The energy space has been in turmoil this year, with the entire sector under intense pressure. That goes for Occidental Petroleum (NYSE:OXY) and OXY stock, which continues to hover near its March low.
Think about that for a moment. The S&P 500 and Nasdaq have gone on to hit new all-time highs, which is rather impressive given the backdrop with the novel coronavirus. There have been big-time winners in that move, along with many stocks that have not hit new highs.
But collectively, most stocks have at least bounced from their 2020 lows. While Occidental has bounced – rallying more than 170% at one point – those gains didn’t last. Currently up 20% from the lows sounds pretty good, until one realizes that the stock is still down more than 75% from the 2020 highs.
That makes Occidental Petroleum a tough pitch for many investors; it’s the quintessential dumpster stock right now. Is it worth a buy?
Breaking Down Occidental Petroleum
While the consensus expectation is that Occidental will improve from an operational standpoint, the lack of a robust recovery has investors staying on the sidelines.
Surprisingly, expectations call for a revenue decline of just 13.5% this year (an acquisition helps). But in 2021, forecasts are stuck, calling for flat growth. In other words, no recovery. The earnings situation is worse.
Analysts expect a decline of 350% this year, swinging from a profit of $1.45 per share last year to a loss of $3.48 per share this year. While 2021 estimates forecast an improvement, expectations call for another loss of $1.45 per share. That’s still down about 200% from 2019’s results.
Before the entire sector collapsed, Occidental closed its acquisition of Anadarko in what was a $38 billion deal.
In the quarter ending September 2019, Occidental had $125.4 billion in total assets. In the most recent quarter, total assets of $89.4 billion were down $36 billion or almost 30%. That’s in a span of just three quarters. Cash and equivalents has fallen from $4.8 billion to just over $1 billion.
Admittedly total liabilities have fallen from $84.4 billion to $66.1 billion, a decrease of 21.6%. But still, current liabilities slightly outweigh current assets, while total debt of $32.5 billion is more than three times the stock’s $9.8 billion market capitalization.
All of this is a detailed way of saying that Occidental’s balance sheet is strained. That doesn’t mean it will file for bankruptcy next month, but investors would at least feel better if it were operating from a position of strength amid a no-growth stretch.
Trading OXY Stock
Despite shares still struggling near the lows, there has been some improvement. Before the last few days, Occidental stock hadn’t traded above the 20-day moving average since June.
Shares momentarily broke below the key $10 level before quickly reclaiming it and are now working on a new base. If the stock can take out this month’s high at $11.34, it could challenge the 50-day moving average. Above that and the 23.6% retracement could be on the table near $17.75.
Here’s the thing, though. While improving, the technicals remain quite weak. If the overall market or oil prices start to correct, this stock could be in trouble.
If it fails to reclaim the 20-day moving average, look for another test of $10. A break of this mark puts the October low on the table, at $9.23. Below that and the March low is in play at $9.
So if you’re considering a position in Occidental, keep the $9 low in mind as a potential risk spot. Know that the recovery could be slow, but near its lows, some value investors may find the stock attractive. For me, there are simply too many headwinds to be interested in this one.
Bottom Line on Energy
Occidental Petroleum took on a big M&A deal in the second half of 2019. In hindsight, that was essentially one of the worst times to make such a deal (not that management could have known ahead of time). But then virtually all stocks were crushed in February. There’s just no way around that one. It didn’t matter if it was tech or energy or real estate. But what made matters even worse for Occidental and its peers was the dynamic of the energy market.
With the energy revolution we’ve seen in the U.S. over the last decade, supply has never been more abundant. Oil companies have essentially tapped into their wells and turned them off.
Meaning that, any time there is a nice increase in oil prices – demand rising and supply tightening – these companies can almost instantly open these wells back up and bring supply to the market.
Even before the novel coronavirus came along, OPEC+ had been trying to work together on balancing production to keep oil prices up. Once the virus decimated the global economy, demand for oil completely dried up. We’re seeing the oil market trying to stabilize, but it’s still fragile.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.