Occidental Petroleum Is Well Below Tangible Book Value

Occidental Petroleum (NYSE:OXY) stock is down 16% in the past month and even over 75% in the year-to-date. OXY stock is wavering at 70% of its estimated $14.05 common stock tangible book value per share (TBVPS).

A magnifying glass zooms in on the Occidental Petroleum (OXY) website.
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Source: Pavel Kapysh / Shutterstock.com

It’s likely that OXY stock will drift further down if oil does not rebound and if its TBVPS deteriorates. But in the near to long term, I believe that OXY stock will move higher as economic mobility increases.

In addition, as Covid-19 vaccines start to slow down the spread of the pandemic in 2021, the price of oil should rise. This will slowly push up OXY stock

Essentially, then, now is a good time to accumulate the stock, especially while it is selling below its TBVPS. I wrote about the calculation for TBVPS for OXY stock in my article last month and I wanted to update this analysis.

Estimating TBVPS Going Forward

Analysts expect the company to have another losing quarter in Q3. In Q2 Occidental lost $1.78 per share and its TBVPS fell from $23.93 per share to $14.79.

You can see the trend in the chart on the right. Note that TBVPS has been falling for the past several quarters. This tends to follow the company’s negative earnings per share in the past two quarters.

10-2-20 - OXY stock - History of TBVPS and EPS
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Source: Mark R. Hake, CFA

You can also see that analysts expect the company to lose money for the next four to six quarters. Therefore, the TBVPS should continue to fall. This chart lowers the TBVPS by the drop in estimated earnings per share. But there could also be additional drops in tangible book value from a write-down of assets, wells, and equipment.

Therefore, by the end of 2021, its TBVPS could fall to $12.05 per share. Let’s take off an additional 10% for further asset write-downs. That brings it to $10.85 per share.

Now since Friday’s stock price was $9.87, this is almost $1 per share lower than the expected tangible book value by the end of 2021 ($10.85). Now it stands at 70% of Q2 TBVPS, but by the end of 2021, it might be at 91% of TBVPS.

That of course, assumes, that OXY stock does not move down any further. I will say this. There will be at least four or five quarters of negative earnings reports by the end of 2021. That is a long time for the stock to stay level in the face of lower earnings and lower TBVPS.

Therefore, OXY stock may drop to 70% of 2021 TBVPS, or $7.60 per share. That would keep it at the same price-TBVPS ratio as today. This implies OXY stock could fall 23% from today’s price.

What This Means for OXY Stock

Keep in mind that most analysts’ predictions tend to assume that things will continue just as they are. They tend to use the “trend is my friend” theory to forecasting. For example, this assumes that the price of oil will stay low and trend lower.

But that almost certainly will not happen. Clearly, as the economy picks up and mobility increases, the price of oil will rise. Moreover, as the Covid-19 vaccines take hold within society, lockdown restrictions will come down.

Granted this could take six months to a year, even after the end of the year, when a number of the vaccines are set to be approved. Therefore, this positive news and the concept that markets look forward could act as a brake on further depreciation in OXY stock.

For example, let’s say that Occidental lowers its quarterly losses by Q2 2020. The market will look forward at least six to nine months ahead. By that time, they will be forecasting positive earnings in 2022.

As a result, OXY stock’s value will reflect future earnings and higher book value. Therefore, I am reasonably sanguine about OXY stock despite lower TBVPS estimates.

And don’t forget the dividend. Occidental is still paying a one cent per share quarterly dividend. This is down from 79 cents as recently as Q2 2020. I suspect management will decide to raise or partially restore the dividend, possibly even before the end of this year. That would also act as a catalyst for OXY stock.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.


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