’s P/E ratio is 13.4, which is close to its 5-year average of 12.8—suggesting a reasonable price. When applying dividend yield theory, which indicates undervaluation when the current yield exceeds the 5-year average, Accidental Petroleum's 2% yield may signal undervaluation, considering the 5-year average yield was only 0.88%. Another model, the Blue Tunnel, suggests the expected fair price is within a reasonable range, though it hasn't been rising over time. The company's valuation grade is a "D" since it's trading at a premium compared to the sector's average of 11.6, meaning you're paying around 19% more for the stock. However, different valuation methods may lead to varying conclusions.

Intrinsic Value Analysis

Now, moving on to the intrinsic price of Accidental Petroleum, which is calculated at just under $56 today, based on four different valuation models. We’ll go over the inputs for each one, starting with Graham's Valuation. This model uses the stock ticker symbol, EPS, long-term growth rate, and AAA corporate bond yield to determine the intrinsic value, signaling undervaluation. However, we don’t rely solely on any one model.

Next, we have the multiples model, which compares the price-to-sales (PS) ratio of similar companies in the sector and multiplies it by Accidental Petroleum’s EPS. This signals overvaluation, giving us a 1:1 balance with the first model.

The third model is the Dividend Discount Model. Given that the company recently lowered its dividend, we used a conservative growth rate of 6.25%, lower than the last few increases, signaling another undervaluation.

Finally, we use the Discounted Cash Flow (DCF) model, which considers free cash flow from the most recent year, and applies a conservative future growth rate of -2%. After calculating the present value of future free cash flows and terminal value, subtracting total debt, and dividing by the shares outstanding, the equity value comes out to $64. This gives us three undervaluation signals and one overvaluation signal, leading to an average intrinsic value of $56.

Margin of Safety and Potential Buy Price

We always apply a 10% margin of safety (MOS) in our valuation process. If a company meets our three golden criteria—wide moat, strong financial metrics, and solid forward-looking data—then we proceed with further analysis. In this case, using a 10% MOS, Accidental Petroleum’s buy price would be around $50. With a 15% MOS, that would drop to $45, and at 20%, it would be $42. Currently, with a 15% MOS, the price is close to $50, suggesting some room for growth.

Wall Street's target for Accidental Petroleum is just under $59, implying a 22% upside. Some investors may prefer a larger margin of safety, and in that case, a 20% MOS would suggest a buy price of $45, or $42 with a 25% MOS, and $39 with a 30% MOS.

Market sentiment

When comparing Accidental Petroleum’s performance to the S&P, we see notable differences. Over the last year, Accidental Petroleum, including reinvested dividends, is down 24%, while the S&P is up 8%. However, over the past five years, Accidental Petroleum has significantly outperformed the S&P, with a gain of 418% versus the S&P’s 153%. Over the past 10 years, the picture shifts again, with Accidental Petroleum down 11% while the S&P is up 175%. Even with reinvested dividends, Accidental Petroleum's performance over the past decade would still leave investors with a loss of around 11%. As always, it’s important to remember that past performance does not guarantee future results.

Accidental Petroleum has the potential to significantly outperform the S&P moving forward, but it could also continue its current trend of underperformance. It's important to consider that investors remain relatively optimistic about the economy, despite being in a period of extreme fear that has lasted nearly a month. Even though the S&P experienced a correction this month, many companies are still in the red with high valuations. When looking at Accidental Petroleum, it's trading around the $12 mark, which is typical for the industry. While it might appear attractive at this price, we need to assess how it compares to the broader sector, which is why we always take an extra step and run the company through our own valuation process.

Conclusion

As mentioned earlier, Warren Buffett has continued to buy Accidental Petroleum, even as its price has dropped around 25% over the last year and 40% from its 52-week high. So, would you consider this a good opportunity to buy at a lower price than Buffett’s purchase price? Let us know your thoughts—whether you see this as a buy, hold, or sell at current levels.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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