Occidental Petroleum Is A Bit On The Pricey Side Again (NYSE:OXY) - Seeking Alpha

Occidental Petroleum Is A Bit On The Pricey Side Again (NYSE:OXY) | Seeking Alpha

Occidental Petroleum Is A Bit On The Pricey Side Again
Occidental Petroleum Corporation (OXY) 9 Comments

Summary

- Occidental Petroleum Corporation's bump in share price has dropped down its free cash flow yield, even at higher prices.
- The company has a 7% FCF yield, not enough to justify its valuation given both long and short-term risks.
- At this time, we recommend against adding to a position in Occidental Petroleum, but don't recommend selling yet.
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Vladimir_Timofeev

Occidental Petroleum Corporation (NYSE: OXY) was a company we last recommended just over 2 months ago. The company has since outperformed off of its latest earnings. Its total return has more than doubled the S&P 500 since then. As we'll see throughout this article, the company's higher current price makes it a worse investment despite strong crude oil prices.

Occidental Petroleum Quarterly Performance

Occidental Petroleum had a strong quarter despite a tough pricing environment.

Occidental Petroleum Investor Presentation

The company generated $1 billion in free cash flow ("FCF"), annualized at a 7% FCF yield. The company's operations remain strong, with 1.22 million barrels / day in production and full-year guidance increased by almost 1%. The company's integrated business has continued to help earnings with Oxychem annualizing at more than $1.9 billion.

The company triggered a $520 million preferred equity redemption, which will save on interest expenditures, to the tune of roughly $40 million annualized. The company has an investment grade rating that will continue to help FCF to grow. The company has continued to invest heavily with more than $6 billion in annualized capital spending, highlighting its strength.

Occidental Petroleum Platform Improvement

The company is working to improve its platform and increase long-term shareholder returns.

Occidental Petroleum Investor Presentation

The company has managed to rapidly improve the efficiency of its operations. Its YoY improvement is 11% and its 7-year improvement is more than 200%. Every time the company manages to improve its platform, it lowers costs, and increases margins. That is enormously important to the company's ability to continue its success.

The continued improvement here is a sign of the company's strength.

Occidental Petroleum Guidance

The company's guidance should enable stronger cash flow in a higher priced environment.

Occidental Petroleum Investor Presentation

The company's guidance for the quarter is just under 1.19 million barrels / day, for the FY, the company is at 1.205 million barrels / day. The company's Permian business is the strongest part of its business, while exploration expenses are higher for the quarter. The company's production remains more than 50% oil at higher margins and operating costs remain low.

The company's 3Q should have some weaker financials. However, overall the company's FCF should remain strong with Brent prices at more than $80 / barrel. That guidance will enable strong future shareholder returns.

Preferred Equity Isn't Bad

The company had to redeem more than $500 million of preferred equity in the quarter.

Occidental Petroleum Investor Presentation

The company's rule is whenever trailing shareholder distributions goes above $4 / share, it has to dedicate 50% of its returns towards repurchasing the preferred equity at a 10% premium. At an 8% yield, it's not a bad forced use of the company's cash. After the next quarter, as the strong 2022 winds down, we expect this to no longer be a requirement.

However, $4 / share is a strong level of shareholder returns to have that threshold. This redemption isn't a big deal even if the company is forced to use its cash on it.

Thesis Risk

The largest risk to our thesis is bumper crude oil prices. The company is profitable at $80+ Brent, though not hugely profitable. At $100+ / barrel it becomes hugely profitable. A period of higher prices could make the company's share price low at its current level and enable stronger shareholder returns.

Conclusion

Occidental Petroleum is expensive at its current FCF yield. The company has a 7% FCF yield. Some % of its shareholder returns are going to paying down interest at a 7.2% yield. The company is using both buybacks and dividends to return money to shareholders otherwise. Overall though, given the volatile oil industry, it's not a yield that makes the company a great investment.

Occidental Petroleum Corporation needs a double-digit yield at $80+ Brent, or a strong diversified portfolio without as much upstream volatility, to be a good investment in our view. At its current yield, we are neutral on the company. We don't recommend selling your shares but we also definitely recommend against investing.

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