Down 50% This Year, Occidental Stock Has A Long Road To Recovery With Sizable Downside Risk

Comparing the trend in Occidental Petroleum’s stock (NYSE: OXY) over recent months with its trajectory during and after the Great Recession of 2008, we expect the stock to post a slower recovery than the benchmark oil prices, primarily due to its $40 billion debt from Anadarko’s acquisition. As the world battles the coronavirus pandemic, oil prices have recovered from the lows of $18 in April to $35 in June, ending the bear trend for the oil & gas industry. In 2008, it took nearly a year for the oil prices and broader market indices to reach pre-crisis levels. Trefis compares Occidental’s performance with the S&P 500 in an interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Occidental Petroleum Stock Fare Compared With S&P 500?

The World Health Organization (WHO) declared a global health emergency at the end of January in light of the coronavirus spread. The rally in the equity market continued till February 19, with the S&P 500 reaching a record high, but the trend reversed sharply over the following weeks. OXY stock lost 76% of its value (vs. about 34% decline in the S&P 500) between February 19 and March 23. A bulk of the decline came after March 6, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia. Notably, though, the multi-billion dollar stimulus package announced by the U.S. government has helped the stock price recover 33% over recent weeks (vs. about 35% gain in the S&P 500) to its current level of $13.

Occidental Petroleum Stock Fared Much Better During The 2008 Downturn

We see OXY stock declined from levels of around $52 in September 2008 (the pre-crisis peak) to roughly $34 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 34% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 37%.

However, OXY recovered strongly post the 2008 crisis to about $55 in early 2010 – rising by 60% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Will Occidental’s Stock Recover Similarly From The Current Crisis?

Transportation and industrial sectors account for nearly 95% of the total oil consumption in the U.S. As Occidental generates a bulk of its revenues from crude oil sales to refineries, the low demand for gasoline has led to a stock build-up with downstream players. While the easing of lockdown measures across various states is likely to improve discretionary spending, the slump in the transportation and industrial sector is expected to remain for a longer period.

After renegotiating the financial covenant in its revolving credit facility, the company has hired an investment bank to restructure its $40 billion debt and push certain maturities further. Due to high operating costs, the company observed a net reduction of cash and cash equivalents during the first quarter. Moreover, the company has $6.5 billion of debt maturing in 2021. If the restructuring efforts do not find success in the coming months, Occidental’s stock is likely to face another round of sell-offs from the heightened risk of a default and subsequent bankruptcy filing.

However, the broader containment of the coronavirus spread is expected to alleviate the downside risk as growing transportation as well as industrial activity would spur crude oil demand. Our dashboard forecasting U.S. COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of Occidental’s multinational peers including Exxon Mobil and Royal Dutch Shell. The complete set of coronavirus impact and timing analyses is available here.

The upstream oil & gas sector is expected to contract by between 30-50% in 2020. We highlight the trends across segments for EOG’s Revenues as well as ConocoPhillips’ Revenues in separate interactive dashboard analysis.

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