Occidental Petroleum: Stability Sheet Doubtless Will not Help Valuation (NYSE:OXY)

OXY Is Still Not A Buy Here

OXY 1Y P/E Valuations

Occidental Petroleum Corporation (NYSE:OXY) is presently buying and selling at an NTM P/E of 9.58x, increased in opposition to its 1Y P/E imply of 7.67x. Based on its projected FY2024 EPS of $5.65, we’re taking a look at a value goal of $54.12, suggesting a notable premium embedded in its present inventory costs.

Normalization In Crude Oil & Natural Gas Spot Prices

OXY had traditionally mirrored the WTI crude oil spot costs. However, we had been observing a notable disconnect since March 2022. Unsurprisingly, that was additionally when Berkshire Hathaway (BRK.A) (BRK.B) disclosed a $5B stake within the firm, one which grew to $12.2B on the time of writing.

While the Ukraine struggle contributed to the risky crude oil costs, the hole additional widened over the previous yr, attributed to the normalization in crude oil and pure gasoline costs by -34.7% and -73.2% because the hyper-pandemic heights.

Despite the moderation in OXY’s inventory costs by -18.1% because the peaks in August & November 2022, it nonetheless seems overvalued in our opinion, particularly in comparison with its friends equivalent to Chevron (CVX) and Exxon Mobil (XOM) as seen within the chart above.

OXY, CVX, XOM 1Y EV/Revenue

This premium can be noticed in OXY’s EV/NTM Revenue of two.71x, in opposition to CVX at 1.48x and XOM at 1.16x, in distinction with the previous’s projected top-line deceleration of -10.6% by way of FY2024, in opposition to CVX at -9.1% and XOM at -7%.

Furthermore, the corporate additionally chooses to prioritize share repurchases, as highlighted by Vicki Hollub, CEO of OXY:

There received’t be vital development from us as a result of there’s nonetheless much more worth to be gained for us by persevering with to give attention to delivering worth to shareholders by way of share repurchases. An enormous focus for us in 2023 is repurchasing our widespread and doubtlessly the popular. (Bloomberg)

The choice could have alarmed buyers, as a result of declines within the prime and backside line within the short-term, as spot costs normalize. However, we’re just a little extra optimistic about its give attention to shareholders’ return.

OXY had retired 27.8M of shares over the previous three quarters, from 1,018.3M shares to 990.5M by the most recent quarter, whereas saying a brand new $3B share buyback authorization. Assuming an analogous cadence, we may even see the corporate repurchase one other 48.97M of shares in FY2023, primarily based on its present inventory costs.

Part of those efforts may also be attributed to the notable improve in OXY’s cash-settled Restricted Stock Units [RSU] by +4975% YoY to $203M and the stock-settled RSUs by +128.5% YoY to $160M, amongst different compensations. On prime of the share buybacks, the corporate has additionally confirmed extremely competent in lowering its immense pandemic money owed by -59.35%, from $48.39B in FQ3’19 to $19.67B by FQ4’22.

As a consequence, we reckon the continued give attention to share buybacks could permit its dividends per share to develop reasonably, regardless of the potential decline in its prime and backside line development by -17.3% and -34.1% in FY2023, primarily based on the consensus estimates. Hence, this may also clarify the notable improve in OXY’s quarterly dividends per share by +38.5% to $0.18 from FQ1’23 onwards.

On one hand, the identical give attention to shareholder returns have been noticed with fellow oil producers within the US, equivalent to CVX, which guided in-line annual capital expenditure between $13B and $15B by way of 2027. This was in opposition to the super doubling of its annual share repurchase packages to $20B, with $75B already licensed within the current earnings name.

On the opposite hand, XOM had opted to extend its deliberate capital expenditure to between $23B and $25B within the upcoming fiscal yr, by a major sum of as much as +35.8% YoY from FY2022 ranges of $18.4B. Particularly, the corporate aimed to additional broaden its manufacturing output aggressively by way of 2027, arguably serving to set off a notable optimism in its inventory value to this point.

However, we should additionally spotlight that XOM’s counter-cyclical transfer was not widespread, with Russia and the OPEC+ opting to chop productions to place a flooring on the normalizing crude oil costs on the $80s, as an alternative of the 2019 common of $60s.

Particularly, OXY’s FY2023 steering in capital spending of between $5.4B (+22.7% YoY) and $6.2B (+40.9% YoY) vary, comprised a +15% YoY inflationary affect on its home oil/gasoline manufacturing prices and as much as $600M (+50% YoY) funding in low carbon companies. We should additionally spotlight that the corporate’s gross margins had already declined by -4.6 proportion factors YoY in FY2022 to 41.1%, attributed to the inflation.

Therefore, it made sense that the corporate had opted to give attention to its stability sheet enchancment, whereas sustaining its manufacturing outputs of 1.18M boe/day in FY2023, in comparison with FY2022 common of 1.15M boe/day.

On the opposite hand, it seems that the OXY inventory could doubtlessly recuperate from these ranges, as a result of projected crude oil costs of as much as $100s from H2’23 onwards, attributed to China’s hovering consumption over the previous few months regardless of the latter’s rising reliance on Russian oil. This could have triggered market analysts’ optimistic Free Cash Flow [FCF] projection of $9.14B in FY2023 and $7.53B in FY2024, in opposition to FY2019 ranges of $1B.

On prime of FQ1’23’s raised dividend numbers, we imagine we may additionally see the corporate retire debt reasonably over the following two years, doubtlessly leading to internet money owed of $15.5B by FY2023 and $12.5B by FY2024, in opposition to FY2022 ranges of $18.13B. We are additionally assuming that the board authorizes one other $3B of share repurchases in 2024 as effectively.

OXY 2Y Stock Price

The firm’s competence to this point is proof why OXY continues to be effectively supported at these premium ranges, bouncing off its February 2023 bottoms. The inventory can be buying and selling under its 50-day shifting averages, suggesting the chance for these wanting so as to add or greenback value common.

Nonetheless, as a result of potential volatility within the intermediate time period, we choose to proceed ranking the OXY inventory as a Hold right here. This is very since market analysts anticipate the Fed to boost terminal rates of interest to six% by September 2023, doubtlessly countering a few of China’s tailwinds.

We should additionally spotlight the cyclical nature of the oil/gasoline shares, considerably destabilized by the continuing Ukraine struggle, Russian oil value cap, and OPEC+ manufacturing reduce, amongst others.

Combined with the slight premium in comparison with its friends, anybody including OXY at present ranges have to be keen to climate reasonable volatility for the foreseeable future, with the macroeconomic outlook remaining unsure by way of 2024.