Occidental: Uniquely Positioned To Benefit From Falling Energy Prices

Jun.18.12 | About: Occidental Petroleum (OXY)

There was an excellent piece in the Wall Street Journal around Occidental Petroleum (NYSE:OXY) over the weekend. The article makes a strong case for why Occidental is strongly positioned to take advantage of the turmoil in the energy patch caused by low natural gas prices and falling oil prices.

Key positives for OXY:

  • It has one of lowest debt ratios (Around $2B in net overall debt for a company with a market cap over $80B).
  • Most of the company's production is tilted towards oil and liquids and not natural gas. As of 1Q2012, production was 61% oil, 11% liquids, 28% natural gas. It is the largest liquids producer in the country for the lower 48 states.
  • It has the financial flexibility and well positioned to pick up assets on the cheap as other companies such as Chesapeake Energy (NYSE:CHK) that have gotten overleveraged are forced to sell oil & gas producing acreage.

4 reasons OXY is a solid long term value at $85 a share:

  • It has an A rated balance sheet and provides investors with a 2.5% yield. More importantly, the company has increased its dividend payouts at just under a 16% annual rate over the past decade.
  • The company is targeting 5% to 8% annual production growth and analysts expect 7% to 10% revenue growth for both FY2012 and FY2013.
  • The stock is selling in the lower third of its five year valuation range based on P/E, P/S, P/CF and P/B.
  • OXY is trading at just 9.6 times forward earnings, a discount to its five year average (12.7). The median analysts' price target on the stock is $115. Credit Suisse has an "outperform" rating and a price target of $135 on Occidental.

Disclosure: I am long OXY.