Buy Occidental Now In Q4 For 2013 Gains

| About: Occidental Petroleum (OXY)
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Current shareholders should continue to hold Occidental Petroleum (NYSE:OXY) long-term; interested investors may consider the current quarter as an opportune entry point to initiate a position on this stock. Occidental's increased volume for the third quarter and sequential increase in average realized natural gas price for the third quarter are reasons to be bullish on the stock. Third quarter revenues and earnings were weak but still surpassed analysts' expectations. The stock price is down on the year, but management is committed to reducing costs, executing a buyback, or increasing its dividend in order to help improve its earnings and value in the market. Occidental Petroleum stock may see a significant uptick or rally early in 2013, if these efforts to reduce costs coincide with the recovering natural gas and crude oil commodity prices.

Apache (NYSE:APA), EOG Resources (NYSE:EOG), Anadarko Petroleum (NYSE:APC), and ConocoPhillips (NYSE:COP) are the E&P firms most comparable to Occidental Petroleum. Occidental's price is around 10.3 times earnings, 2.7 times sales, and 1.65 times its book value. Apache's 9.8 price-to-earnings and 1.05 price-to-book ratios are the lowest among these firms; EOG's 22.2 price-to-earnings and 2.7 price-to-sales ratios are the highest among the aforementioned. Occidental's current ratio is around 1.5 while its 0.19 debt-to-equity ratio is the lowest among the firms. Occidental Petroleum's annualized dividend is around $2.16 per share. Sales revenue has increased 6.4% over the past five years.

Occidental Petroleum's EPS is around $7.76; it has increased 45.4% in 2012 and is projected to increase 10.4% in 2013.

Anadarko's 449.6% EPS decline in 2012 is the worst among the firms while ConocoPhillips' 23.5% projected EPS increase in 2013 is the highest among the firms. Occidental's 16.8% ROE, 41.1% operating margin and 24.3% profit margin are the highest among the aforementioned firms. Occidental's 0.76% float short and 1.49 short ratio are the lowest among these firms. Its beta is around 1.1, and its average volume is around 4.06 million; its 1.79 relative volume is the highest among the firms. The stock has decreased 12.5% YTD, 6.7% over the past month and has declined around 3.6% since its last earnings release.

On Occidental Petroleum's third quarter earnings release, net sales totaled $5.96 billion, decreasing from $6 billion YOY. Oil and gas net sales totaled $4.63 billion, decreasing from $4.67 billion; oil and gas earnings totaled $2.02 billion, decreasing from $2.61 billion YOY. Earnings for the nine months 2012 totaled $7.47 billion, decreasing from $8.79 billion YOY. Capital expenditures for the third quarter totaled $2.59 billion, increasing from $2.01 billion YOY. Lower prices and higher costs declined earnings, but were partially offset by increased oil volumes. Third quarter net income totaled $1.37 billion, decreasing from $1.77 billion YOY. Third quarter sales averaged 765 mboe per day, increasing from 743 mboe per day YOY.

Daily production totaled 766 mboe per day, increasing 4% YOY. Domestic oil and gas production totaled 469 mboe per day, increasing 8% YOY; this was the eighth consecutive quarter of record production. Domestic liquid production totaled 334 mbbls per day, increasing 10% YOY; this was also record production for Occidental Petroleum. Third quarter US crude oil production totaled 260 mbbls, increasing from 230 mbbls; oil production increased across the entire US portfolio.

Natural gas production totaled 812 mmcf per day, increasing from 799 mmcf per day YOY. Occidental's average realized price was $96.62 per barrel of oil, decreasing from $97.24 YOY. Average prices for NGL were $40.65 per barrel, decreasing from $56.06 per barrel YOY. Third quarter realized prices for natural gas averaged $2.48 per mcf, decreasing 41% from $4.23 YOY. Compared to the second quarter, average realized worldwide oil and NGL prices decreased 3% and natural gas prices increased 19%.

Occidental's CEO is currently focused on mitigating operating costs in order to improve profitability. If that approach doesn't improve the firm's stock price, management is prepared to return cash to shareholders through a buyback or increasing the dividend. Improving the drilling operations in Texas and California are the primary focal points for improving the firm's stock price and profitability. Occidental will change the strategy if the improvements aren't apparent through the next few quarters. Occidental intends to allocate $5.5 billion for developing new prospects at its California, Texas and New Mexico assets.

Third quarter Permian basin production in Texas and New Mexico increased 3%, sequentially; production in California declined around 1%. Permitting at new fields in California is coming slower than expected, while operating costs in the state have doubled. Occidental is now focused on conventional drilling in California as opposed to shale and has decreased the rig count to 20 from 30 earlier in 2012. Occidental's CEO believes there is still room to substantially lower current operating costs.

Occidental's CEO recognizes that the effects from mitigating costs from an operational standpoint will be much quicker than from a capital perspective. Occidental will still be more aggressive in its capital program than in 2011 while delaying or declining production at drills where returns are weaker. Occidental may decrease capital spending on wells by 15% in the US. Occidental may also build a $400 million pipeline in the West Texas to Houston region in order to mitigate the differential and increase returns in this region. Translating more of the volume growth into profits is the CEO's core focus looking forward. Getting the California assets to lower operating costs is the more direct and responsive approach to improve profits in the near term.

The CEO also believes that current operating costs at the Permian basin asset are also too high. The CEO believes simplifying the drilling program will make Occidental more efficient. Shale drilling has a decline rate of around 40% or greater; moving to more conventional drilling means Occidental won't have to drill as many wells next year simply to sustain a flat production rate. Whether it's the focus on mitigating costs, increasing dividends, or improving commodity prices, Occidental is an attractive candidate for capital appreciation or increased ROI in the mid-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.