Occidental Petroleum Stays Neutral

Zacks Equity Research

We reiterate our Neutral recommendation on Occidental Petroleum Corporation (OXY). In the first quarter of 2012, the company reported mixed results. The company’s earnings lagged the Zacks Consensus Estimate and the year-ago number, primarily due to a decline in natural gas and natural gas liquids prices.

We know that Occidental engages in the exploration of crude oil and does not conduct refining operations. We believe that the company’s share prices can fluctuate more than that of its peers based on crude oil price movements, thus causing the shares to underperform in comparison to its peers in a decreasing oil price scenario.

On the positive side, Occidental continues to have a strong financial position and had a cash balance of $3.8 billion as of March 31, 2012. Leveraging its financial strength, the company can carry on strategic acquisitions domestically and in international frontiers. Occidental’s strong relationships in the Middle East provide it with an attractive combination of stable overseas asset classes and mature domestic properties.

Occidental has successfully repositioned itself by divesting non-core assets and focusing on upstream operations. The resulting portfolio includes low-risk and long reserve-life properties that provide steady production growth and higher crude oil leverage. At present, the company plans to curtail costs at its loss-making entities due to depressed natural gas prices and re-invest in assets in the Permian Basin and California.

On the flip side, political instability and natural calamities pose challenges for the oil and gas companies. These hamper oil exploration activities and damage production infrastructure.

Apart from that, Occidental also faces cost overruns, interruption in development activities related to approval delays for drilling, delay in regulatory approvals, property or border disputes, and equipment failures. These factors may impact the company’s production growth and targeted returns.

As per the Zacks Consensus Estimates, Occidental’s second quarter and full year 2012 earnings are pegged at $1.94 and $8.08 per share, respectively.

Occidental Petroleum Corporation currently retains a Zacks #3 Rank (short-term Hold rating). The company competes with ConocoPhillips (COP).

Based in Los Angeles, Occidental Petroleum Corporation along with its subsidiaries engages in the exploration, development, production and marketing of crude oil, natural gas liquids and natural gas. The company has operations in the United States, Middle East, North Africa and Latin America. 

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