Seismic change is afoot in the energy patch and Occidental Petroleum (NYSE:OXY) reflects as much. However, that’s not a positive for OXY stock. One statistic paints the picture of woe OXY stock investors: Year-to-date, the S&P 500 Energy Index is lower by about 45%, but Occidental is off more than 75%.
There are other problems with OXY stock. Not only is it cheap by price – it closed barely over $10 on Sept. 14 – but by more scientific statistical gauges, this energy name is actually inexpensive. Over the near-term, that’s a potential recipe for disaster for investors seeing the low price with confirmation that the shares really are cheap.
Here’s part of the problem: Energy stocks have long been considered value propositions, but that’s not helping the sector’s cause. Over the past three years, a period including plenty of calls highlighting low multiples in the sector, the aforementioned S&P 500 Energy Index is lower by 41.5% while the S&P 500 is up 43.5%.
Occidental’s status as a value play, while true, is also deception that investors need to be aware. Yes, historical data confirm buying the cheapest decile of energy based on various valuation factors has been a winning strategy. However, those trends aren’t guaranteed to repeat and the environment today is much different for fossil fuels producers than it was even just five or six years ago.
OXY Stock Damped by Debt, Demand
Occidental is facing a dual scenario of negativity by way of a suffocating debt burden and weakening demand for oil.
Starting with the former, the company has $38.5 billion in long-term debt of which $2.5 billion is due in 12 months. Conversely, Occidental has just $1.1 billion in cash. It’s no wonder the company carries junk ratings and is highly vulnerable to declining crude prices.
“Despite the company’s focus in the prolific Permian Basin, the sharp drop in oil prices in the first half of 2020 has diminished cash flow, exacerbating the pressure on its over-levered balance sheet notwithstanding the virtual elimination of OXY’s dividend and spending cuts,” according to Moody’s Investors Service.
An efficient way to reduce debt is to sell assets and once upon a time, Occidental had some gems. However, with oil prices depressed, so are the prices the company could fetch if divests properties and drilling rights.
“OXY remains under pressure, however, to achieve meaningful levels of debt reduction, presumably under a reinvigorated asset sale program. OXY’s financial flexibility to confront further commodity price weakness will continue to be strained,” said Moody’s.
“Demand for oil falls over the next 30 years,” according to BP. “The scale and pace of this decline is driven by the increasing efficiency and electrification of road transportation.”
One way of looking at that outlook is that no matter a how long an investor holds onto Occidental, there’s a very real possibility it does reclaim its pre-pandemic highs.
Know What You’re Getting Involved With
What’s vexing about Occidental right now is that the company is probably worth more than $10 a share. That doesn’t mean markets will recognize that anytime soon.
What is easy to recognize, however, is that repairing this balance sheet is a lengthy process and production is likely to plateau until debt is pared. Those issues don’t touch on the extent to which traditional energy stocks are out of favor.
This isn’t a mini protest that quickly burns out. Institutional investors are eschewing fossil fuels and some banks are growing wary of lending to companies engaged in business seen as contributing to climate change. That adds up to a lot of risk for Occidental and for investors considering the stock.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.