WTI has endured a tough slide in the last few months. The continuous prompt month of oil has fallen from near $95 to, at times, below $75 as we head into year-end. Fears of a possible Fed-induced recession could be weighing on the key commodity. Furthermore, Henry Hub natural gas prices have turned lower in recent weeks, as concerns regarding a mild winter hurt that market's supply/demand dynamic. Energy-sector equities have been trading rather poorly, as a result.
Still, I have an overweight rating on shares of Occidental Petroleum (OXY, Financial). I see the stock as a compelling value today, though it yields less than some of its peers, and the chart situation is not too bullish at the moment.
WTI Plunges 23% From Its September Rebound High
Source: Stockcharts.com
Company Description
OXY is a large multinational producer of oil, gas, and chemicals. Its oil and gas segment explores for and produces crude oil and natural gas in key shale regions of the CONUS. Occidental's international operations include assets in Latin American countries and the Middle East/North Africa, helping to diversify this Energy-sector large cap. Its often-overlooked chemicals segment manufactures chemicals, vinyls, and performance chemicals. OXY is further diversified via midstream and marketing activities.
Key Data
The Houston-based $53 billion market cap Integrated Oil & Gas industry company within the Energy sector trades at a low 13.2 trailing 12-month GAAP price-to-earnings ratio and the stock pays a small 1.2% forward dividend yield. After reporting quarterly earnings earlier this month, shares trade with a low 24% implied volatility percentage while short interest on the stock is material at 5.2%.
Earnings Review
Earlier this month, OXY reported its first bottom-line beat in several quarters. Q3 non-GAAP EPS verified at $1.18, easily topping the Wall Street consensus estimate of $0.84. The stock traded higher post-earnings by 1.6% and there have been a slew of analyst upgrades of EPS lately. Revenue also came in better than expected at $7.4 billion, though that was a sharp 22% decline from year-ago levels - recall that oil and gas prices were relatively high during the third quarter of 2022.
Strong performance was driven by high oil and gas production, which came in ahead of the management team's previous guidance, and profits from OxyChem were also robust. Free cash flow of $1.7 billion easily covers the company's dividend payout and buyback activity. What's more, the firm redeemed more than $340 million of preferred stock, improving the capital structure in favor of common equity holders. Moreover, OXY has now bought back about 60% of its $3 billion authorized amount.
Risks
The major risk for Occidental is the ongoing downtrend in both oil and natural gas prices - further declines would pressure margins. Another factor to consider is possible delays in key upstream projects which could result in the firm missing its oil and gas production targets.
Valuation
On valuation, analysts at BofA see earnings falling steeply this year but per-share profit growth is expected to recover well in 2024 with normalized EPS near $6. The current consensus outlook is not quite as optimistic, but a bottom-line growth rate of about 30% is seen for 2024 while sales hover just below $30 billion on an annualized basis.
With a forward operating P/E multiple of near 12, the stock is to the cheap side, though its yield is below that of many other Energy-sector companies. Still, with an EV/EBITDA ratio less than half that of the broader market and a very high free cash flow yield, there are plenty of favorable valuation metrics to weigh. Overall, if we assume normalized EPS near $5 over the coming four quarters and apply a below-market 15 P/E, then shares have an intrinsic value near $75 in my view.
Occidental: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts
Source: BofA Global Research
Competitor Analysis
I concede that there are even better valuations among other integrateds in the oil & gas space, but with the backing of Berkshire Hathaway, there is a unique degree of confidence prospective investors should have with OXY. The broader sector has been troubled with low growth rates this year, and the latest 20% fall in WTI is not a good sign heading into 2024. I encourage readers to also consider shares of Exxon Mobil (XOM) and Chevron (CVX) which have slightly lower FY 1 non-GAAP earnings multiples.
Event Outlook
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Monday, February 26 AMC. Shares trade ex an $0.18 dividend on Thursday, December 7. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
Source: Wall Street Horizon
The Technical Take
OXY has hit the pause button after a solid rally to cap off 2021 and jumpstart 2022. Notice in the chart below that shares have been confined to a trading range between $55 and $68 for the better part of the last year. Given that congestion, there is a considerable amount of volume by price up to the mid-$60s, making rally attempts tough to hold by the bulls. The good news is that this $13 zone provides levels off of which to trade. Long today with a stop under $54 sets up as a favorable risk/reward. Moreover, a bullish upside breakout above the mid to high $60s would portend a measured move price objective to the low $80s based on the height of this current pattern.
A bearish breakdown, however, could send the stock down to the low $40s. Maybe more concerning for those long, should OXY fall below that key support, then there is an air pocket down to the low $30s – relatively few shares have traded until you go much further down on the chart. Elsewhere, the RSI momentum gauge at the top of the graph illustrates that momentum has been waning since the summer. Be on the lookout for the RSI to break out before price does.
Overall, with a flat long-term 200-day moving average, the battle between the bulls and bears wages on. Technically speaking, I would like to see a breakout above $68 before getting too excited.
OXY: Stubborn Trading Range, Monitoring Momentum Trends
Source: Stockcharts.com
The Bottom Line
I have an overweight rating on OXY. I see shares as a solid value today, and while a rebound in oil and gas prices would undoubtedly help, the valuation risk/reward is compelling. Technicals, meanwhile, are not quite as sanguine.
