A Turn-Around Story
Piyush 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) has seen a 11% decline YTD in its share price on the back of falling crude prices. The company runs oil and gas exploration, development and marketing operations in North and South America along with Asian and African countries. The company with market capitalization in excess of $68 billion is also involved in the production of petroleum based basic chemicals and storing of CO2. Occidental operates with over 7.4 million acres geographically spread in different countries of which 73% is leased. The company has 22 plants which are involved in the chemical production segment and as far as CO2 collection is concerned, the company has a collection capacity of 3.5 mtpa.
It’s very obvious that Occidental Petroleum is not involved in the streaming business, and hence if prices of the mentioned commodities stay up, the company would prosper. Over the first half of the year, the prices of crude were dropping continuously, as investors were worried about the global macroeconomic concerns, and on June 22, crude entered the sub $90 level. But a lot has changed since then, with incidents ranging from oil shortage arising due to problems with Iran, and a sequence of stimulus packages announced recently to kick start the global growth engine. From sub $90 levels, crude has now risen to above $110 levels, which aggregates to an 18% increase.
Presenting a similar case, the prices of natural gas have also seen a decline YTD, but are up 68% from the lows created in April. Natural gas producers have reduces their operating rigs, and the total count of the rigs is 45% lower than last year, which has taken the number to a 13 year low. It is because this reason, that natural gas is expected to rise higher, and end the current year with positive returns.
Talking about the financials, the company reported a 24% increase in net profits in the last year. Also in the previous year, the sales of the company expanded by 26% and the earnings saw a 45% upside. However the recent quarterly earnings and sales were down from the year ago quarter, which was solely due to dropping crude prices and not because of inefficient operations.
The management of the company being bullish on oil and natural prices, revved up its production levels in the current year. The increased production levels are still intact and currently Occidental Petroleum, on an average daily basis, produces 766,000 barrels of oil equivalents which is 9% up compared to the year ago quarter.
The prices of crude oil and natural gas may have risen, but it is the monthly average price of these commodities which affect the profitability of oil and gas companies.
In the below table we can see monthly crude oil prices.
|
Month |
30 day Crude Average Price |
|
June |
$98.2 |
|
July |
$101.8 |
|
August |
$109.3 |
The 30 day average crude pricing reached near the $110 mark only after the August end. This shows that the financial benefits of the risen crude prices are likely to experienced in the current ongoing quarter.
|
Company |
Net Profit Margin |
Debt/Equity |
|
Occidental Petroleum |
24.36% |
0.19 |
|
Exxon Mobil |
9.6% |
0.1 |
|
Devon Energy |
23.6% |
1.82 |
The company shares its market space with ExxonMobil (NYSE: XOM) and Devon Energy (NYSE: DVN). On a three year comparative basis, Occidental Petroleum has outperformed all its peers in terms of stock returns. All the competitors’ trade at similar P/E levels, but what gives Occidental Petroleum the edge is the highest dividend yield of 2.54% with Exxon’s 2.49% second in line. ExxonMobil however has the lowest debt/equity ratio, with Occidental behind it. The massive net margin of Occidental Petroleum makes it the clear winner and our fundamental pick.
Also the comparative stock performance of the three companies over the last 3 years, shows that Occidental Petroleum has outperformed its peers in terms of returns.
In my opinion, the prices of natural gas and oil are headed north which will start driving the profitability of Occidental Petroleum steadily as the average monthly price of crude and natural gas increases. The fundamentals look good with low debt and high net profit margins. The company has been outperforming its peers and it is due to all these mentioned compelling reasons, that I have a strong Foolish buy rating for the stock.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and ExxonMobil. 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.If you have questions about this post or the Fool’s blog network, click here for information.
