California Black Gold: Occidental Petroleum, Buying The Pullback

| About: Occidental Petroleum (OXY)

Occidental Petroleum (NYSE:OXY) is a California-based oil and gas exploration and production (E&P) company headquartered in Westwood, Los Angeles. The company has substantial operations in North America, the Middle East, South America, and North Africa. Occidental is the largest oil producer in Texas, and the largest producer of natural gas in California. Occidental, the fourth-largest oil E&P company in the U.S. by market capitalization at 64B, has room to grow steadily as the company chases after its much larger competitors Chevron (NYSE:CVX) and Exxon Mobil (XOM).

Valuation

A major winner over the last 10 years, Occidental has grown shareholder value 450% from May 2002; and the dividend has increased almost five-fold from 12.5cents to 54cents. Currently trading at $79.90 per share, OXY shares trade at 9.5x earnings, yield a decent 2.7%, and have 82% institutional ownership; a sponsorship rate significantly higher than the $400B market cap Exxon Mobil, at 50%. Occidental reported a strong first quarter on April 26th. Details:

Q1 2012 total daily oil and gas production of 755,000 barrels of oil equivalent, the highest in Occidental's history", "In announcing the results, Stephen I. Chazen, President and Chief Executive Officer, said, "For the quarter, we generated strong results with diluted EPS of $1.92 per share, cash flow from operations of $2.8 billion and annualized ROE of 16 percent. We increased our annual dividend rate by $0.32 per share, or 17 percent, to $2.16 per share.

Concerns

As European markets continue to sell off, and Chinese growth continues to be questioned, the energy complex will sell off. Weakness in the energy markets is a negative for Occidental shares, or an opportunity to buy on sale.

Natural Gas

Occidental is a major global producer of the energy of the future, natural gas. The low price of natural gas in the U.S. has actually slowed earnings growth in the past. The price is currently less than 1/6th of a few years ago, but the message is clear, natural gas is here to stay. As the price recovers, Occidental, the top natural gas producer in the state of California, will be sure to profit from this growing energy super-trend.

Conclusion

Occidental Petroleum is a winner in a long-term winning sector. Energy demand over the coming decades will be under constant upward pressure brought on by a U.S. recovery, and demand growth in Asia, Africa, and South America. Occidental has sold off substantially from its 2012 peak of $105 per share; and after reporting strong first-quarter earnings OXY shares are looking oversold at $79.90. Occidental is a high-quality company with a long history of earnings growth and dividend hikes; the valuation at these levels short term and long term is compelling. At a market cap of just $64B it will be much easier for OXY shares to double to $128B than for XOM to make the run from $400B to $800B. In conclusion, for investors who embrace a California state of mind, and are long the energy complex, now may be the time to start building a position in Occidental Petroleum.

Always do your homework.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OXY over the next 72 hours.