Occidental Petroleum Corporation (OXY) Stock Analysis

Market Capitalization: $44.89 Billion
Shares Outstanding: 938.34 Million
Sector: Energy
Industry: Oil & Gas Integrated
Analysis as of: December 23, 2024

1. Company Overview

Occidental Petroleum Corporation (NYSE: OXY) is a major American multinational corporation engaged in hydrocarbon exploration in the United States, the Middle East, and Latin America. Founded with a mission to deliver superior shareholder value by leveraging its operational expertise and strategic acquisitions, Occidental Petroleum focuses on both upstream and downstream operations, including exploration, production, refining, and marketing of oil and gas products.

Key Business Segments:

• Exploration & Production (E&P):
  • Hydrocarbon Exploration: Occidental conducts extensive exploration activities to discover and develop oil and natural gas reserves, utilizing advanced geological and technological methods.
  • Production Operations: Manages the extraction and production of hydrocarbons, ensuring efficient and sustainable operations across its asset base.
• Chemical Manufacturing:
  • Dow Chemical Joint Venture: Occidental holds a significant stake in Dow Inc., a leading global chemical company. This partnership enhances Occidental’s diversification and stability through consistent chemical revenues.
  • Integrated Operations: Synergies between oil and chemical operations enable cost efficiencies and expanded market reach.
• Carbon Management:
  • Carbon Capture and Storage (CCS): Invests in CCS technologies to reduce carbon emissions, aligning with global sustainability trends and regulatory requirements.
  • Environmental Initiatives: Committed to minimizing environmental impact through responsible resource management and innovative sustainability practices.

Strategic Initiatives:

• Asset Optimization: Continuously evaluates and optimizes its asset portfolio to focus on high-margin operations and divest non-core assets to enhance profitability.
• Debt Reduction: Implements aggressive strategies to reduce debt levels through asset sales, refinancing, and disciplined capital allocation to strengthen the balance sheet.
• Technological Innovation: Invests in cutting-edge technologies to improve operational efficiency, enhance exploration capabilities, and advance environmental sustainability.
• Global Expansion: Expands its footprint in key international markets to capitalize on emerging opportunities and diversify revenue streams.

2. Financial Performance

a. Revenue and Growth

TTM Revenue (as of Sep 30, 2024): $27.14 Billion
YoY Revenue Growth (TTM): -7.39%

Analysis:

• Declining Revenue Growth: Occidental Petroleum experienced a contraction in revenue growth of -7.39% in the trailing twelve months (TTM), indicating challenges in maintaining its sales momentum amidst fluctuating oil prices and operational headwinds.
• Volatile Historical Growth: The company witnessed significant revenue fluctuations, with a notable surge of +41.14% in FY 2022 followed by a steep decline of -22.87% in FY 2023. This volatility underscores the cyclical nature of the oil and gas industry and Occidental’s sensitivity to market dynamics.
• Consistent Performance Post-Pandemic: Despite recent declines, Occidental has demonstrated resilience with periods of robust growth, particularly during recovery phases post-economic downturns.

b. Profitability

Net Income (TTM): $3.71 Billion
EPS (TTM): $3.84
Profit Margin: 16.25%
Return on Equity (ROE): 13.12%
Return on Assets (ROA): 4.59%

Analysis:

• Solid Net Income: Occidental reported a substantial net income of $3.71 billion in the TTM period, reflecting effective management and profitable operations despite revenue challenges.
• Healthy Earnings Per Share (EPS): An EPS of $3.84 indicates strong profitability on a per-share basis, enhancing the stock’s attractiveness to investors seeking earnings growth.
• Moderate Profit Margins: A profit margin of 16.25% demonstrates the company’s ability to convert revenue into profits efficiently, although there is room for improvement to bolster bottom-line performance.
• Decent Return Metrics: ROE of 13.12% and ROA of 4.59% signify reasonable returns on shareholder equity and assets, highlighting operational efficiency and effective capital utilization.

c. Margins

Gross Margin (TTM): 61.77%
Operating Margin (TTM): 21.35%
Profit Margin (TTM): 16.25%

Analysis:

• Strong Gross Margin: A gross margin of 61.77% indicates that Occidental effectively manages its cost of revenue relative to its earnings, showcasing robust operational efficiency and cost control measures.
• Healthy Operating and Profit Margins: Operating margin of 21.35% and profit margin of 16.25% reflect the company’s ability to manage operating expenses and convert a significant portion of revenue into net profits.

d. Cash Flow

Operating Cash Flow (TTM): $11.32 Billion
Capital Expenditures (CapEx) (TTM): -$7.02 Billion
Free Cash Flow (FCF) (TTM): $4.30 Billion
FCF Per Share: $4.59

Analysis:

• Robust Operating Cash Flow: Operating cash flow of $11.32 billion underscores Occidental’s strong ability to generate cash from its core business operations, essential for funding capital projects and reducing debt.
• Significant Capital Expenditures: CapEx of -$7.02 billion reflects substantial investments in fleet expansion, technological upgrades, and infrastructure to support long-term growth and operational efficiency.
• Positive Free Cash Flow: FCF of $4.30 billion indicates that after accounting for capital expenditures, Occidental generates ample cash to invest in growth initiatives, reduce debt, or return capital to shareholders through dividends and buybacks.

3. Balance Sheet

Total Assets: $85.80 Billion
Total Liabilities: $50.87 Billion
Shareholders’ Equity: $34.93 Billion
Total Debt: $27.65 Billion
Cash & Equivalents: $1.76 Billion
Net Cash Position: -$25.89 Billion
Debt-to-Equity Ratio: 0.79
Current Ratio: 1.00
Quick Ratio: 0.60
Working Capital: $13.00 Million

Analysis:

• Extensive Asset Base: With total assets of $85.80 billion, Occidental maintains a vast asset portfolio, including significant investments in property, plant, and equipment essential for its exploration and production activities.
• Robust Shareholders’ Equity: Shareholders’ equity of $34.93 billion indicates a strong capital structure, providing a substantial buffer against potential liabilities and financial downturns.
• High Debt Levels: Total debt of $27.65 billion signifies a considerable leverage position. While manageable with a debt-to-equity ratio of 0.79, the substantial debt load poses financial risk, particularly in volatile oil markets.
• Negative Net Cash Position: A net cash position of -$25.89 billion highlights the company’s significant debt obligations exceeding its cash reserves, necessitating effective debt management strategies.
• Liquidity Concerns: A current ratio of 1.00 and quick ratio of 0.60 indicate that Occidental has just enough short-term assets to cover its immediate liabilities, with limited liquidity to handle unexpected financial obligations.
• Minimal Working Capital: Working capital of $13.00 million suggests limited short-term financial flexibility, emphasizing the need for prudent cash flow management.

4. Valuation

Current Stock Price (Dec 23, 2024): $47.13
PE Ratio (TTM): 12.45
Forward PE: 15.34
Price-to-Sales (PS) Ratio: 1.56
Forward PS: 1.57
Price-to-Book (PB) Ratio: 1.68
Price-to-Free Cash Flow (P/FCF) Ratio: 10.42
Price-to-Operating Cash Flow (P/OCF) Ratio: 3.96
EV/EBITDA: 5.47
EV/Sales: 2.61

Analysis:

• Reasonable PE Ratios: A trailing PE ratio of 12.45 and forward PE of 15.34 suggest that Occidental is moderately valued relative to its earnings. While the trailing PE indicates potential undervaluation, the forward PE reflects expectations of future earnings growth.
• Competitive Price-to-Sales (PS) Ratio: A PS ratio of 1.56 and forward PS of 1.57 indicate that the stock is trading at a reasonable valuation relative to its revenue, making it attractive to value investors seeking exposure to the oil and gas sector.
• Moderate Price-to-Book (PB) Ratio: A PB ratio of 1.68 suggests that the stock is trading above its book value, reflecting investor confidence in the company’s asset management and growth prospects.
• Fair Price-to-Cash Flow Ratios: P/FCF of 10.42 and P/OCF of 3.96 indicate that the stock is reasonably valued relative to its free and operating cash flows, suggesting efficient cash generation capabilities.
• Attractive EV Ratios: An EV/EBITDA of 5.47 and EV/Sales of 2.61 are favorable compared to industry averages, indicating that Occidental is attractively valued in terms of its earnings and revenue relative to its enterprise value.

5. Market Performance

52-Week Range: $45.17 – $71.19
52-Week Price Change: -21.33%
Beta (5Y): 1.60
Relative Strength Index (RSI): 45.65
Average Volume (20 Days): 12,691,307
Short Interest: 31.92 Million (3.40% of Shares Outstanding)
Short Ratio (Days to Cover): 2.83

Analysis:

• Declining Price Performance: Over the past 52 weeks, Occidental Petroleum’s stock has decreased by -21.33%, trading within a wide range of $45.17 to $71.19. This decline may reflect market volatility, declining oil prices, or investor concerns over the company’s high debt levels.
• High Volatility: A beta of 1.60 indicates that Occidental’s stock is significantly more volatile than the broader market, amplifying both potential gains and losses. Investors should be prepared for substantial price fluctuations.
• Neutral RSI: An RSI of 45.65 suggests that the stock is neither overbought nor oversold, maintaining a balanced technical position without significant price pressures.
• Substantial Trading Volume: An average volume of approximately 12.69 million over the past 20 days signifies high liquidity, facilitating ease of trading for investors.
• Notable Short Interest: With 3.40% of shares outstanding sold short and a short ratio of 2.83 days to cover, there is a moderate level of bearish sentiment. This short interest indicates skepticism about the company’s future performance but is not excessively high.

6. Financial Health and Risks

a. Liquidity

Current Ratio: 1.00
Quick Ratio: 0.60
Working Capital: $13.00 Million

Analysis:

• Marginal Liquidity: Occidental’s current ratio of 1.00 indicates that the company has just enough short-term assets to cover its immediate liabilities. The quick ratio of 0.60 further highlights limited liquidity, suggesting potential challenges in meeting short-term obligations without additional financing or asset liquidation.
• Minimal Working Capital: Working capital of $13.00 million underscores the company’s limited short-term financial flexibility, necessitating careful cash flow management to sustain operations and fund strategic initiatives.

b. Leverage

Total Debt: $27.65 Billion
Debt-to-Equity Ratio: 0.79
Debt-to-EBITDA Ratio: 1.97
Debt-to-FCF Ratio: 6.42
Interest Coverage Ratio: 5.29

Analysis:

• High Financial Leverage: A debt-to-equity ratio of 0.79 signifies a significant reliance on debt financing. While the ratio is below 1, the substantial total debt poses financial risk, especially in a volatile oil market.
• Manageable Debt Servicing: A debt-to-EBITDA ratio of 1.97 indicates that Occidental can comfortably service its debt with its earnings before interest, taxes, depreciation, and amortization. However, this ratio approaches industry cautionary thresholds, warranting vigilant debt management.
• Reasonable Debt-to-Free Cash Flow Ratio: Debt-to-FCF of 6.42 suggests that the company has a reasonable capacity to cover its debt obligations with its free cash flow, mitigating the risk of financial distress.
• Adequate Interest Coverage: An interest coverage ratio of 5.29 demonstrates that Occidental generates sufficient earnings to cover its interest expenses, reducing the risk of insolvency related to interest obligations.

c. Profitability & Cash Flow

• Consistent Profitability: Occidental’s net income of $3.71 billion and profit margin of 16.25% highlight the company’s ability to generate substantial profits from its operations, supported by strong revenue and effective cost management.
• Robust Cash Flow Generation: Operating cash flow of $11.32 billion and free cash flow of $4.30 billion indicate that Occidental effectively manages its cash flows, allowing for reinvestment in growth initiatives, debt reduction, and capital returns to shareholders.
• Solid Return Metrics: ROE of 13.12%, ROA of 4.59%, and ROIC of 6.43% reflect the company’s ability to generate returns on shareholder equity, assets, and invested capital, respectively. While these metrics are positive, there is room for improvement to enhance overall financial performance.

d. Operational Risks

• Oil Price Volatility: As an oil and gas company, Occidental is highly sensitive to fluctuations in global oil prices. Declining prices can significantly impact revenue, profitability, and cash flow.
• Regulatory Compliance: Adhering to stringent environmental and safety regulations is crucial. Non-compliance can result in hefty fines, operational restrictions, and reputational damage.
• Operational Efficiency: Maintaining high operational efficiency is essential to manage costs and sustain profitability. Any disruptions in exploration, production, or refining processes could adversely affect performance.
• Debt Management: High debt levels increase financial risk, especially during periods of declining earnings or rising interest rates. Effective debt management strategies are critical to mitigate this risk.

e. Market & Regulatory Risks

• Global Economic Conditions: Economic downturns can reduce demand for oil and gas, affecting Occidental’s revenue and profitability. Additionally, geopolitical tensions and trade disputes can disrupt supply chains and market access.
• Environmental Regulations: Increasingly stringent environmental regulations require continuous investment in cleaner technologies and sustainable practices, potentially increasing operational costs.
• Technological Advancements: Rapid advancements in energy technologies necessitate continuous investment to stay competitive. Failure to adopt new technologies can result in operational inefficiencies and loss of market share.
• Cybersecurity Threats: As a large energy operator, Occidental is vulnerable to cybersecurity threats that could compromise sensitive data, disrupt operations, and damage the company’s reputation.
• Climate Change Impacts: Climate change poses long-term risks to the oil and gas industry, including regulatory changes, shifts in energy demand, and increased frequency of extreme weather events affecting operations.

7. Conclusion

Pros:

• Attractive Valuation Metrics: With a trailing PE ratio of 12.45 and forward PE of 15.34, Occidental Petroleum is reasonably valued relative to its earnings, offering potential upside for investors anticipating continued profitability and growth.
• Strong Profitability: The company boasts impressive net income of $3.71 billion and a healthy profit margin of 16.25%, reflecting efficient cost management and robust revenue generation.
• Robust Cash Flow: Operating cash flow of $11.32 billion and positive free cash flow of $4.30 billion demonstrate the company’s ability to generate and manage cash effectively, supporting strategic initiatives and debt reduction.
• Solid Return Metrics: ROE of 13.12%, ROA of 4.59%, and ROIC of 6.43% indicate the company’s capability to generate returns on shareholder equity, assets, and invested capital, respectively.
• Dividend Yield: An annual dividend of $0.88 yielding 1.84% provides income potential for income-focused investors, enhancing the stock’s attractiveness.
• Strategic Initiatives: Continuous investments in fleet modernization, technological innovation, and environmental compliance position Occidental for sustained growth and competitiveness in the evolving energy landscape.

Cons:

• Declining Revenue Growth: A negative revenue growth of -7.39% in the TTM period highlights challenges in maintaining sales momentum amidst market volatility and operational headwinds.
• High Debt Levels: Total debt of $27.65 billion and a debt-to-equity ratio of 0.79 indicate significant leverage, posing financial risk, particularly in volatile oil markets.
• Negative Net Cash Position: A net cash position of -$25.89 billion underscores the company’s substantial debt obligations exceeding its cash reserves, necessitating effective debt management strategies.
• Liquidity Concerns: Current ratio of 1.00 and quick ratio of 0.60 suggest limited short-term liquidity, increasing the risk of financial strain during unexpected downturns.
• Significant Stock Price Decline: The stock has decreased by -21.33% in the last 52 weeks, reflecting potential underlying issues or negative market sentiment affecting investor confidence.
• High Beta: A beta of 1.60 indicates that Occidental’s stock is highly volatile, amplifying both potential gains and losses compared to the broader market.
• Altman Z-Score: An Altman Z-Score of 1.53 suggests an increased risk of bankruptcy, highlighting financial vulnerability that investors should carefully consider.
• Operational and Market Risks: Exposure to oil price volatility, regulatory compliance, and global economic conditions can significantly impact the company’s financial performance and operational stability.

Final Note

Occidental Petroleum Corporation stands as a significant player in the oil and gas industry, leveraging its operational expertise, strategic initiatives, and robust financial performance to drive growth and shareholder value. The company’s ability to navigate industry challenges, manage financial leverage, and invest in sustainable practices positions it for potential long-term success. However, investors must carefully weigh the attractive valuation and profitability against the inherent financial and operational risks, including high debt levels, revenue volatility, and regulatory compliance challenges.

Disclaimer:
This analysis is for informational purposes only and does not constitute investment advice. Investing involves risks, including potential loss of principal. Past performance is not indicative of future results. Consult a qualified financial advisor before making any investment decisions.