Potential investors in Occidental Petroleum (NYSE:OXY) stock have a lot of questions they need to ponder carefully. Occidental Petroleum is at the confluence of several possible inflection points. Is it going to continue to sink as oil exploration and production companies fall out of favor in the rush toward clean energy? Should investors purchase now as prices have dipped close to pandemic lows? WTI crude remains around $40, as it has for several months. If WTI crude rises along with consumer demand, will OXY as well? Or is Occidental Petroleum fated to a slow death as the U.S. and the world transition energy wise?
Further, the downfall of oil is not a foregone conclusion. But even if oil is replaced, some oil equities will rise regardless. So where does OXY stock fall in all of this?
Capital Stays at Occidental for Now
When the pandemic struck Occidental Petroleum quickly reacted to control its spending. On March 10 the company announced it would reduce 2020 capital spending from a planned high of $5.4 billion to between $3.4 to $3.7 billion.
Two weeks later Occidental Petroleum reduced that number to between $2.7 billion to $2.9 billion.
The company did the same with dividends after first stating that it would reduce them to 11 cents per share. Two weeks later OXY’s dividend had been slashed to 1 cent. Occidental Petroleum had previously paid a 79 cent dividend which it had continuously increased since 2002. At that time OXY shares dropped precipitously to near $10 following a long, steady decline. OXY stock had gone from $80 in 2018 to $40 in 2020. This has been the tone for OXY since.
When Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A, BRK.B) sold out its stake in Occidental Petroleum in August shares didn’t move much. Prices moved less than 2% following the announcement which made it like any other day. Could the Oracle of Omaha have been wrong? Certainly. He’s fallible despite his stellar track record. In the time since Berkshire Hathaway sold out of OXY shares it has continued to fall. So, from that perspective it looks to have been the correct move.
However, if oil prices rise it seems like OXY share prices should as well.
But that’s likely going to be a problem for Occidental and the rest of the oil industry as well. Because oil prices aren’t expected to change much from their current $40 per barrel levels for the remainder of the year. Prices shouldn’t budge much as inventories remain in excess and Covid-19 cases continue to fluctuate. Neither factor indicates any upward trend in the near term for oil demand.
The good news is Occidental Petroleum isn’t expecting another collapse in oil prices based on that. Yet, despite PR claims from operators within the oil industry that they can operate and find profitability in this environment, the truth is likely gloomier. This is a question that afflicts the oil exploration and production sector at large in the short term surely. But this problem is also much larger than a minor blip due to the pandemic gutting demand.
What about other firms?
No pundit knows what will happen to share prices of firms across the sector, much less an individual firm’s. But we can quite easily gauge overall investor sentiment on a firm by firm basis. In order to gauge whether the markets are positive about a given stocks’s short term fate we need to simply look at short sellers.
About 5% of OXY stock is sold short right now. ConocoPhillips (NYSE:COP) has about 1% of its shares currently sold short. Hess (NYSE:HES), Cabot Oil & Gas (NYSE:COG) and many other exploration stocks fall in this range of less than 5 percent of float shorted. There are multiple oil stocks which investors expect to fall and have greater than 20% of shares shorted.
So, from this perspective markets seem to believe that OXY stock is reasonably strong given its environment. That is, it falls within an average range from a short selling perspective.
Occidental suggested that it could make money at $30 per barrel when it reduced capital spending in March. So theoretically it’s making money as you read this (WTI crude is around $40). Nevertheless OXY stock doesn’t look great right now. Because investors have continued to walk the price down to current levels. The point here is that investors aren’t going to be interested in oil companies if oil prices aren’t high. So whether Occidental can find profit or not in a tight environment like that which exists now is irrelevant. The market likes oil stocks historically because oil prices were high. Profitability was simpler then. Investors want steadiness from oil shares, not volatility.
Takeaway on OXY
To conclude, OXY shares represent a mixed bag of investor sentiment. That much should be no surprise. Investors certainly won’t be enticed to purchase OXY stock because of its current dividend. That’s for certain. But when the company increases it that will of course pull in some investors. Analysts are uncertain about OXY stock. This is unsurprising given all of the factors at play currently. And uninspiring for readers looking for news they can trade. Warren Buffett sold out his position. And yet on the other hand Occidental doesn’t have a preponderance of short sellers who believe it’s going to fall.
I’d say OXY stock is a hold. There’s certainly very little I see to suggest bullishness. The one positive trend I could suggest is that as an intermediate time-horizon energy investment, OXY could provide good returns. This simply means when oil rises it should too. So hold.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.