Insiders Are Buying; Is This a Good Opportunity?

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

Many investors consider SEC filings about insider trading a good tool for investment analysis. These filings give an idea about any insider trading during a specific period. So keeping this in mind, I have picked up a stock which has under-performed over the year, but has recently noted heavy insider trading. According to Sec filings, Avedick Poladian, an Independent Director of Occidental Petroleum (NYSE: OXY), has bought 5,000 shares of the company. His holdings in Occidental Petroleum now totals to 30,000 shares. Mr. Poladian is the Chief Operating Officer and Executive Vice President of Lowe Enterprises, a real estate company. 

Shares of the company are down ~21% year to date. Also, the October 2012 release of its third quarter 2012 earnings shows net income down 22% year over year. The declining income was due to lower pricing and higher operating costs, the effect of which will impact earnings for the coming quarters. However, management believes that the operating costs in California, Bakken, and the Permian will soon come down and ease drilling activity. The overall production growth for the quarter is 8% year over year. The majority of the increase in production was contributed by the Permian and Williston basins. The California production was overall flat, as the growth in liquids was offset by the lower gas volumes due to start up issues of a new gas plant. The issues have been rectified now, and the plant is now running as expected. 

When we look at two of its major competitors, ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), these two companies are also boosting their production levels through global expansions and acquisitions. 

Exxon has formed its growth platform around the market expansion through strategic acquisitions. It has closed the first phase of its acquisition deal with Denbury Resources, which will expand its reach into oil and gas assets to boost production in crude oil. The acquisition of these properties will add 196,000 net acres to Exxon bringing the total acreage to 600,000 acres in the Bakken. The Bakken assets would be a significant opportunity for Exxon, as the total output for the region is expected to be ~1.2 billion barrels per day by 2015.

In addition to this, it has finalized the acquisition of Celtic Exploration, worth $2.6 billion, in order to focus more heavily on natural gas production. Exxon forecasts that the demand of natural gas is expected to increase globally as growing environmental concerns will reduce the demand for coal, which will reflect in increasing demand for nuclear power and natural gas. The company has planned its strategies accordingly to fulfill the growing demand for specific energy resources. Other than these two major deals, Exxon has an additional 21 projects lined up for 2014, which makes it a defensive stock. 

Another competitor, Chevron, is investing globally through acquisitions to increase its output. It has acquired Chesapeake to gain a foothold in the oil rich Permian Basin. This deal would add a further 246,000 acres to its current acreage of 700,000 acres in the Delaware basin. The acquired assets would bring in significant exposure, thus enabling the company to track some rich oil and liquid gas options. Additionally, as part of its efforts for increasing its regional footprint, Chevron has moved to emerging markets wherein it has acquired a 50% stake in LL Investicijos of Lithuania. The stake would benefit Chevron with its high shale gas reserves. Also, Lithuania is extending its market to new explorers in order to reduce its dependence on Russia for natural gas supply. The new contracts are duly reflecting the company's capability in increasing the output and tapping the opportunities prevailing in the market. 

Coming back to Occidental Petroleum, let us look at how it has planned its growth strategies for the long haul. I believe that the development of its Al Hosn Gas Project, which is progressing as planned, and the partnership with Magellan Midstream are major catalysts that will drive production and revenue growth. 

Al Hosn Shah Gas Project

The Al Hosn project is ~60% completed and is expected to contribute significantly to earnings in 2014. Occidental has partnered with the Abu Dhabi National Oil Company (ADNOC) with a 40% interest in a 30 year joint venture agreement. The project is worth $10 billion, and Occidental has a $4 billion stake in it. Upon completion as expected in late 2014, this project should generate a net 20 Mboe/d of NGLs and condensate 200 MMcf/d of natural gas annually, thus generating substantial free cash flow of $600 million for OXY. The capital spending for the project accounts for 11% of total spending and is expected to be $1.2 billion for 2012. Though the projected spending is higher, upon completion of the project it would be a significant cash generator for the company.

Partnership with Magellan Midstream

Last month Occidental has entered into a collaboration contract to construct the BridgeTex Pipeline with Magellan Midstream, which transports, distributes, and provides storage for petroleum products. The pipeline will transport the Permian Basin crude oil from Colorado City, Texas to the Houston Gulf Coast area. It will start operating in mid-2014. Through this pipeline, Occidental will be able to move approximately 300,000 barrels of oil per day. The BridgeTex Pipeline has already received orders from the Federal Energy Regulatory Commission, which has approved the tariff structure for the pipeline. The joint partnership will be capable of meeting customer requirements with its solid capacity.

The Bottom Line

Summing up the above points, Occidental has prepared its strategy to boost its production, which will offset the recent declines in production growth and earnings. Among its international operations, the Middle East represents the most significant part wherein the company has limited duration contracts in the UAE, Oman, and Qatar. The Al Hosn Gas project will drive potential production growth and cash flows. Additionally, the Magellan partnership will provide incremental capacity too. Considering all these factors, I think the company’s stock provides a good entry opportunity at this point with a forward P/E of 10.43x.


ShwetaDubey has no positions in the stocks mentioned above. 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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