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Shares of Occidental Petroleum (OXY) fell almost 5% over the past trading week. The energy company reported its third quarter results on Thursday before the market open.

Third Quarter Results

Occidental Petroleum reported third quarter revenues of $5.97 billion, down 0.7% on the year. Production increases could not entirely offset the impact of lower prices, notably in US natural gas.

The company reported income from continuing operations of $1.38 billion compared to $1.77 billion last year. Earnings per diluted share fell from $2.18 per share in 2011 to $1.69 per share over the past quarter. On average, analysts were looking for Occidental to earn $1.63 per share over the past quarter.

Occidental reported a strong 4% increase in production to 766,000 barrels per day.

CEO Stephen I. Chazen commented on the results, "Our third quarter 2012 total company production of 766,000 barrels of oil equivalent per day was 27,000 per day, or 4 percent higher than the third quarter of 2011 production. Our domestic production of 469,000 barrels of oil equivalent was 8 percent higher than the third quarter of 2011 and was a record for the eight consecutive quarter. Our domestic liquids production of 334,000 barrels per day, which was also a record, was 10 percent higher than last year's third quarter."

Segmental Information

Oil and Gas

Oil and gas operating earnings were $2.0 billion, compared to $2.6 billion last year. Lower product prices and higher costs were only partially offset by higher oil production volumes. Oil and gas equivalent production came in at 766k barrels per day, up 27,000 on the day. Domestic production rose 33,000 barrels per day, while international production fell by 6,000 barrels.

Realized prices came in at $96.62, down 62 cents on the year. NGL prices were $40.65 per barrel, down 27.5% on the year. Domestic gas prices rose 41% to $4.23 per MCF over the past quarter.

Chemicals

Earnings for the chemical segment were $162 million, down from $245 million in the third quarter last year. Lower earnings were the result of lower prices in polyvinyl chloride and vinyl chloride monomer, partially offset by lower natural gas and ethylene costs.

Midstream, Marketing and Other

Earnings for the midstream segment doubled from $77 million last year to $156 million over the past quarter. Higher margins in the marketing and trading business, was offset by lower income in gas processing and pipelines.

Valuation

Occidental Petroleum did not provide a consolidated balance sheet for its third quarter results. The company ended its second quarter with $4.4 billion in cash and equivalents and operates with $7.6 billion in short and long term debt, for a net debt position of $3.2 billion.

For the first nine months of 2012, Occidental Petroleum generated revenues of $18.0 billion. The company net earned $4.3 billion, or $5.25 per diluted share. Full year revenues are expected to come in around $24 billion. The company is on track to net earn almost $6 billion, or $7 per share.

The market currently values the firm at $65 billion. This values the company at 2.7 times annual revenues. The company is valued at roughly 11 times annual earnings.

Occidental Petroleum currently pays a quarterly dividend of $0.54 per share, for an annual dividend yield of 2.7%.

Investment Thesis

Year to date, shares of Occidental Petroleum have fallen some 15%. Shares rose from $95 in January to highs of $105 in February. Shares fell back to $80 in the summer as oil prices retreated on worries about an economic slowdown. Shares rallied back to $90 and are currently exchanging hands around $80 per share.

Over the past five years, shares have risen almost 15%. Shares traded as low at $45 during the crisis in 2008 and steadily rose to a peak of $115 in 2011. Shares have sold off some 30% from those levels ever since. Between 2008 and 2012, revenues stagnated around the $24 billion mark. Earnings came in around $7 billion in both 2008 and 2012. Profits fell to $2.9 billion in 2009, but recovered from that point in time.

CEO Chazen keeps the pedal on the gas. He is not happy with current returns, and if improvements will not materialize in the coming quarters, the strategy will change. Occidental will contemplate paying higher dividends or selling out wells to other companies. Chazen sees plenty of potential for efficiency in California, which represents half the US rig count of the company. He warns that operating costs have to come down. Furthermore management changes have already been made.

Shares of Occidental have been underperforming compared to major other energy companies. CEO Chazen seems committed to improvements, as he demonstrated in the earnings call. It seems fair that investors can expect operational improvements in the coming quarters. If this does not materialize, the company is ready to employ other value-creating strategies including dividends or sales of underperforming assets.

Shares are trading at relative fair levels, as improvements in operational performance could send shares back to levels above a $100 in the medium term. The company represent a nice addition for a diversified and long term portfolio. Shareholders in Occidental should not expect significant short term outperformance, until further measures are announced.

Source: Occidental Petroleum - Tough Hand Of CEO Chazen Will Create Long-Term Value