Occidental Petroleum (OXY, Financial) has declined by 25% in the last year and stock returns are much worse for many companies in the oil and gas industry. However, Occidental Petroleum was trading at $73.16 on Dec. 15, 2015 and is currently trading at $71.5. Therefore, for YTD15, the stock has moved sideways, and I am of the opinion that this is an indication that the stock has bottomed out and can be considered for long-term investment. In this article, I will discuss some key factors for liking Occidental Petroleum at these levels.
The first reason to like Occidental Petroleum is the company’s focus on a few assets that have strong potential than investment is diversified assets, making operations more complex. As of 2Q15, the company’s assets included the Permian Basin where the company expects high free cash flow and moderate production growth, the Al Hosn Project and the asset in Latin America. These assets imply 50% production in the U.S. and 50% from the other two regions. Further, the assets are 66% weighted towards oil and 10% toward natural gas liquids and higher oil production is another positive.
In FY14, these assets resulted in total production of 591mboed, and this was the same as FY13 production of 591mboed. However, for FY15, Occidental Petroleum expects 30-33mboed growth from Permian Basin and 30-45mboed growth from Al Hosn and Latin America. The production outlook for FY15 therefore stands at 650-670mboed. Strong production growth in challenging times is another reason to like Occidental Petroleum and is the reason for the stock remaining firm in the last two quarters.
Amid production growth, I am also encouraged by the company’s continued decline in F&D cost. For three years ended FY14, the average F&D cost for U.S. assets was $21.9 per barrel of oil equivalent. However, for FY14, the F&D cost was only $12.18 per barrel of oil equivalent. Even for international assets, the F&D cost for FY14 has declined to $16.89 as compared to 3-year average F&D cost of $18.66. As capital efficiency continues to improve, I see a bright outlook for Occidental Petroleum as oil price recovers gradually.
Specific to the Permian Basin, Occidental Petroleum is the largest producer and operator in the basin and 60% of the production comes from CO2 related EOR projects. This has the potential to generate strong FCF for the company. To put things into perspective, the Permian EOR can operate at a cash cost of $22 per barrel, and this is perfect in the current oil price environment.
Further, Occidental Petroleum has made investments in infrastructure to support the upstream provide low operating cost and advantaged realized prices. The company has also shifted to horizontal drilling and this will boost resources as well as production in the coming years.
From a long-term perspective, Occidental Petroleum expects to achieve annual production growth of 5% to 8%. With a strong balance sheet and investment grade credit rating, I believe that this growth is likely.
I mentioned above that the company’s Permian Basin operations are generating and is also likely to generate strong FCF in the coming years. In line with this, Occidental Petroleum has been rewarding shareholders through constant increase in dividends. The company had an annual dividend of $2.56 per share in FY14, and this is expected to increase to $3.00 in FY15.
In addition, Occidental Petroleum has 28.4 million shares in the last five quarters under its current share repurchase program. The company expects to repurchase another 69 million shares under the current program, and I believe this is an indication of the point that the management believes that the stock might be undervalued in addition to the fact that share repurchase is to have an incremental positive impact on EPS.
Investors will note that Occidental Petroleum has reduced its capital expenditure from $8.7 billion in FY14 to $5.8 billion in FY15. I don’t see this as a negative in an environment where companies are cutting investments to keep the balance sheet strong. The important point is that even with reduction in investment, the company’s production will grow strongly in FY15.
Considering all these factors discusses, Occidental Petroleum is certainly an attractive stock to consider for the long term. Investors can consider exposure at current levels, but gradual investment in the energy sector is advisable.
