Occidental Petroleum Corp (OXY, Financial) has recently been in the spotlight, with a daily gain of 2.3% and a three-month gain of 11.5%. Its Earnings Per Share (EPS) stands at 5.89. However, this begs the question: Is the stock significantly overvalued? This analysis aims to answer this question and provide an in-depth valuation analysis of Occidental Petroleum (OXY).
Company Introduction
Occidental Petroleum is an independent exploration and production company with operations in 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. Its 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. Despite its current stock price of $66.05, the GF Value, an estimation of its fair value, stands at $50.36. This discrepancy calls for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line gives an overview of the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is considered 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.
Based on the GF Value, Occidental Petroleum (OXY, Financial) appears to be significantly overvalued. The stock's fair value is estimated considering historical multiples, the company's past business growth, and analyst estimates of future business performance. At its current price of $ 66.05 per share, Occidental Petroleum stock appears to be significantly overvalued. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. It is crucial to review the financial strength of a company before deciding to invest in its stock. A good starting point is to look at the cash-to-debt ratio and interest coverage. Occidental Petroleum has a cash-to-debt ratio of 0.02, which is worse than 91.67% of 1021 companies in the Oil & Gas industry. GuruFocus ranks the overall financial strength of Occidental Petroleum at 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies carries less risk, especially if the company has demonstrated consistent profitability over the long term. A company with high profit margins typically offers better performance potential than a company with low profit margins. Occidental Petroleum has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $31.50 billion and Earnings Per Share (EPS) of $5.89. Its operating margin of 29.55% is better than 73.4% of 966 companies in the Oil & Gas industry. GuruFocus ranks Occidental Petroleum's profitability as fair.
One of the most important factors in the valuation of a company is its 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 54.64% of 851 companies in the Oil & Gas industry. The 3-year average EBITDA growth is 33.1%, which ranks better than 71.41% of 822 companies in the Oil & Gas industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) is another way to evaluate 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Occidental Petroleum's ROIC was 10.98, while its WACC came in at 10.02.
Conclusion
In conclusion, the stock of Occidental Petroleum (OXY, Financial) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 71.41% of 822 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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