Can it get any worse than this for Occidental Petroleum (NYSE:OXY)? OXY stock is back to its lowest levels in nearly 20 years, major investors have dumped their positions, and the company is struggling to shore up its balance sheet.
With oil prices in another correction to start September, things are seemingly going from bad to worse.
However, paradoxically, that may be creating quite the comeback opportunity. You see, Occidental’s market capitalization recently slipped below $10 billion. That’s pretty incredible for two reasons.
One, Occidental paid $55 billion for Anadarko Petroleum just a year ago. Now the combined equity value of the companies is less than one-fifth that figure. Even adding the debt back in, both companies today are worth much less than just Anadarko was as a standalone operation last year.
And two, Occidental still has a huge asset base. Until the novel coronavirus hit, the newly merged company was producing roughly $6 billion a quarter in revenues, or $24 billion annually. Needless to say, any sort of unexpected improvement can really turn the tide when you can buy a company at a $10 billion market capitalization and it does several multiples of that in annual revenues even when oil prices are at a trough.
Sufficient Liquidity
Until late last year, OXY stock was viewed as a powerful income generator. The company’s shares yielded as much as 8% and were a cornerstone of many income investors’ portfolios. However, everything changed. With the overly expensive Anadarko deal, Occidental blew up its balance sheet. Throw in the pandemic, and not only did Occidental have to nearly eliminate the dividend, things got so bad that analysts started talking about potential bankruptcy.
However, sentiment has gone too far in that direction, at least for now. While Occidental’s balance sheet is still quite bad, sentiment has gotten overly negative. Occidental just sold off Rocky Mountains assets for more than $1 billion and is back on pace to hit is asset divestiture targets for 2020. The company also issued $2 billion in new debt recently.
Occidental still has multiples of that coming due over the next two years. That being said, it appears the company has sufficient avenues to raise capital that it will be able to roll over its debt.
Oil Market Is Starting To Stabilize
Yes, oil prices have declined again over the past few weeks, and traders are nervous. That’s understandable. However, keep in mind that prices are now dropping to $35 per barrel, whereas back in March, prices were in the $20s and even crashed below zero at one point. An oil price range in the $30s and $40s is different. It’s not great, and Occidental isn’t going to be meaningfully profitable at current levels. But it’s not an existential crisis at this level either.
Occidental’s asset base is so huge that the main priority is making it through the pandemic and oil market downturn in one piece. That looks increasingly likely. Gasoline demand is starting to come back. Air travel is recovering to a decent degree, especially outside of the U.S. With more and more emerging markets reopening their airports by the week, look for jet fuel use to pick up in a big way in coming months.
Meanwhile, supply continues to shrink. Drilling activity has rolled over as much as 75% since the March crash, and analysts expect U.S. oil production to slide sharply as a result. These decline in drilling activity won’t cause the price of oil to spike overnight. But as supply starts to fade and demand comes back, it tips the balance back in favor of the bulls over the next year or two.
OXY Stock Verdict
I’ve been cautious on OXY stock in the past. CEO Vicki Hollub has done a poor job running the company. The Anadarko acquisition was a particularly unfortunate decision. And Occidental’s share price was overvalued given the company’s high cost base and downbeat prospects. These problems haven’t magically fixed themselves this summer.
However, when the price changes, so does the investment outlook. With OXY stock back near its lowest point since the year 2001, risk and reward are more properly aligned now. Could Occidental keep slumping even farther? Absolutely.
If you’re still neutral or bearish on oil prices, there are safer plays. A refiner like Valero (NYSE:VLO) or a major integrated producer with a better balance sheet such as Chevron (NYSE:CVX) will hold up better if the energy market slump drags on.
But from here, for traders with an upbeat view of the oil market, Occidental offers significant upside. Sentiment can’t get much worse. The Covid-19 demand slump is starting to clear up. And the recent price drop has put Occidental at oversold levels. All this sets up the potential for a sizzling rally in coming months.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
