A Challenging Pick

Kelley is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Conundrum

What would you do if confronted with the fact that one of the investors you admire most made a stock pick that was in direct opposition to your own?

The Back Story

When I wasn’t eating over Thanksgiving weekend, I spent time researching some stocks I have been watching.  I was intrigued by Occidental Petroleum Corporation (NYSE: OXY), which was at a nice price with an equally nice dividend. I did some research and decided that if it dropped under $75 a share I would buy some.

On Monday Nov. 26 Occidental Petroleum slide under $75 a share and I bought a few initial shares. I was feeling happy with the purchase and the price I paid.

After work Monday I was reading some commentary about the stock on the Motley Fool website when I discovered that Motley Fool co-founder David Gardner made an underperform call on the stock on the same day I made an outperform call. Not only was it the opposite call, it was at about the same time for about the same price. How’s that for seeding some self-doubt? Rather than bemoaning this clear sign of my own ignorance I have decided that I will take it as a challenge. David and I (also known by our user names TMFSpiffyPop and briars) both entered our picks on our caps pages and so here we sit, ready to watch the future of Occidental Petroleum Corporation unfold. If you would be so kind as to lend me your name, David, I will lend you Goliath’s.

Disclaimer

Let me say that anyone reading this for advice would be best served by following his. For my part, I have put real money on this but my history of good picks is neither as long nor as plentiful as his.

Defense

I like Occidental Petroleum for three main reasons:

1) They are diverse. They are primarily an Oil and Gas company but they have a midstream segment and a chemical segment. They operate in three main regions, the U.S., Middle East, and Latin America where production quantities are 60%, 33%, and 7% respectively. In each of these regions they pull from multiple sources which can afford them some protection should they have trouble in any one area. They are involved in both oil and gas production which allows them to remain profitable during the current natural gas glut which has left many solely natural gas producers scrambling to enter the oil market for self-preservation.

2)  They are conservative. Occidental Petroleum has the balance sheet of a company that pays attention to debt levels. Their debt to equity ratio remains at or under 19%. Their management has recently made a commitment to reduce operating expenses, the effects of which should be seen as soon as next quarter. They are also cautious when it comes to acquiring assets. It should also be known that Occidental is primarily an oil recovery company that does some exploration. This is an important distinction for investors who are not interested in companies that spend large amounts of cash on speculative assets. Occidental Petroleum’s specialty is buying older, known assets that are on the decline and using new technology to enhance production. If companies have the technology, this seems to be a wiser use of capital than exploration.

3)  They are priced well. With a P/E of 10.5, a nice dividend, and a price only 5% off its 52 week lows I think the price looks good here. This stock hasn’t been below $70 a share since 2009. And while a run up to the $100 range does not appear to be around the corner I don’t think it will take much to see it climb that way again. This company is still increasing production, we should see production increases from California in the coming year and production increases in the Middle East in 2014. In the meantime, any increases in the price of oil or natural gas will help this stock.

 Final Thoughts

There are of course downsides to every story, and David Gardner is right to point out that Occidental Petroleum operates in two challenging regions “Occidental Petroleum operates, among other places, in two very difficult spots: California and the Middle East. One is very hostile toward development, and the other is geopolitically unstable.” Investing in oil and gas companies can be risky. Many of them derive at least a portion of their production from the Middle East. Marathon Oil (NYSE: MRO) (a company David gave an outperform rating) is still suffering from exposure to Libya. It also has interests in deep water drilling which is a uniquely expensive and risky type of drilling. Marathon Oil is also trading at a P/E of 12 and it has a smaller yield than Occidental. I would still choose Occidental Petroleum over Marathon Oil at these prices.

Dear Goliath,

After writing this defense of my choice, Occidental Petroleum, my self-confidence has improved but I have not been able to rid myself of an impending sense of doom, which I will no doubt carry with me until this challenge is over. I just hope any future stock picks we make are in agreement.


briars owns shares of Occidental Petroleum Corporation. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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