Sell Occidental Petroleum Stock Ahead Of OPEC Meet?

OXY: Occidental Petroleum logo
OXY
Occidental Petroleum

The global economic recovery observed a headwind last week after the WHO declared the Omicron coronavirus mutation as a variant of concern. The benchmark oil prices fell sharply as market participants anticipated demand crunch from another round of travel restrictions. Notably, the OPEC and non-OPEC nations are expected to release plans on further easing of production curtailments in the next few days as oil consuming countries utilize strategic reserves to contain surging fuel prices. High benchmark prices assisted cash flows and subsequently debt retirals of Occidental Petroleum (NYSE: OXY) in the third quarter, but the recent macroeconomic developments are likely to be a drag on revenues and profits. While the company remains committed to deleverage the balance sheet and create long-term value for shareholders, Trefis believes that the stock has low upside potential in the near term. Our interactive dashboard highlights Occidental Petroleum During 2008 Recession vs. Now.

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 108% from the lows seen on Mar 23, 2020, with the Fed’s multi-billion dollar stimulus package keeping the economy afloat during the prolonged lockdown and the vaccination drive allowing things to gradually return to near-normal conditions despite several waves of Covid infections.

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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 22% 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.

Long-term debt obligations and declining benchmark prices are headwinds for shareholders

Occidental Petroleum’s revenues (adjusted for interest and dividend income, as well as one-time gains/losses from asset sales) declined 15% from $20.9 billion in 2019 to $17.8 billion in 2020 as the pandemic led to a slump in demand and drove down benchmark prices. In 2019, Anadarko’s acquisition led to an increase of $28 billion in long-term debt obligations. Thus, the annual interest expenses of more than $1 billion are a drag on shareholder returns. High benchmark prices in the third quarter have been a boon for the company’s cash flows, but the release of  oil reserves by many countries are likely to cause benchmark price correction.

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-September 2020: Recovery of demand, with the phased lifting of lockdowns – no panic anymore with number of cases appearing to have plateaued
  • October 2020-February 2021: Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
  • Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

The company plans to maintain a prudent capital investment plan along with divestitures to assist long-term shareholder returns. However, declining benchmark prices are likely to be a drag on investor returns.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Nov 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
 OXY Return -11% 74% -58%
 S&P 500 Return 1% 24% 108%
 Trefis MS Portfolio Return -2% 48% 302%

[1] Month-to-date and year-to-date as of 11/30/2021
[2] Cumulative total returns since 2017

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