Occidental: Value Enhancing

10/31/2013 7:00 am EST


Eric Vermulm, CFA

Senior Portfolio Manager, Stack Financial Management

The energy sector has a history of strong performance late in bull markets, coupled with defensiveness early in bear markets, suggests Eric Vermulm, senior portfolio manager of Stack Financial Management in InvesTech Market Analyst.

Taking that theme to the individual stock level, one of our preferred names in the energy patch is Occidental Petroleum (OXY).

Occidental is a growing energy company focused on stable geographic areas, with a production mix tilted toward oil. So far in 2013, over 60% of production has come from wells in the attractive geopolitical climate of North America.

At the same time, 71% of production has come in the form of liquids—oil and natural gas liquids—leaving the more volatile natural gas segment as the company's smallest, at only 29% of total.

With exposure to growing oil rich plays, such as the Permian Basin in West Texas, OXY is forecasting a healthy 5-8% annual production growth rate for the foreseeable future.

In terms of financial strength, OXY boasts one of the strongest balance sheets in the industry. Net debt to capital is a very manageable 9%, significantly less than peers, which have an average 25% debt to capital.

With such a strong financial position, management has the flexibility to make strategic acquisitions, buy back stock, or pay dividends.

Dividends are a priority of OXY's management team. Consistent dividend increases have allowed the annual payout to grow by an average of 15% over the past five years.

This has led to the current 2.7% dividend yield, which is well above median and high enough that it should provide some downside protection in a bear market.

Occidental's management is currently considering value enhancing restructuring options. Early indications are that the choices may include a spin-off of the company's California assets, or a divestiture of the international production fields.

Although Stack Financial Management owns OXY for its superior profitability and financial strength, having management look for more shareholder value is an added benefit.

With a shareholder focused management team and a 2.7% dividend yield, Occidental Petroleum looks attractive at eight times cash flow.

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