Value investors are scouring over Occidental Petroleum (NYSE:OXY) at today’s price. Up until recently, OXY stock was trading for just 68% of its tangible book value per share as of the end of Q1 2020.
This means that if the company was liquidated, investors could potentially make 47%. If you divide 32% (i.e., 1 minus 68%) by 68%, you get 47%. To clarify this, let’s look at the actual numbers.
Occidental Petroleum’s tangible book value per share (TBVPS) was $23.93 per share as of Q1 2020. By comparison, on July 17, OXY stock closed at $16.28. So the difference of $7.65 per share represents a potential ROI of 47% if the stock rose to its TBVPS.
However, the company recently indicated that it was going to write down its book value by $9 billion. This was due to a reduction in the value of some of its oil and gas properties. That reduces the tangible book value from $21.533 billion to $12.533 billion.
That means that the TBVPS fell to $13.92 per share as there are 900 million shares outstanding. So at Monday’s closing price of $15.69, Occidental stock trades above this tangible book value per share. It is now at a premium of 12.7% over TBVPS.
What Oxy Stock Is Worth
Besides using book value, another way to value the company is based on its free cash flow. Last month I wrote that based on its expected free cash flow and assuming an oil price rise, OXY stock could be worth almost double the mid-June price. In fact, Barron’s reported one analyst believes OXY stock is worth $32 per share.
Since June 17, when I wrote that article the stock has fallen from $19.04 to $15.69. The price of oil has not changed much since then. But the company has made some moves that might have influenced the stock price.
For example, Occidental recently issued about 113 million warrants to shareholders to purchase shares at $22 per share. The warrants are good for seven years. These warrants will likely dilute shareholders if they are exercised once the price rises. But it will also bring in more than $2 billion to the company. It can use the money to reduce debt.
In addition, according to Reuters, Occidental will replace $9.12 billion in notes due in 2021 and 2022. It will issue new notes that would remove provisions that could have pushed it into default. In addition, the company is looking to sell some properties in Wyoming and Colorado that could bring in $700 million.
What Analysts Are Saying
Barron’s wrote last month that SunTrust Robinson Humphrey analyst Neal Dingmann was very bullish on OXY stock. He likes the company’s ability to produce large amounts of free cash flow, especially if the price of oil rises.
Its free cash flow could rise to nearly $4 billion in 2021, according to Barron’s. Since OXY has a market value of $15.1 billion now, that would give it an FCF yield of 26%. That is huge. A normal FCF yield would be below 10%.
That implies that the stock could be worth $40 billion, or $44.44 per share at a 10% FCF yield. Even at a 15% FCF yield, it is worth $26.67 billion (i.e., divide $4 billion by $15 billion).
That would be a stock price target of $29.63 per share, more than 80% above today’s price.
The Bottom Line
As economic activity begins to pick up later this year and next, the price of oil will likely rise. I pointed out in a recent article that oil price increases are highly correlated to economic aggregates. So as soon as the market believes that the Covid-19 vaccine is widely available, people will begin to move, travel, and lift restrictions on economic activity. That will push the price of oil much higher.
So at today’s price, OXY stock is very undervalued. Patient investors will do well to average cost into this stock and will likely be rewarded next year.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.