This Energy Stock Is Ready To Outpeform

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

In a difficult quarter for the energy industry, Occidental Petroleum (NYSE: OXY), the largest onshore crude producer in the U.S., reported profits that beat analysts’ consensus estimates. Excluding a $1.1 billion write-down for the impairment in value of natural gas assets, fourth-quarter EPS was $1.83 a share, which exceeded the average of 23 analyst estimates compiled by Bloomberg.

This article examines how the company was able to achieve this on the back of record domestic production for the ninth consecutive quarter, as well as a cost reduction of over $1 a barrel compared to the third quarter. According to the fourth-quarter earnings release, the company has achieved around half its target of slashing drilling costs by 15% this year.

Fourth Quarter Financials

Occidental Petroleum announced core income of $1.5 billion (EPS of $1.83 per diluted share) for the fourth quarter of 2012, compared with $1.6 billion (EPS of $2.02 per diluted share) for the same quarter in the previous year. In the fourth quarter of 2012 the company recorded after-tax charges of $1.1 billion, or EPS of $1.41 per diluted share, which was principally related to the impairment of gas assets. Net income for the quarter after this charge was $336 million (EPS of $0.42 per diluted share), compared with $1.6 billion (EPS of $2.01 per diluted share) for the corresponding period of 2011.

Core income was $5.8 billion ($7.09 per diluted share) for 2012, compared to $6.8 billion ($8.39 per diluted share) for the previous year. Net income for 2012 was $4.6 billion (EPS of $5.67 per diluted share), compared with $6.8 billion (EPS of $8.32 per diluted share) in the previous year. Stephen I. Chazen, President and Chief Executive Officer, said that fourth quarter domestic production of 475,000 barrels of oil equivalent per day, of which 342,000 barrels per day were liquids, was a record for the ninth consecutive quarter.  The total company production for the year was 766,000 barrels of oil equivalent per day, which was 5% more than in 2011.  Domestic oil production grew by 11% for 2012 to 255,000 barrels per day from 230,000 barrels in 2011.

Fourth quarter core income amounted to $1.5 billion, or an EPS of $1.83 per diluted share.  The EPS was $0.13 higher than the preceding quarter because of higher liquids volumes, higher realized prices, and lower operating costs. In the fourth quarter, production costs were $1.04 a barrel lower than the third quarter, with improvements in most units. The cost reductions were a result of efficiencies such as savings in surface operations, reductions in expenses on outside contractors, and curtailment of uneconomic down-hole maintenance.   Cash flow generated from continuing operations before working capital changes was $12.1 billion for 2012, and capital expenditure was $10.2 billion.

Oil and gas core earnings for the fourth quarter were $2.3 billion, compared to $2.5 billion for the same quarter of the previous year. Lower earnings were a reflection of lower year-over-year prices for all products in the fourth quarter of 2012 and higher DD&A rates, which were partially offset by higher liquids volumes. After including the gas asset impairment charges, segment earnings were $522 million. For the quarter, daily oil and gas production volumes averaged 779,000 barrels of oil equivalent (BOE), compared to 748,000 BOE in the corresponding quarter of the previous year.  The production increase can be attributed to higher volumes of 26,000 BOE per day from domestic operations and 5,000 BOE per day from international production. The international increase included higher production in Libya, Iraq, and Bahrain, which was offset by lower volumes from Dolphin and in Yemen due to the expiry of the Masila field contract.

Other energy stocks

Pioneer Natural Resources (NYSE: PXD) has concluded an agreement with Sinochem Petroleum USA, a U.S. subsidiary of the Sinochem Group, to sell 40% of its stake in about 207,000 net acres in the promising horizontal Wolfcamp Shale play in the southern portion of the Spraberry Trend Area Field, for a total sum of $1.7 billion. Sinochem will pay $500 million in cash to Pioneer at the closing, before normal closing adjustments, and will pay the remainder of $1.2 billion by absorbing some of Pioneer's share of future drilling and facilities costs.

Pioneer looks attractive at the moment. While the company beat revenue expectations for the fourth quarter, it missed estimates on earnings per share. Compared to the fourth quarter of 2011, revenue increased significantly, along with GAAP earnings per share. Revenue for the quarter amounted to $818.7 million, compared to expectations of $779.9 million. GAAP reported sales came in 32% higher the same quarter in 2011, at $619.1 million.

Seadrill Limited (NYSE: SDRL) has finalized a forward agreement from a commercial bank, through which it will finance its exposure to Sevan Drilling. It has divested its existing holdings of 96 million shares, and the forward agreement will provide exposure to the same number of shares. Seadrill no longer owns shares directly but is exposed though forward agreements to the 96 million shares, representing 28.52% of the outstanding shares.

Seadrill looks less attractive as an investment. The company was recently struck by maintenance issues involving blowout preventers on its ultra-deepwater drilling rigs. Because of this, Seadrill expects downtime of approximately 100 days in the fourth quarter. In the company's third quarter earnings report, it had expected 41 days. I expect this development to dampen the company's fourth quarter earnings results, which will be released in late February.

Conclusion

Occidental has strong and consistent earnings, with net income at more than 6% of gross revenues.  The balance sheet is solid and shows a significant asset-to-liabilities ratio. Share repurchases have been implemented over at least the past three years, demonstrating the company's confidence in its prospects. A decent dividend yield and a diversified business mix should show that the company will stay strong for a long time.  Unlike many other energy companies, the company has produced good results as a result of volume increases in production. I think that the stock will continue to outperform. Investors should consider buying this stock today.


jordobivona has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. 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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