Occidental Petroleum: Value, Growth and Income

11/02/2017 5:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Occidental Petroleum Corp (OXY) looks like a good bet on potential upside in oil prices and further rotation into value names. The stock also tends to hold its value reasonably well during selloffs, observes Elliott Gue, editor of Energy & Income Advisor.

During Occidental Petroleum’s second-quarter earnings call, management reiterated its commitment to maintaining (near term) and growing (intermediate term) the dividend.

This goal will require the company to grow cash flow to levels that support the current payout and fund the capital expenditures needed to hold production flat at $40 per barrel.

Management also made the case for Occidental Petroleum to cover its payout and grow production by 5 percent to 8 percent annually if oil prices hover around $50 per barrel.

In the near term, Occidental Petroleum must focus on replacing last cash flow from divested assets via production growth in the Permian Basin, the start-up of projects in its petrochemical segment and the expansion of the Al-Hosn gas project in the United Arab Emirates.

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Occidental Petroleum boasts an impressive footprint throughout the Permian Basin. The company continues to run rigs in the Texas portion of the Delaware Basin and the Midland Basin.

Occidental Petroleum also has a substantial acreage position in the Permian Basin that hasn’t been evaluated, creating the potential for additional inventory upside as other operators delineate nearby assets.

The company sometimes comes under criticism for the patchwork nature of these holdings; we view them as a convenient source of capital or fodder for asset swaps.

Growth-oriented investors argue that Occidental Petroleum’s generous dividend would be better deployed in additional drilling and completion activity; income-oriented investors remain skeptical about the payout’s sustainability and growth potential. We prefer to regard the dividend as a bonus and focus on the stock’s valuation and company-specific fundamentals.

Occidental Petroleum exhibits many of the qualities we prize in an exploration and production company: a strong balance sheet (a leverage ratio of 2.39 times and $2.2 billion in cash), franchise assets in the Permian Basin and steady cash flow from conventional fields.

These advantages give the company valuable optionality to ramp up drilling and completion activity or return cash to shareholders via dividends or stock repurchases.

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