How Occidental Is A Well-Rounded Value Play On Energy

| About: Occidental Petroleum (OXY)
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Occidental Petroleum (NYSE:OXY) reported a solid first quarter of 2012. Revenue beat by $320M (out of $6.27B), and EPS came up a bit short (1.92 versus 1.97 expected). I thought this was a bit strange, since occidental hit record levels of petroleum production in the last few months. Oil prices have not crashed, so what is responsible for the earnings miss?

One of the biggest culprits is the slide in natural gas prices. The US Natural Gas Fund (NYSEARCA:UNG) has slid about 70% in the last 12 months (Ouch!) The commodity itself has (and continues to) lose certain speculators a lot of money as its unrelenting price slide continues.

Looking at the quarterly report, you can also see the OxyChem division suffering a bit from weak demand for chemicals. Earnings in Q1 2012 dropped 16% relative to the same period in 2012. According to the company, lower export volumes combined with higher raw material costs deteriorated sales volume and profit margins significantly. Certain seasonal effects made large impacts, for instance very low sales figures for calcium chloride (used for de-icing) due to the mild winter. I expect that the dent in chemical revenue is only temporary, so investors really have nothing to worry about in the long run.

The company's core business in oil and gas has had remarkable performance, despite quite a few setbacks that were outlined in the quarterly reports. First off, operating costs have increased significantly while the price of natural gas has continued to fall from improving extraction methods in the industry. I expect that a recovery in natural gas prices is inevitable after the supply shock induced by recent technological upgrades ends and demand has a chance to respond. I'd expect OXY earnings from natural gas in particular to explode as a result due to the profit-margin differentials. This is where the value potential of the stock comes into play.

The brightest segment of OXY's operations is its domestic petroleum production. Domestic production skyrocketed by 51,000 barrels/day on average , and crude oil production hit a new all-time high (755,000 barrels were produced in Q1 2012 relative to 730,000 in Q1 2011) despite weakness in the Middle East, North Africa, and Columbia.

The dent in overseas production was apparently caused by insurgency activity in Columbia and the expiration of the Masila Field contract in Yemen combined with negative effects on Occidental's contracts in the region as a result of increased Libyan oil production. Given weakness in its other major operations, the fact that Occidental was able to deliver a strong overall quarter means that oil production in the U.S. has been a lot healthier than some investors believe.

Overall, the impression seems to be that domestic oil production will continue its trend. Occidental has had great success employing its top-notch carbon dioxide flooding program for easy oil extraction out of U.S. wells. Natural gas is a bit tricky, although I think that since natural gases have already been hit so hard it's only a matter of time before they rebound and significantly expand Occidental's ability to generate profits on those operations. Ultimately, Occidental serves as a partial natural gas play with huge appreciation potential and a safety-net of crude oil production in the United States.

The company's current P/E ratio seems cheap, and I expect that natural gas earnings should be able to compress that ratio significantly in a few years. The company's dividend of 2.3% is also more than enough to cover inflation, which makes shares of OXY a solid buy-and-hold stock that should only be sold after a substantial recovery in natural gas.

Disclosure: I am long OXY.