Occidental Petroleum

01/10/2014 8:00 am EST

Focus: ENERGY

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; it is from this sector that we chose our top conservative idea for the coming year, notes Eric Vermulm in InvesTech Market Analyst.

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

At the same time, 73% 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 27% of the 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 8%, significantly less than peers, which average 25% debt to capital.

With such a strong financial position, OXY's management has been able to raise the annual dividend by an average 17% over the past five years. As a result, OXY now yields 2.7%, 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. The process is ongoing, but some indications are that the company may spin-off of its California assets.

We like OXY for its superior profitability and financial strength, while 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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