At this point in the game, picking publicly traded oil companies is less an exercise of forecasting which one of them will perform well; instead, it’s all about which isn’t going to collapse. Unfortunately, Occidental Petroleum (NYSE:OXY) belongs on the less-than-desirable side of that dichotomy. On a year-to-date basis, OXY stock has dropped nearly 74%. However, I expect further losses, perhaps into low single-digit territory or worse.
For anyone that disagrees with this line of thinking, I highly recommend the analysis by my colleague Chris Markoch. Honestly, you could stop reading anything I have to write and just read his arguments against OXY stock. In a logical manner, Markoch explains how Occidental bet big on shale oil via its hugely expensive Anadarko Petroleum acquisition. He wrote:
“In general, oil drilling and exploration requires oil to be selling at a high price per barrel. That’s even more the case when it comes to shale, which is an expensive way to extract oil. In 2016, a wave of shale-reliant companies entered bankruptcy as oil prices dropped.”
Prior to the coronavirus pandemic that has gripped the world, OXY stock already looked weak. Though energy prices recovered from their lows last decade, oil surpluses generally increased. What the coronavirus did later was kill off demand.
Granted, there is an argument that OXY stock has plummeted to ridiculous levels; thus, it could be a contrarian pick. However, I agree with Markoch in that “oil prices will not be climbing anytime soon.” Nothing about Occidental is unique. Sector players are drilling for a dumb commodity, a commodity that right now, no one wants to buy. And it’s not clear where demand will originate.
OXY Stock Has Nowhere to Turn
I think the first clue that this deeply injured economy is no speed bump is the market response. What most lay folks don’t realize is that the red ink is worse than the stated print. Frequently and alarmingly, the volatility has triggered Wall Street’s circuit breakers.
If it weren’t for these mechanisms which give investors a “cooling” off period and ensures adequate liquidity measures, the markets would surely look much worse than it presently does. But don’t hold your breath because the real pain is coming.
How am I so confident in this bearish assessment? Well, just look at the top-level fiscal and legislative measures that government officials launched at the coronavirus-led panic. The U.S. Federal Reserve kept cutting benchmark interest rates until it hit near zero. Recently, the Trump administration is working with various lawmakers and agencies to release $500 billion in direct payouts to taxpayers. This is part of a $1 trillion stimulus package.
In ordinary circumstances, President Trump would call this socialism. My how the tables have turned! Despite this news, the futures market turned negative. Additionally, several international financial indices have also turned red.
Of course, these figures will flip flop over the next several days. My point is that nothing the U.S. government has promised – including giving cash to people – has substantively calmed jitters. Frankly, that’s awful news for OXY stock. This lack of traction suggests no demand base exists.
Occidental reminds me of a cartoon where a character giving chase runs off a mountain cliff. He’s still running in midair until he realizes there’s no ground beneath his feet.
Because really, where would the company turn to for revenue support. With the world’s biggest economy practically shut down, it’s game over for OXY stock.
I Mourn with Occidental
I’ve been writing for InvestorPlace for the last five years. During this time, there was always a simple understanding: right or wrong, the markets will move on.
Sincerely, I do not wish to cause alarm or generate more drama than is necessary. But something fundamental has changed in this country. I fear that unless a miracle occurs, we may endure lasting negative changes to our society.
Yes, we can hope for that miracle. In fact, I want to be wrong, begging even. But I’ve got a very sick feeling in my stomach about what’s happening here and what is virtually guaranteed to happen abroad.
Do me a favor. If the Trump administration engineers a substantive economic recovery by June of this year, please feel free to tell me what an idiot I am. I’ll gladly take the abuse in exchange for a solid economy for all of us. In the meantime, I’d stay far away from OXY stock or any investment like it.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
