Occidental Petroleum Corp (OXY, Financial) experienced a daily loss of 2.42%, contrasting with a 3-month gain of 6.88%. The company's Earnings Per Share (EPS) stands at 5.89. This analysis seeks to answer the question: is Occidental Petroleum (OXY) modestly overvalued? The valuation analysis that follows will provide insights into this question.
Company Introduction
Occidental Petroleum is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. It reported net proved reserves of 3.8 billion barrels of oil equivalent at the end of 2022. The company's net production averaged 1,159 thousand barrels of oil equivalent per day in 2022 at a ratio of 75% oil and natural gas liquids and 25% natural gas. The stock's current price is $61.39, while its GF Value, an estimation of fair value, is $50.51. This suggests that the stock is modestly overvalued.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page 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.
Our analysis suggests that Occidental Petroleum is modestly overvalued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. As the stock's share price of $61.39 is significantly above the GF Value Line, it suggests that the stock may be overvalued and its future returns could be poor. This could potentially impact the long-term return of its stock, which is likely to be lower than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Hence, a careful review of a company's financial strength is crucial before deciding 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, which ranks worse than 91.94% of 1018 companies in the Oil & Gas industry. GuruFocus ranks Occidental Petroleum's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually dictate a better investment compared to a company with lower 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 73.45% of 968 companies in the Oil & Gas industry. Overall, the profitability of Occidental Petroleum is ranked 7 out of 10, indicating fair profitability.
Growth is a critical factor in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Occidental Petroleum's 3-year average revenue growth rate is better than 54.51% of 853 companies in the Oil & Gas industry. Its 3-year average EBITDA growth rate is 33.1%, which ranks better than 71.55% of 826 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to evaluate a company's profitability 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. Ideally, the return on invested capital should be 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 9.12.
Conclusion
In summary, the stock of Occidental Petroleum is estimated to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 71.55% of 826 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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