With earnings season in full steam, the volatility of many stocks, including oil names like Occidental Petroleum (NYSE:OXY), has increased. In 2020, OXY stock is down around 58%.
Yet that metric tells only half the story. On March 18, the shares hit a 52-week low of $9. Now they are hovering over $17. That is an increase of around 90% in four months. Put another way, those who were brave enough to invest $1,000 in OXY stock in early spring would now have close to $1,900.
Now market participants are wondering if Occidental Petroleum’s stock can continue to rapidly climb in the second half of the year. The company is expected to report its second-quarter earnings in early August.
Those who do not yet own the stock may want to analyze the company’s Q2 results before buying its shares. Long-term investors may regard any decline of OXY stock towards the $15 level as an opportunity to acquire the shares. Here’s why.
What to Expect From Occidental’s Q2 Earnings
The first half of 2020 must have been among the most challenging periods in the firm’s recent history. Since the start of the year, the price of oil has plummeted. The price of West Texas intermediate (WTI) is used as a benchmark for U.S. oil. In early January, it cost around $60 per barrel. By late March, it was down to $20. Now it is around $41.
When Occidental released its Q1 results in early May, its net loss came in at $2.2 billion, or $2.49 per share. Its loss, excluding certain items, was $467 million or 52 cents per diluted share.
At the time, management said “first quarter results were impacted by the steep decline in oil prices in March triggered by a significant drop in oil demand.” And that is why it reported a substantial loss. One positive highlight of the results was that the company had $1 billion of mark-to-market gains on crude-oil hedges, which helped reduce its losses.
Occidental’s Q2 results will show the extent to which COVID-19 and the volatility of oil prices impacted Occidental’s earnings.
The increase in the price of OXY stock since late March corresponds to the increase in the price of oil. Therefore, the shares may not be able to continue their bull run in the second half of the year unless oil prices rise further.
What Else Could Derail OXY Stock in the Short Run?
In March, the company’s board decreased the stock’s quarterly dividend to 11 cents per share from 79 cents per share, starting in July. As a result, OXY stock has become much less appealing for income investors.
Occidental has around $40 billion of debt. That is a high level of debt. In Q1, it announced that it would reduce its 2020 capital spending to $3.5 billion –$3.7 billion from $5.2 billion–$5.4 billion and implement additional cost reductions. However, those spending cuts will not be enough.
The Street wants to know whether the company is close to finding a buyer for its land in Colorado and Wyoming. By selling the land, the company would reduce its debt. If there is another setback for the industry in general or for Occidental in particular again soon, there’s a good chance that the Street will become concerned about the company’s debt and its balance sheet.
The Bottom Line on OXY Stock
In the past three months, conditions of the oil market have improved, helping boost the price of OXY stock. Those who have participated in the rally may want to take some money off the table.
Alternatively, investors may consider initiating an ATM covered call position with, for example, a horizon of over two months. A covered call that expires on August 21 would decrease the volatility of portfolios, offer some protection against declines by the stock and enable investors to participate in a potential rally of the shares.
Long-term investors may consider buying OXY stock if its price declines towards $15 or below.
On a final note, activist investor Carl Icahn increased his stake in Occidental from 2.5% to almost 10%. Therefore shareholders may want to watch moves that Icahn and, potentially, other activist investors make vis-a-vis the shares. There may be a takeover bid for Occidental Petroleum, possibly by Chevron (NYSE:CVX) or another large oil firm.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil holds covered calls on OXY (July 24 expiry).