Bottom-fishing is an activity that’s not for every market participant. It takes a certain type of fortitude to look at Occidental Petroleum (NYSE:OXY) and see an opportunity there. If you truly believe in “buy low and sell high,” though, then OXY stock is absolutely worth considering.
The commodities market is buzzing about OPEC’s putative plan to maintain oil-production cuts through July or possibly even longer than that. That’s undoubtedly a tailwind for Occidental, assuming OPEC sticks to its commitments.
That, however, is a very big “if.” Rather than rely on promises being kept among major oil-producing nations, it makes more sense to drill down on the data and determine whether Occidental presents a favorable reward-to-risk profile now.
A Closer Look at OXY Stock
Fascinatingly, the $100 level has been a wall of resistance for many years with OXY stock. It’s just one of those market mysteries that defies explanation. Maybe the stock will reach and even break through $100 someday, but that’s a very long-term goal.
For the time being, we have to be realistic and just hope that OXY stock can recover its losses since the beginning of the year. The stock began 2020 above $40 per share but cratered in February and March. The onset of the novel coronavirus was largely to blame for this distressing price action.
As the bulls attempt to stage a price resurrection for OXY shares, informed investors must consider a number of complex factors. A couple of analyst upgrades might provide some clarity and encouragement. The final decision is the trader’s responsibility, though, as there are no easy answers in the global commodities matrix.
A Dud of a Deal
Based in Houston, Occidental is known as the Permian Basin’s biggest oil producer. While the company does have operations in Latin America as well as in the Middle East, Occidental is mainly considered a symbol of American shale oil’s ups and downs.
In the past year or two, there have been few ups and many downs for OXY stock. The massive global oil glut in March and April certainly took a toll on the company and its peers. Along with that, the coronavirus crisis crushed energy demand.
Those factors can’t be blamed on Occidental. Yet, the company’s problems aren’t entirely externally sourced. A headline-grabbing deal from May of last year turned out to be one of the costliest mistakes that Occidental’s ever made.
Specifically, OXY famously acquired energy-sector rival Anadarko Petroleum for an astounding $56 billion. Granted, this effectively doubled Occidental’s size. Yet, the deal also imposed around $50 billion worth of debt burden upon the company.
A Pair of Upgrades
Analysts, investors, and social-media pundits can now look back and see the error of assuming so much debt in the risky Anadarko acquisition. But it’s easy to play “hindsight quarterback” after a bold move goes wrong.
Market traders punished Occidental relentlessly, pushing the OXY share price ever lower. However, a couple of prominent analysts are now taking a shine to the embattled shale antihero.
First, SunTrust Robinson Humphrey analyst Neal Dingmann upgraded OXY stock from “hold” to “buy.” Dingmann also raised his price target from $13 to $25, citing “massive” asset sales as a possible catalyst.
Even more ambitious was Bank of America Securities analyst Doug Leggate. He upgraded the stock from “neutral” to “buy” and assigned OXY shares a highly optimistic price target of $32.
Like Humphrey, Leggate seems to envision the possibility of mega-scale asset sales in Occidental’s near future:
“The idea that Occidental management—and specifically the board cannot extract $10 billion — $15 billion of asset sales, over the next three years is now the only call against Occidental’s investment case.”
It’s an interesting thesis to consider. Just as Occidental overpaid in its Anadarko acquisition, perhaps it can redeem itself by unloading some dead weight. This isn’t an ideal growth catalyst, but it’s better than nothing.
The Bottom Line
The analyst upgrades are all fine and good, but they shouldn’t be one’s sole reason to own OXY stock. Bottom-fishers should only scoop up the shares with a firm belief that the price rout has been overstated and overextended. A snapback, if and when it happens, would be long overdue and could be of epic proportions.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.