Occidental Petroleum Stock Fully Valued?

by Trefis Team
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Per Q1 filings, Occidental Petroleum (NYSE: OXY) still has $2-3 billion of assets remaining to divest and ease cash flows for shareholder returns. The company incurred $10 billion of asset impairment charges last year and slashed its asset base by almost 25%. However, the recent surge in benchmark prices has been pushing OXY stock higher despite concerns of continued demand crunch and easing of OPEC+ supply curbs during the latter half of the year. Currently, the company has not completely reinstated the dividend as the first quarter operating cash just met the capital expense target. Moreover, the $36 billion of long-term debt, more than the stock’s current market value, is another factor weighing on long-term capital gains. Thus, broader macroeconomic factors coupled with high leverage are expected to be a drag on investor returns. Our interactive dashboard analysis highlights Occidental Petroleum’s stock performance during the current crisis with that during the 2008 recession.

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 92% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how OXY and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Occidental Petroleum Stock vs S&P 500 Performance Over 2007-08 Financial Crisis

OXY stock declined from levels of around $63 in September 2007 (pre-crisis peak) to levels of around $50 in March 2009 (as the markets bottomed out), implying OXY stock lost 23% from its approximate pre-crisis peak. It recovered post the 2008 crisis to levels of about $78 in early 2010 – rising by 57% between March 2009 and January 2010. In comparison, the S&P 500 Index first fell 51% in the wake of the recession before recovering 48% by January 2010.

Huge debt pile is a drag on shareholder returns

Occidental Petroleum’s revenues declined by 14% from $18.9 billion in 2018 to $16.3 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. The Anadarko acquisition loaded OXY’s balance sheet with $28 billion of long-term debt in 2019. Thus, the annual interest expenditure of more than $1 billion is weighing on shareholder returns. Moreover, the slump in oil demand slashed OXY’s asset base by 25% as the company incurred $11 billion of impairment charges in 2020. Improvement in the company’s finances depends on the successful execution of the asset divestiture plan and an improvement in operating cash flows.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

While the company plans to maintain a prudent capital investment plan along with divestitures, Trefis believes that the stock could face another downside as benchmark prices observe a correction from rising OPEC+ production during the latter half of the year.

Is Exxon Mobil a better pick over Occidental Petroleum? Check out Exxon Mobil Stock Comparison With Peers to see how XOM compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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