What’s next for Occidental Petroleum (NYSE:OXY) stock? Oil prices have partially recovered from their novel coronavirus lows. But, this hard-hit oil name needs a lot more than $40 per barrel oil to fuel its recovery. After getting in over its head after buying Anadarko Petroleum, there’s a lot more work to do.
Granted, Occidental’s current share price reflects this. The stock may have nearly doubled off its lows. But, shares remain far below where they were pre-pandemic.
Yet, the proverbial “second shoe” may have yet to drop. Even after the company has slashed its dividend, wrote off assets, and scrambled to refinance debt. In a recent article, our own Will Ashworth pointed out the many similarities between this company, and now-bankrupt Chesapeake Energy (OTCMKTS:CHKAQ).
That’s not to say Occidental is heading down the same dire path. But, considering there are less risky oil stocks out there you can buy to bet on rising prices, it may be best to skip this name for now.
How Much More Can OXY Stock Recover?
As InvestorPlace’s Dana Blakenhorn wrote Jul 1, most of Occidental’s issues right now result from its ill-timed buyout of Anadarko in 2019. The deal made sense when oil was well above $50 per barrel. But, as oil prices tumbled earlier this year, it quickly became one of the biggest blunders in M&A history.
Anyone who owned Occidental stock since then knows this full well. Even after bouncing back from its 52-week low, shares remain down 58.4% year-to-date. Yet, does that mean the stock is a great opportunity, while it remains depressed? Or is buying shares today like catching a falling knife?
A little of both. On the bull side, there’s more room for shares to recover, as long as oil prices continue to climb higher.
That’s the view of Suntrust Robinson Humphrey’s Neal Dingmann. Back in June, the analyst upgraded shares from “hold” to “buy,” with a price target of $25 per share.
His rationale? If oil prices continue to rise, Occidental could generate $4 billion in free cash flow next year. Considering the stock today has a market cap of $15.4 billion, that would be a real needle mover, to say the least.
Surging cash flow would allow the company to pare down its heavy debt load. It would also bolster confidence in the stock by investors, as it would no longer be on the same road to Chapter 11 seen with Chesapeake.
Yet, with shares at around $17 per share, a $25 price target only implies 47% upside from today’s prices. And, considering there’s little room for error (more below), the risk/return at today’s prices isn’t in your favor.
Occidental May Not Be The Best Way to Bet on Rising Oil Prices
The bull case for Occidental stock hinges entirely on oil climbing higher. In other words, it’s a “predicting the unpredictable” situation. Unlike other kinds of turnaround stories, you aren’t betting on management’s ability to turn around the ship. Here, you are betting on a factor outside the company’s control.
But, there are better ways to make this same play. A good example is Marathon Oil (NYSE:MRO). As I’ve discussed previously, Marathon offers investors an opportunity to make an asymmetric wager on rising oil prices. That is to say, the amount that company’s share price could rise vastly exceeds how much it could fall.
In contrast, the potential downside with Occidental vastly exceeds the upside. Granted, Marathon is fairly levered ($5.5 billion in long-term debt against a $4.4 billion market cap). But with this company, the amount of long-term debt is many times its market cap. Also, there’s the $10 billion in preferred stock sold to Warren Buffett to finance the Anadarko deal.
This high amount of debt, along with the preferred shares, leave little room for error with the common stock. Similar to Chesapeake, it’s a double-edged sword situation. Sure, shares could head higher on an ounce of improvement. Yet, continued deterioration could wipe out shareholders, if the company fails to meet its massive debt obligations.
Does that sound like its worth it just for the chance shares rally from $17 to $25?
With Risk/Return Not in Your Favor, Skip Out on OXY Stock
Oil exploration and production (E&P) stocks today offer investors potential outsized returns in exchange for greater levels of risk. But, in the case of Occidental, it isn’t worth the trouble. With other leveraged oil plays like Marathon out there, why take a chance with this company, which has more in common with Chesapeake than it does with its E&P peers?
That’s not to say shares can’t move higher from here. But, with better ways out there to bet on rising oil prices, it’s best to skip out on Occidental stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.