With a debt laden balance sheet and continued volatility in the upstream oil and gas market, Occidental Petroleum (NYSE:OXY) stock is too volatile for investors to bet on at this time.
Investors looking for exposure to the oil and gas sector should consider companies in the space that are in better shape financially right now and can weather the current market volatility. Oil and gas companies such as ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM) have much better fundamentals and offer better long-term prospects than OXY stock.
OXY stock is cheap right now and that has piqued the interest of speculators. Shares of Occidental Petroleum have risen 80% since bottoming at $9 in the spring. But at $16 per share, OXY stock is still more than three times lower than its 52-week high.
Some investors are attracted by the cheap valuation and are betting that OXY stock will continue trending higher as oil and gas prices stabilize further and the global economy recovers from the novel coronavirus pandemic.
However, those speculative investors are overlooking the fact that Occidental stock remains depressed for reasons that have nothing to do with market volatility or the pandemic-induced shutdown. The problems plaguing Occidental primarily involve the company’s misguided and poorly timed acquisition of Anadarko Petroleum and a balance sheet that is weighed down by debt.
Current market conditions have just made it more difficult for Occidental Petroleum’s management to course correct and right the ship.
Warren Buffett Gets It Wrong
Retail investors can be forgiven for thinking OXY stock is worth buying. Even legendary investor Warren Buffett got it wrong about Occidental, investing $10 billion to purchase more than 36 million shares of the troubled oil and gas producer. Carl Icahn, another legendary investor, also has a sizable stake in Occidental and is now pushing to replace the company’s entire board of directors.
The main problem with Occidental has been the company’s $55 billion acquisition of Anadarko, a company engaged in hydrocarbon exploration. The deal was finalized in August 2019, but it left Occidental saddled with $37 billion of debt that it’s now struggling to pay down.
The fact that oil prices turned negative this spring during a price war between Russia and Saudi Arabia that occurred at the height of the Covid-19 outbreak only made it more difficult for management to address its debt. While oil is now hovering around $40 a barrel, that price is still unprofitable for most oil and gas producers, including Occidental Petroleum.
Attempts by Occidental to sell some of its assets in the current climate have been unsuccessful, leaving it with limited options other than to take on even more debt in the near term and slash its dividend from 79 cents per share to just a penny.
An Ugly Second Quarter
The Houston-based company is scheduled to report its second quarter earnings on Aug. 10 and has already warned that it will be ugly. In a Securities and Exchange Commission filing, Occidental said that it will record an after-tax impairment charge on its oil and gas properties of as much as $9 billion in the second quarter.
This comes after a $1.4 billion impairment charge during the first quarter. That resulted in the company posting a $2.2 billion loss in the first quarter. The second quarter loss will be considerably larger.
And while oil and gas prices have recovered from their April lows, the industry is likely to be feeling the effects of this difficult year for some time to come. Auditor Deloitte forecasts that the sector will need to write off as much as $300 billion in assets. Those write-offs could have a significant impact on the sector’s access to credit, which could force many companies to file for bankruptcy protection.
In Deloitte’s estimation, 30% of U.S. oil and gas producers are technically insolvent. The auditing firm foresees a massive wave of consolidation coming for oil and gas producers large and small.
The Bottom Line on OXY Stock
Even if Occidental had not undertaken the Anadarko acquisition, the company would still likely be struggling in the current environment. The massive debt load that Occidental has been saddled with because of the Anadarko deal has only made its situation more tenuous.
Speculation continues to swirl about whether Occidental will survive in the long term.
Among 21 analysts offering 12-month price forecasts for OXY stock, the median target is $16 per share, with a high estimate of $28 and a low estimate of $6. The current consensus among 26 polled investment analysts is to “hold” stock in Occidental. A total of 15 analysts say to hold OXY stock, while seven analysts say to sell shares in the company. Only three analysts say to buy OXY stock at the current time.
With so much uncertainty surrounding OXY stock, investors would be best advised to avoid taking a position in the company at this time. Until Occidental can lower its debt and restore its dividend payments, it’s not worth buying shares of OXY stock, especially when there are many other oil and gas producers that are in better financial shape.
As of this writing, Joel Baglole did not hold shares in any of the aforementioned securities.