Occidental Petroleum Corp (OXY, Financial) has witnessed a daily gain of 3.31%, and a 3-month gain of 14%, with an Earnings Per Share (EPS) of 5.89. This prompts an essential question: Is the stock modestly overvalued? In this article, we will delve into a comprehensive valuation analysis of Occidental Petroleum. Read on to understand the financial strength, profitability, growth, and intrinsic value of OXY.
Company Overview
Occidental Petroleum is an independent exploration and production company with operations spanning across the United States, Latin America, and the Middle East. By the end of 2022, the company reported net proved reserves of 3.8 billion barrels of oil equivalent, with net production averaging 1,159 thousand barrels of oil equivalent per day. The production ratio was 75% oil and natural gas liquids and 25% natural gas.
As of August 12, 2023, the stock price of Occidental Petroleum (OXY, Financial) stands at $65.84, while the GF Value, an estimation of its fair value, is $50.73. This comparison suggests that the stock is modestly overvalued.
Understanding GF Value
The GF Value is a proprietary measure that calculates the intrinsic value of a stock. It considers factors such as historical trading multiples, an internal adjustment based on the company's past growth and returns, and future business performance estimates. The GF Value Line provides a visual representation of the fair value at which the stock should ideally be traded.
The stock of Occidental Petroleum (OXY, Financial) is estimated to be modestly overvalued according to the GF Value. This assessment is based on historical multiples, an internal adjustment factor, and future business performance estimates. If the stock price is significantly above the GF Value Line, it may be overvalued, indicating potentially lower future returns. Conversely, if it is significantly below the GF Value Line, it may be undervalued, suggesting higher future returns. Currently, at a price of $65.84 per share, Occidental Petroleum has a market cap of $58.20 billion and is estimated to be modestly overvalued.
Given the relative overvaluation, the long-term return of Occidental Petroleum's stock is likely to be lower than its business growth.
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Financial Strength
Before investing in a company, it is crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage can provide valuable insights into a company's financial strength. Occidental Petroleum has a cash-to-debt ratio of 0.02, which is lower than 92.6% of companies in the Oil & Gas industry. The overall financial strength of Occidental Petroleum is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. Companies with high profit margins are generally safer investments than those with low profit margins. Occidental Petroleum has been profitable 6 times 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 73.17% of companies in the Oil & Gas industry. Overall, the profitability of Occidental Petroleum is ranked 7 out of 10, indicating fair profitability.
Growth is one of the most crucial factors in the valuation of a company. According to GuruFocus research, long-term stock performance is closely correlated with growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Occidental Petroleum is 12.3%, which ranks better than 54.57% of companies in the Oil & Gas industry. The 3-year average EBITDA growth is 33.1%, which ranks better than 71.7% of companies in the Oil & Gas industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to assess its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Occidental Petroleum's return on invested capital is 10.98, and its cost of capital is 9.1.
Conclusion
In conclusion, the stock of Occidental Petroleum (OXY, Financial) is estimated to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 71.7% 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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