Oil and gas prices have been jumping higher throughout 2018. That’s despite a number of experts calling for a permanent lid on energy prices just a few years ago. Of course, these increases have energy stocks ramping higher too. Occidental Petroleum (NYSE:OXY) is one of those names. Even though OXY stock is up “just” 13% so far this year, shares are up more than 40% over the last 12 months.
So, is the recent slowdown in gains a chance for investors to hop on board? There are three main reasons why they should at least consider it, given OXY’s growth and valuation profile, dividend yield and its setup on the charts.
Occidental is scheduled to report earnings on Aug. 8 (with its conference call on Aug. 9), but some in the industry already have reported.
Specifically, Schlumberger (NYSE:SLB) issued its quarterly report earlier this month — the results of which were mixed. However, many investors put a lot of emphasis on what SLB management have to say during the conference call, as they carry plenty of credibility in the industry. CEO Paul Kibsgaard had this to say:
“[It’s] becoming increasingly likely that the industry will face growing supply challenges over the coming year and a significant increase in global E&P investment will be required to minimize the impending deficit. …Spare production capacity, which is essentially limited to only a few OPEC countries, is now nearing its lowest level for more than a decade.”
I included bold emphasis to highlight Kibsgaard’s main point — that supply needs to increase in order to accommodate rising demand. The global economy is doing well and because of some countries’ instability, other producers will have to step up to the plate and pump more oil.
Valuing OXY Stock
Kibsgaard spoke positively about the Permian, which may have some investors interested in names like Pioneer Natural Resources (NYSE:PXD) and Anadarko Petroleum (NYSE:APC) too.
But don’t sleep on OXY stock.
Analysts expect the company to grow revenue 30% this year to $17.2 billion. In 2019, estimates call for further 9% growth. On the earnings front, they expect a massive 450% increase to $4.90 per share this year, followed by 7% growth in 2019 to $5.24 per share.
What does that men for OXY stock? While shares trade at about 30 times last year’s earnings, that’s in the rearview mirror. We don’t care about what OXY did in the past, we care about what it’s doing right now and what it will do in the future.
In that sense, shares trades at 17 times this year’s earnings. That’s rather reasonable given the double-digit earnings and sales growth this year and high-single-digit growth for both metrics next year. Further, throw in the 3.75% dividend yield that OXY stock pays and shares become even more attractive. Management gave this payout a slight boost a few weeks ago.
Last quarter, earnings per share of 92 cents came in a whopping 21 cents ahead of expectations. Occidental also beat on revenue expectations. Cash flows, an important metric for investors, continue to improve as well. Trailing operating cash flow has increased 22.5%, while trailing free-cash flow is up a whopping 32%. Look for this growth rate to continue as time goes on.
Increasing cash flows bode well for Occidental, as bolstering cash flow makes the company much more flexible. Whether that’s with the dividend, paying down debt or investing in its businesses.
Trading OXY Stock
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The chart for OXY stock is actually pretty encouraging. After a huge rally off the March lows, Occidental has simply chopped around in the $80’s since May. Support is trending slightly higher, while resistance is clearly sitting between $86 and $87.
Let’s keep it simple: So long as OXY stock stay above support, there’s no reason to bet against it. At least not with this kind of growth, valuation and dividend yield. Should support continue to hold, a retest of resistance is in the cards. Bulls will hope to eventually push through this mark.
Should support fail, look for support near $78, where the 100-day moving average could also come into play. Below that and the 200-day is in the cards.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
