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In light of the Kinder Morgan (NYSE:KMI) buyout of El Paso (EP) and the inevitable soaring demand for natural gas, bullish sentiment surrounds Williams Companies (NYSE:WMB). I find that this oil & gas operator has decent, but not incredible, upside. In agreement with the Street consensus, I maintain a safe outlook on Occidental Petroleum (NYSE:OXY).

From a multiples perspective, Oxy is the cheaper of the two, despite its size. It trades at a respective 12.7x and 11.3x past and forward earnings while Williams trades at a respective 16.3x and 16.4x past and forward earnings. Analysts currently rate Oxy a "buy" and Williams near a "strong buy."

At the third quarter earnings call, Williams Companies CEO Alan Armstrong noted favorable developments:

In the quarter, certainly you started to see the benefit of a lot of our projects that we've invested in the last couple of years really starting to kick in. Really across-the-board, the -- certainly, the Bakken's kicking in for E&P. The Perdido Norte project really starting to pick up volumes and help to fill up our Markham facility and as well, our Echo Springs facility that's now just had its 1-year anniversary of the new train being built there. We actually hit a record in the quarter of 41,000 barrels a day and are now operating a little over that. So you should expect to see more of this to come as these projects we've been investing in continue to kick in. Finally, our business really is perfectly positioned to reap the benefits of this U.S. turning to natural gas.

After recently carving out its E&P business to create two publicly traded companies, investors are now better able to value the business. E&P runs low-cost operations and produces strong volumes, despite the challenging backdrop. Catalysts include Piceance, Marcellus, and Bakken, as well as the potential acquisition of Southern Union. Solid third quarter results yielded better than expected cash flow in infrastructure; thus, I am optimistic about future integration.

Consensus estimates for Williams' EPS are that it will grow by 18.8% to $1.52 and then by 11.2% more in the following two years. Assuming a multiple of 19x and a conservative 2012 EPS of $1.55, the rough intrinsic value of the stock is $29.45, implying 6% upside. Of the 3 revisions to estimates, 2 have gone down for a net change of -2.8%. Accordingly, I would continue recommend holding out.

While I am not particularly bullish about Oxy, it does provide a defensive play that capitalizes on natural gas and NGLs. Third quarter production increased by approximately 6K BOE per day per month - more than double what was anticipated. Chemicals, meanwhile, grew 30% y-o-y as average upstream production of 739 mboed grew 3% sequentially. With that said, increased scale at California has been challenged by staffing issues, which will be presumably resolved in mid-2012 as rig-building grows to 5 per 6 months.

Consensus estimates for Oxy's EPS are that it will grow by 45.3% to $8.31 in 2011 and then by 3.9% and 16.9% more in the following two years. Assuming a multiple of 13.5x and a conservative 2012 EPS of $8.48, the rough intrinsic value of the stock is $114.48, implying 18.1% upside. Even if the multiple holds steady and 2012 EPS turns out to be 4.2% below the consensus, the stock would still appreciate. Thus, despite lacking strong upside, the downside is very small.

Source: Occidental, Williams Have Modest Upside With Little Downside Risk