Occidental Petroleum Corp (OXY, Financial) has seen a daily gain of 2.35% and a 3-month gain of 12.78%. Despite these positive movements, the stock's Earnings Per Share (EPS) stands at 5.89, leading to questions about its valuation. Is Occidental Petroleum overvalued? This article aims to answer this question by diving into a comprehensive valuation analysis of the company.
Company Overview
Occidental Petroleum Corp is an independent exploration and production company with operations across the United States, Latin America, and the Middle East. As of the end of 2022, the company reported net proved reserves of 3.8 billion barrels of oil equivalent. The net production averaged 1,159 thousand barrels of oil equivalent per day in 2022, with a ratio of 75% oil and natural gas liquids and 25% natural gas. The company's stock price stands at $65.23, while the GF Value, an estimation of fair value, is $50.78.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock, derived from GuruFocus's exclusive method. The GF Value Line gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $65.23 per share and the market cap of $57.70 billion, Occidental Petroleum stock appears to be modestly overvalued. Because Occidental Petroleum is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's essential to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Occidental Petroleum has a cash-to-debt ratio of 0.02, ranking worse than 92.61% of companies in the Oil & Gas industry. Based on this, GuruFocus ranks Occidental Petroleum's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Occidental Petroleum has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $31.50 billion and Earnings Per Share (EPS) of $5.89. Its operating margin is 29.55%, which ranks better than 72.91% of companies in the Oil & Gas industry. Overall, GuruFocus ranks the profitability of Occidental Petroleum at 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term stock performance of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Occidental Petroleum is 12.3%, which ranks better than 54.63% of companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 33.1%, which ranks better than 71.67% of companies in the Oil & Gas industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Occidental Petroleum's return on invested capital is 10.98, and its cost of capital is 9.02.
Conclusion
In conclusion, the stock of Occidental Petroleum appears to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 71.67% of companies in the Oil & Gas industry. To learn more about Occidental Petroleum stock, you can check out its 30-Year Financials here.
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