Is This 2012 Oil & Gas Loser a Buying Opportunity?

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

Few major energy companies have had a worse year than Occidental Petroleum (NYSE: OXY). After reaching a high of $105 per share earlier in the year, the stock is now trading around $76, down roughly 30%. Occidental has significantly underperformed other energy majors in 2012.

Does This Present an Opportunity For Energy Investors?

Dahlman Rose recently initiated coverage of Occidental shares with a "Buy" rating. Standpoint Research also initiated coverage with a "Buy" rating and a $90 price target. The 19 analysts following Occidental have an average price target of more than $100 per share, which is 30% higher than the current price. Occidental's dividend yield stands at 2.8%, and dividend payments have increased more than 100% over the past five years. The stock price is near a five year low valuation based on several metrics, and analysts expect a 5% increase in revenues for 2013.

Financials

Occidental announced income from continuing operations of $1.4 billion for the third quarter of 2012, compared with $1.8 billion for the third quarter 2011.

Chemical segment earnings for the third quarter came to $162 million, compared with $245 million in the same quarter of the previous year. The decline was due to lower price realization in most product lines, particularly polyvinyl chloride (PVC) and vinyl chloride monomer (VCM), which was partially offset by lower natural gas and ethylene costs.

Midstream segment earnings totaled $156 million for the third quarter, compared to $77 million year-on-year. These results reflect improved margins in the marketing and trading businesses, which were partially offset by lower income in the gas processing and pipeline businesses.

Occidental’s realized price for worldwide crude oil was $96.62 per barrel for the third quarter of 2012, compared with $97.24 per barrel for the third quarter of 2011. Third quarter 2012 realized prices were lower than second quarter 2012 prices for worldwide oil and NGLs, and were higher for domestic natural gas.

Production Outlook

Occidental is well balanced in terms of production and international reach.  The range consists of 60% oil, 22% NGL, 29% gas. 61% of total production is in the U.S., while 39% is international. Occidental is the largest acreage holder and producer of gas and NGLs in California. Production in the third quarter of 2012 was 147 mboe/d and represents a large part of total production in the U.S. However, production growth in California has been slower than expected.

Occidental is the largest producer in the Permian Basin and produces approximately 15% of all Permian oil production. Third quarter production in the Permian Basin was 209 mboe/d. The company predicts it has another 2.5 BBOE of recoverable resources. The Al Hosn gas project in Abu Dhabi has been a large burden on capital resources thus far but is expected to start generating cash in late 2014.

Key Metrics and Peer Comparison

Occidental’s current share price of $78 is around 10 times earnings, 2.7 times sales, and 1.65 times book value. Despite concerns about production growth, Occidental's long-term production growth is impressive compared to its peers. Production has grown 5 to 8% annually, compared to 3 to 5% for ConocoPhillips (NYSE: COP), 5 to 7% for Marathon Oil (NYSE: MRO) and 4 to 5% for Chevron (NYSE: CVX). ConocoPhillips recently teamed up with Sinopec to study and develop shale gas exploration in southwestern China's Sichuan Basin. Meanwhile, Marathon Oil has its sights set on the Eagle Ford Shale for 2013. Marathon Oil plans to allocate more than one third of its $5.2 billion capital budget for 2013 in this key growth area. In early December, Chevron announced a $36.7 billion capital and exploratory program for 2013. The majority of the spending program is geared toward upstream crude oil and natural gas exploration and production projects.

Recommendation

Occidental is substantially undervalued at its current stock price. Investors have a rare opportunity to establish a position in Occidental at a low price. In addition to the dividend yield, Occidental has upside potential of 25% to 30% over the next 12 to 24 month time frame.


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