An Insider Bought Occidental Petroleum, Should You?

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According to a filing with the SEC, Avedick Poladian bought 5,000 shares of Occidental Petroleum (NYSE: OXY) on December 4th at an average price of $73.43 per share. Poladian, who serves as COO of real estate company Lowe Enterprises, is a member of Occidental’s Board of Directors and after his most recent purchase owns a total of 30,000 shares of the company’s stock. Insider trading filings, particularly insider purchases, can be good to track as studies show that stocks bought by insiders tend to outperform the market on average (read more about studies on insider trading).

The $61 billion market cap oil major had its sales decline very slightly in the third quarter of 2012 versus levels from Q3 2011. Slightly higher production was offset by lower prices for natural gas and natural gas liquids. The higher production also caused cost of sales and SGA expenses to come in higher, with the result being that Occidental’s net income was down 22%. Sell-side analysts don’t expect much of a rebound, but they also don’t expect the company’s business to decline much further: their consensus earnings estimate for 2013 matches Occidental’s performing on a trailing basis very closely, and so the trailing and forward P/E multiples are both 10. The market has been pricing oil majors very cheaply in general- ExxonMobil (NYSE: XOM) and BP (NYSE: BP), for example, are also in that same range- and we think that the industry is a good source of value though Occidental is not necessarily the cheapest stock. Occidental Petroleum Corporation also pays a dividend yield close to 3%.

46 hedge funds and other notable investors owned Occidental Petroleum Corporation at the end of the third quarter of the year, which earned it a place on our list of the most popular energy stocks among hedge funds (see the full rankings). Billionaire David Shaw’s D.E. Shaw was one of the funds reporting a position in the stock, increasing its stake slightly to 2.1 million shares (check out D.E. Shaw's stock picks). Renaissance Technologies, whose founder Jim Simons has become a billionaire thanks to the fund’s success since inception, also bought the stock and owned 1.2 million shares at the end of the quarter (find more stocks Renaissance Technologies has been buying).

We’ve mentioned ExxonMobil and BP, and would also include Chevron Corporation (NYSE: CVX) and ConocoPhillips (NYSE: COP) as additional choices in oil and gas. It turns out that on a trailing basis Occidental is the most expensive of these five oil majors, if only narrowly: the other four stocks have trailing P/Es in the 7-9 range. However, these peers are generally expected to see their businesses worsen next year and so Occidental finds itself more or less in the middle of a similarly narrow range when pricing these stocks on a forward earnings basis. In a way, this makes sense as this is a commodity business and it’s not that likely that any of these businesses will be increasing their production much more than any other. However, we can’t help but think that the industry as a whole looks cheap. BP offers the highest dividend yield of the bunch, at over 5%, and tends to be cheap in terms of multiples as well; of course, this company is suffering from poor sentiment after the Deepwater Horizon disaster. Exxon Mobil and BP also joined Occidental on our list of the most popular energy stocks.

We’re not sure if Poladian likes something in particular about Occidental, or if buying the stock is just a way to go long the oil and gas industry. We’re skeptical that the company is the best buy- BP is cheaper and actually increased its earnings last quarter versus a year earlier, while Exxon Mobil is about the same price as Occidental and is the market leader. Those two companies in particular look like more interesting opportunities for future research. 


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in COP. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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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