Is Occidental Petroleum Stock a Buy?
Actions of Occidental Petroleum (NYSE: OXY) have recovered a substantial part of their lost value since OPEC decided to cut mandatory production last year. The Company is an independent exploration and production company with operations in the United States, the Middle East and Colombia. In 2020, US and international operations contributed 80% and 20% of total production, respectively. The company’s cash flow can increase significantly with a rise in benchmark prices, but high interest charges hold back investor returns. Thus, long-term returns to shareholders largely depend on reducing massive debt, which in turn will ease cash flow and generate capital for future growth. Our interactive dashboard analysis highlights Occidental Petroleum’s stock market performance during the current crisis with that of the 2008 recession
Timeline of the 2020 crisis so far:
- 12/12/2019: Coronavirus cases first reported in China
- 01/31/2020: WHO declares global health emergency.
- 02/19/2020: Signs of effective containment in China and hopes of monetary easing from major central banks help S&P 500 reach record high
- 03/23/2020: S&P 500 34% drop of the maximum level observed on February 19, as cases of Covid-19 accelerate outside China. It doesn’t help that oil prices collapse in mid-March amid a Saudi-led price war
- From 03/24/2020: S&P 500 recovers 86% since lows on March 23, as the Fed’s multibillion-dollar stimulus package removes short-term survival anxiety and puts liquidity into the system.
In contrast, here is how OXY and the market as a whole behaved during the crisis of 2007/2008.
Timeline of the 2007-08 crisis
- 1/10/2007: Approximate pre-crisis peak of the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
- 03/01/2009: Approximate low of the S&P 500 index
- 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)
Occidental Petroleum Stock vs S&P 500 Performance on the 2007-08 Financial Crisis
OXY stock fell from levels of around $ 63 in September 2007 (pre-crisis peak) to levels of around $ 50 in March 2009 (as markets bottomed out), implying that OXY stock is down 23% from its approximate pre-crisis peak. It recovered from the 2008 crisis to levels of around $ 78 in early 2010 – up 57% between March 2009 and January 2010. By comparison, the S&P 500 index initially fell by 51% following the recession before recovering from 48% in January 2010..
Huge pile of debt slows shareholder returns
Occidental Petroleum’s revenue fell 14%, from $ 18.9 billion in 2018 to $ 16.3 billion in 2020, as the pandemic resulted in lower demand and lower benchmark prices. The Anadarko acquisition burdened OXY’s balance sheet with $ 28 billion in long-term debt in 2019. Thus, annual interest expense of over $ 1 billion weighs on shareholder returns. Additionally, declining demand for oil reduced OXY’s asset base by 25%, as the company incurred $ 11 billion in depreciation charges in 2020. Improving the company’s finances depends on the proper execution of the asset disposal plan and the improvement of operating cash flows.
Phases of the Covid-19 crisis:
- From early to mid-March 2020: Fear of the rapidly spreading coronavirus epidemic results in reality, with an acceleration in the number of cases worldwide
- End of March 2020 and beyond: social distancing measures + lockdowns
- April 2020: Nourished stimulation suppresses short-term survival anxiety
- May-June 2020: Resumption of demand, with progressive lifting of locks – no more panic despite a steady increase in the number of cases
- Since the end of 2020: weak, but persistent quarterly results demand improvement and advances in vaccine development boost market sentiment
While the company plans to maintain a cautious investment plan alongside divestments, Trefis believes that the stock could face another downside, with benchmark prices seeing a correction in the rise in production of the OPEC + during the second half of the year.
Is Exxon Mobil a better choice over Occidental Petroleum? Check Comparison of Exxon Mobil Shares with Peers to see how XOM stacks up against its peers on important metrics. You can find other useful comparisons at Peer comparisons.