Occidental Petroleum May Get a Reality Check

Among the investment sectors that received a gut-check from the novel coronavirus, the oil market looked particularly ominous. That’s especially the case when the price of crude dripped momentarily below zero, a brief but unprecedented ignominy. Since then, companies like Occidental Petroleum (NYSE:OXY) have witnessed some encouraging signs. In particular, OXY stock has more than doubled from this year’s intraday low.

OXY stock Popped Yet There's Still Nothing to Like
Source: Pavel Kapysh / Shutterstock.com

As well, we have some encouraging data points to consider. First on the list is the oft-discussed May jobs report, where the economy added 2.5 million jobs. For the bulls, the nominal tally is not the most significant factor. Rather, it’s that the report represented a complete reversal from earlier calls of doom and gloom.

Later, the Commerce Department revealed that retail sales jumped nearly 18% in May from the prior month. Again, the enthusiasm wasn’t exactly centered on the hard numbers, although anybody will take good news at this time. But just like the jobs report, the boost in retail sales repudiated the idea that American consumers were fearfully self-quarantining.

Instead, they wanted to go out and do things other than just the essentials. Of course, this has a huge impact on OXY stock due to oil demand implications.

Still, I’m not getting too excited about the Occidental Petroleum’s recent rally. Fundamentally, I must go back to the company’s decision to buy Anadarko Petroleum in a cash-heavy deal. According to Reuters, Occidental quadrupled its debt to $40 billion in a bidding war that also included Chevron (NYSE:CVX).

While the buyout may have made sense to some at the time, in this pandemic, cash is king. With that constrained, OXY stock is unusually risky now.

Oil Markets Are Giving OXY Stock False Hope

However, it’s fair to point out that debt isn’t the end-all, be-all for an organization. Plus, I can think of many fiscally unsound stocks that have found surprisingly bullish support. In many cases, having a credible narrative is good enough.

But that’s also my contention with OXY stock. Yes, past economic data offers some positive implications for OXY stock. However, I want to know if the underlying fundamentals – namely, petroleum-based product demand – truly justifies Occidental’s recent upswing.

To get a better picture, I used TomTom.com’s automotive traffic congestion data from major global metropolises. In my opinion, I can’t think of more relevant markets than Los Angeles and New York City, given their scope. So, for me to believe in OXY stock, I must see substantially higher traffic rates there.

Instead, I’m not getting the most confident read. Roughly 14 weeks into this crisis, New York traffic is down 58% compared to its year-ago level, whereas Los Angeles is down 63%. While these are significant improvements during the depths of the pandemic when traffic was down to 20% of last year’s capacity – or was almost non-existent in the Big Apple’s case – current traffic is still heavily deflated.

Traffic rates in Los Angeles, New York City vs. last year
Click to Enlarge
Source: Chart by Josh Enomoto

Interestingly, oil prices have recovered at a higher rate than traffic levels in these two powerhouse cities. Currently, crude is down approximately 28% from the year-ago period.

Now, some of this could be that not every location has suffered like major U.S. hotspots. For instance, traffic in Tokyo, Japan is down only 12% from the year-ago level. Nevertheless, no other country has America’s car culture. And according to PolicyAdvice.net, no other country logs as many miles as we do.

Therefore, until traffic in the U.S. improves substantially, I can’t comfortably recommend OXY stock.

An Ambiguous Situation with Air Travel

The other big catalyst for the oil markets is air travel. Of course, jet fuel demand is pivotal. However, you also have associated demand to consider. As people travel to their destinations, that puts more car rentals, taxis, buses, etc. to greater use.

But even here, the situation doesn’t look great for OXY stock. Sure, on one hand, people are traveling much more by air than they did during the peak of this crisis. According to the Transportation Security Administration, passenger volume capacity was 7.2% that of the year-ago level in April and May combined.

In recent days, though, the capacity is now above 20%. But it begs the question – is that good enough for OXY stock and other oil investments?

In my opinion, airline travel mimics what we’re seeing on the road. Yes, more planes are flying, just like more cars are driving on the road. But the bottom line is that oil prices are far outpacing demand in both sectors. Again, this makes me nervous about OXY or any oil-based name for that matter.

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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/oxy-stock-may-get-a-reality-check/.

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