Occidental: Defense and Offense

07/10/2015 7:00 am EST


Eric Vermulm, CFA

Senior Portfolio Manager, Stack Financial Management

Our latest featured recommendation is an international oil and gas company with the growth potential and financial strength well suited for a late stage bull market, observes Eric Vermulm, analyst for Investech Market Analyst.

In the past, energy has been one of the best performers in a maturing bull market. Additionally, the defensive characteristics behind Occidental Petroleum (OXY) have helped it hold up well in prior economic and commodity driven downturns.

In the last 12 months, the company, which has 76% of its 2.8 billion barrels of reserves in liquids, saw less than half of the downside of crude oil prices.

Not only did OXY hold up much better than crude, it also outperformed the average S&P 500 oil producer over the same period.

Occidental’s balance sheet, one of the most attractive in the energy arena, provides a margin of safety in downturns in addition to backing its current 3.9% dividend yield.

Although it has over $6.8 billion of debt, much of this is offset by a $5 million cash stockpile.

Factoring in the cash, net debt to capital is a very manageable 7%, better positioning OXY when compared to peers at an average of 28%.

With below average leverage, OXY has been able to raise its dividend for 13 consecutive years. Over this time period, the dividend has compounded at an annual rate of nearly 15%.

Balance sheet flexibility is also allowing the company to build out production in the Permian Basin. OXY has long been the largest conventional producer in the oil rich Permian.

In recent years, however, unconventional drilling has helped the company reinvigorate its operations in the play and capitalize on existing infrastructure.

Due mainly to expansion of its horizontal drilling program, OXY expects company­wide production to grow at a healthy 5­8% per year over the long-term.

The unique mix of defense and offense at OXY makes it both a growing company and one with strong cash generation potential.

While lower oil prices are forcing many energy companies to take on more debt, OXY is covering its capital spending and dividend from cash flow.

Management is also continuing to search for ways to generate additional cash through non­core asset sales.

After spinning off its higher risk California assets late in 2014, the next targets include the mid-continent US acreage and a portion of the Middle East portfolio.

Overall, OXY is a company well positioned to not just grow production in coming years, but to reward shareholders with an attractive total return.

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