Strong Cash Flow + Stellar Dividend

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

Occidental Petroleum (NYSE: OXY) is an integrated global oil and gas exploration company with a substantial chemical business as well.  The company has a $61 billion market capitalization and has been boosting capital spending by roughly 10% this year.  Other integrated exploration and refining giants, including ConocoPhillips (NYSE: COP) have seen significant earnings declines. This was due largely to the sluggishness in natural gas prices.  ConocoPhillips and other energy companies are very exposed to the slowdown in gas prices and will need a rise this winter in order to excite investors. Occidental, on the other hand, has seen a rise in earnings of $0.06 per share in the third quarter of 2012. Other companies with like-sized valuations such as Anadarko Petroleum (NYSE: APC) are seeing similar profit growth.  This is partially because companies like Occidental and Anadarko are more nimble and have the ability to sell off large shares of gas assets and/or shift focus to oil and liquids very quickly.

One thing that really makes Occidental attractive is its dividend hikes.  The company has paid quarterly dividends every quarter since 1975 and has increased its dividend each year for the last decade.  The latest quarterly dividend is $0.54 per share, which means that the company’s dividend amounts to a 15.8% compound annual rate of increase over the last decade.  This is a remarkable achievement when considering that very few, if any, energy firms have seen that kind of growth given the volatility of oil and gas prices.

Occidental's profits primarily come from oil exploration and production, which means a meaningful decline in global oil prices is the key risk to the stock. Trading right around $74 the stock is at a 52 week low.  This is a perfect opportunity for investors to get in at a low price with a significant rise in the stock almost all but certain. The company is conservative in its commodity price projections, and bulls see shares rising about to $120 given a diversity of exploration growth prospects in California, Texas and the Middle East, plus strong chemicals demand.

The company should be a core holding for all long-term and short-term investors seeking plays in the energy sector.  Occidental has one of the strongest balance sheets in the energy sector, and their solid and consistent growth makes the company a premium investment at its low price.

I like the diversity the company has with low-risk, onshore production with good growth opportunities in California, the Permian Basin in Texas, and the Williston Basin in North Dakota.  These low-risk but solid performers are combined with higher-risk, but higher reward projects Occidental has in the Middle East. Occidental, which has energy projects in Latin America, also has a great opportunity in Libya, where some projects were producing half of the oil generated before the Arab Spring.  Any company with this sort of balance should attract investors’ interest.  Its low risk with high reward, the sorts of things shareholders dream.

Occidental also has ventures in Iraq, the United Arab Emirates, Oman, Bahrain and Qatar. Political turmoil in Yemen, uncertainty in Iraq and threats from Iran could hurt Occidental's production targets. But it is the largest oil producer in the Permian Basin and the largest producer of oil and gas in California, where recent changes in the permitting process should speed production. These are two enormous plays that will increase cash flow and profits like turning on a spigot.  The domestic side of the business means that Occidental will have all the capital they need well into the future. 

The most attractive aspect of Occidental is its very low price.  It is trading at just above 10 times earnings.  Compare that to some of its peers and you find real value. Anadarko is trading at almost 20 times earnings; EOG Resources (NYSE: EOG) is trading at almost 27 times earnings, while Kodiak Oil & Gas (NYSE: KOG) is trading at over 36 times earnings.  I do not like that these three companies also have exposure in the continuing slumping natural gas market.  Kodiak has the added pressure of having almost its entire oil assets in the Bakken play.  This makes it particularly vulnerable to price instability in the shale crude. EOG is in a better position, but is invested far more heavily in the struggling gas market than Occidental. In addition, Occidental is well more balanced internationally and domestically, as well as having a much better risk profile then these three.

The rut the natural gas sector has been in recently has not affected Occidental very much, and will not affect it going into the future.  The company is very successful in producing oil, and while oil might take a small dip I do not expect to see anything comparable to the sluggishness that has plagued the gas industry over the last couple of years.  Commodity prices are always risky, but Occidental has a very nice yield and tremendous cash flow.  Proof of this can be found in the amazing 10 year streak of rising dividend payments. The balance the company has in having huge oil plays in very low-risk onshore productions in North America, combined with the relatively high-risk but very high reward plays in the middle east is very attractive. This makes Occidental a winning investment, even if some of the riskier plays run into problems.  


jordobivona has no positions in the stocks mentioned above. 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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