Occidental Petroleum (OXY) has had a pretty rough year so far. Riding high on strong US oil production in the early months of the year, the stock has fallen about 20% off its highs. This is despite record numbers in the company's upstream operations. Revenue for Q2 2012 came in at $5.77 billion, just slightly below our estimates. Income of $1.328 billion was in-line with our expectations, about 27% lower than Q2 2011.
The biggest culprit, as I pointed out in an article reacting to the Q1 2012 numbers, is primarily the huge slide in natural gas prices caused by developments in the hydrofracking process which led to an oversupply of the US natural gas market. This supply gut has been plaguing the company's profits in upstream operations for a long time, along with other major natural gas sellers. One of the most notable examples is Chesapeake Energy (CHK), which is the second largest natural gas producer in the US.
OxyChem, Occidental's struggling chemicals division, has actually benefiting from lower natural gas prices although it wasn't enough to prevent a 23% decline in the division's revenue relative to Q2 2011. While the financial data for this division has been particularly weak and depressing, it's a very small part of Occidental's business and reflects abnormally bad market conditions for polyvinyl chloride and other major compounds produced by OxyChem.
Occidental has a leading presence in the oil industry and should see more instances of record production as it ramps up operations in the Bakken formation and the Permian basin. Oil prices have struggled this year largely due to concerns over Chinese economic growth (particularly the ever-persistent fear of a "hard landing" scenario), but I think we may see that bearish pressure ease substantially if US dollar strength begins to subside (which is almost necessary at this point to facilitate a return to normalcy in financial markets). Building tensions in the Middle East can also help float prices a bit higher in coming months.
In the second quarter, Occidental reported a daily production average of 766,000 barrels of oil equivalent, with 60% of the production coming from the United States. This strong production (that continues to expand) is the reason that I haven't given up on OXY yet, despite its relatively weak financial data in recent quarters. Another encouraging sign is the recent ~70% surge in natural gas prices, which was triggered largely by a switch from coal in many power plants and declining production figures (which were inevitable given the low price earlier in the year).
In conclusion, if natural gas and crude can fetch higher prices with a weaker US dollar (and other potentially catalysts), we will see drastically improved earnings data for Occidental so long as production can continue at this rate. OXY also offers a decent dividend that is growing rapidly.
Disclosure: I am long OXY.