Compared To The Competition, Occidental Is Now A 'Wait And See' Stock

Jun.29.12 | About: Occidental Petroleum (OXY)

As part of the energy industry, Occidental Petroleum (NYSE:OXY) stands out from the crowd. It stands out most notably because it is a consistently profitable company. It is not in a rush to grab as much land as possible to begin fracking and other forms of exploration as some of its rivals are and it has not been in the news for the wrong reasons. For being the fourth largest oil producing company, Occidental does not draw significant amounts of attention. This means nothing. The company is in a position that will allow it to brush of price volatility and keep its revenue.

Good news for Occidental comes from a natural gas and oil deposit in Carson. The company plans to extract this using many different wells but is refraining from any use of fracking. According to the company, fracking is of little use on these deposits as previous attempts have not extracted much gas. This particular site is estimated to generate about $100 million in oil revenue for the state over the next twenty years. Since the revenue split is 51% for the government, 49% for Occidental, oil revenues for the company should also be around $100 million. If oil prices increase by much, the company stands to gain an even better profit.

Another venture that should bode well for the company is a new partnership with Magellan Midstream to create a pipeline from Colorado City, Texas to the Houston Gulf Coast. Both companies can expect to generate revenue from the project by getting binding permission from other companies for use of the project. In the long term, Magellan Midstream will be the pipeline operator, with responsibility being shifted to the company after construction.

There are few different views on Occidental's future. Two major analytics recently gave their advice, with one rating it as 'market perform' and the other a 'neutral'. Many are hesitant to recommend Occidental due to lagging natural gas prices hurting profitability. The company has been helped by high oil prices but the large inventory of natural gas has increased volatility in oil prices as well. In addition, Occidental is subject to political instability and natural disasters, making it a riskier stock to hold in the first place.

However, there are some strong believers in Occidental. According to this author and the Wall Street Journal, Occidental has a unique place among other energy stocks, making it better able to handle the volatility of oil prices. The author makes the argument that Occidental is below its historical ratios, has a very low debt load relative to the industry, and is expected to have higher revenue growth than it predicts.

But Occidental will be adding to the debt loads very soon, as it intends to sell at least $1.75 billion in corporate bonds. These bonds should be a safe bet for investors, with Fitch giving them an "A" rating, citing sustainable debt levels as one of the driving forces of this rating. However, as previously cited, political turmoil is one of the main cautions cited by Fitch. Specifically, Occidental's exposure to the Middle East and North Africa could potentially be problematic for the company.

But Occidental is just part of an industry growth spurt to some extent. There are quite a few energy locks that look very good at the moment.

Not surprisingly, Exxon Mobil (NYSE:XOM) is one such company. It has had a very good month and continues to see increases in its stock price daily. Analysts' average recommendation is 'overweight', with the average price target of about $94. It has just signed a new deal with Russian oil firm Rosneft to develop tight oil and natural gas reserves. Exxon Mobil is uniquely positioned to develop these reserves due to its advanced equipment and experience with unconventional exploration. Expect this stock to go higher with this development. It should be noted that Exxon is much more heavily invested in natural gas exploration than Occidental.

A similar company to Exxon Mobil is Chevron (NYSE:CVX). Chevron's stock price saw a number of peaks and valleys today, and it jumped up and down frequently. The long term outlook on Chevron is very positive, as its new deals are viewed very positively. One major development is the sale of Liquid Natural Gas to Tokyo Electric Power Company. LNG is seeing a surge in demand in Asia and being a major player in that market will yield long term sustainable profits. This deal should be very good to Chevron.

More in Occidental's line of direct competition is BP (NYSE:BP). BP has seen many stumbles over the past few years but appears to be regaining its footing. This says something about the industry overall, as BP has not necessarily outperformed. This withstanding, it still has an 'outperform' recommendation, which was downgraded from 'strong-buy'. Not everyone shares this outlook. Recommendations are across the board and investors do not seem so optimistic. In fact, many shareholders are seeking a change in management due in part to the mismanagement of the oil spill and its problems with partners in Russia.

One company not doing much in the way of moving or shaking is Marathon Oil (NYSE:MRO). The main announcement it has had in the past few days has been the deal it signed with Technip to supply submarines for the exploration of an oil field off the coast of Norway. That is not to say that Marathon is a bad company to have, it has just been less notable than others.

Overall, Occidental looks strong but not stronger than its competition. Its low debt loads and oil dominant portfolio will keep its margins high. This will continue if natural gas is actually above its bottom, something that is looking increasingly likely. But if this is the case, Occidental may need to step up its weight in natural gas. Its competitors are grabbing natural gas deposits across the globe and Occidental might find it needs to do the same. Personally, I would wait on this stock. It has a lot to look good but there is also some uncertainty that needs to be dealt out.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.