As Occidental shines a light on its respective businesses, we see three drivers of $123/share NAV [net asset value] and $120/share target price, up from $110: (1) The company's Middle East free cash flow and resource base; (2) higher nonconventional activity in the Permian; and (3) higher activity in California. On top of this rising NAV, OXY should have $18 billion of cash once disposals are complete. Some of this will be used for debt repayment, reinvestment, and continuing cash needs, but a $10 billion buyback in first-half 2014 is in the realm of possibility (perhaps as a Dutch auction). As we have argued before, there is room for the shares of pure-play shale companies in the right basins to rise (even with tough competition for investor dollars). However, OXY could outperform mega-cap peers.
Our earnings increase is due to slightly higher volumes in second-half 2013 and to the ramp-up in Permian production volumes in 2014 and beyond. We are raising our 2013/2014/2015 EPS estimates to $7.07/$7.17/$7.62 (from $6.76/$7.11/$7.45).