The coronavirus crisis and Anadarko’s acquisition have been weighing on Occidental Petroleum’s stock (NYSE: OXY) since the beginning of the year. With the stock down by a staggering 76%, is it the right time to take a closer look? The company’s cash position deteriorated through the first and second quarters as the declining benchmark prices dragged down operating margins. Occidental ended the June quarter with $1 billion of cash, but its short-term debt stood much higher at $2.4 billion. While long-term equity returns depend on the company’s strategy to manage its huge debt pile of $36 billion, Trefis believes that the ongoing asset sales are likely to provide an uptick to the stock and boost investor sentiments.
In order to address near-term debt maturities, the company has entered into purchase and sale agreements to divest Wyoming, Colorado, and Utah assets for $1.3 billion and its Colombia assets for $825 million. As the transactions are expected to close during the fourth quarter, the company will achieve its $2 billion asset divestiture target for 2020.
Occidental Petroleum’s revenues increased by 60% from $13.2 billion in 2017 to $21.2 billion in 2019, primarily driven by Anadarko’s acquisition and augmented by increased production & stable benchmark prices.
While the company has seen steady revenue growth over recent years, its P/S multiple has declined. The increased debt load and macroeconomic weakness have been key factors behind the falling stock price as interest expenses zoomed from $0.4 billion in 2018 to $1.06 billion in 2019 – taking the net income margin to negative territory. With a series of asset sales on the cards, OXY’s shareholders can expect margin improvement along with a resumption of dividends.
We believe the stock is likely to observe an upside as the outstanding debt gets trimmed and the cash position improves. Our dashboard What Factors Drove -84% Change in Occidental Petroleum Stock between 2017 and now? has the underlying numbers. OXY’s P/S multiple changed from 2.4 in 2017 to 1.5 in 2019. While the company’s P/S is now 0.4 there is an upside when the current P/S is compared to levels seen in the past few years.
So what’s the likely trigger and timing for an upside?
Weakness in crude oil and natural gas prices is the key concern for the oil and gas industry. Companies including Exxon Mobil, Chevron, BP, and Royal Dutch Shell have incurred sizable impairment charges with the expectations of benchmark prices remaining under $50/barrel until 2025. However, Occidental Petroleum stock is likely to benefit from a steep fall in commercial crude oil inventories as pent-up demand will subsequently raise upstream production and improve cash inflow.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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