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Reasons That Make Occidental Petroleum a Buy
Posted by: abirk (IP Logged)
Date: June 17, 2013 11:13AM
Occidental Petroleum (OXY) is an oil-related stock. Occidental Petroleum Corporation (Occidental) conducts its operations through various subsidiaries and affiliates. The company operates in three segments: oil and gas; chemical; and midstream, marketing and other. The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas. The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls. The midstream, marketing and other segment (midstream and marketing) gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.
OXY is a good dividend-paying stock. Since the beginning of 2013 Occidental is up 23.04% excluding the reinvestment of dividends. OXY is in a good position to pay dividends when compared to its peers like Exxon Mobil (XOM) and Chevron (CVX) each of which are only up 4.9% and 13.69%, respectively.
The chairman of Occidental Petroleum Corporation (OXY), Ray R. Irani, who drew criticism over his compensation as CEO, is out. Irani, 78, has come under fire by shareholders for his compensation. The Los Angeles-based oil and gas producer defended the compensation, saying it was tied to Occidental's performance. The company's net income jumped 55 percent to $4.53 billion in 2010. Under Irani's leadership, Occidental grew to become the fourth-largest U.S.-based oil company. Its stock market value was $9 billion in 2000 and is $73 billion now.
Occidental Petroleum Corporation has a market cap of $73.5 billion and is part of the basic materials sector. The company has a P/E ratio of 16.6, below the S&P 500 P/E ratio of 17.7. The company's strengths can be seen in multiple areas, such as its expanding profit margins, increase in stock price during the past year and largely solid financial position with reasonable debt levels by most measures.
These strengths outweigh the fact that the company has had sub-par growth in net income. Occidental boasts a dividend of 2.72% with a payout ratio of 42.25%. The payout ratio is quite decent and has a room for growth even if earnings cannot be grown. For the past 11 years the company has raised dividends, and it is expected that it will continue to do so in the near future. Occidental is contemplating strategic alternatives to create value for shareholders by analyzing what a breakup of the company could look like. A $0.64 per share dividend will be payable on July 15 to shareholders with an ex-date of June 8.
Occidental has a history of returning shareholder value. OXY is sporting a return on assets, equity and investment value of 6.4%, 11.12% and 7.31%, respectively. It is currently trading at a 12-month P/E ratio of 17.23. But compared to this, the one-year forward-looking P/E ratio is at 12.64. Its future for sure looks better with this. The stock is expected to go up to $112 for a 19% gain.
S&P Capital expects $7.47 EPS in 2013 and $7.90 in 2014, led by 70% or greater liquids production. Their NAV of $103 per share indicates a 20% discount to NAV at current levels. In February 2012, the quarterly dividend was raised a whopping 17% to $0.54 per share. Since 2002, the dividend has been raised every year, indicating free cash flow strength. In 2012, OXY invested $0.7 billion in share buybacks, while delivering $1.6 billion in dividends for shareholders, totaling a return of $2.3 billion to shareholders. Over the past 10 years, OXY's compound annual dividend growth rate is 15.8%.
OXY expects to reduce costs and therefore enhance returns on production. At the Credit Suisse 2013 Energy Summit, the company expects to reduce production costs by at least 6% for 2013, to a goal of $14 per barrel.
The company is set to reduce costs since 2012 to improve operational efficiencies in all categories, including capital. The plan was to reduce operating expenses and drilling costs to 2011 levels. The company plans to achieve a minimum of $300 million of savings in operating costs. Improving efficiencies and outright cutting of less efficient segments helped OXY to lower its capex $10.2 billion to an expected $9.6 billion in 2013 without affecting production growth.
Occidental Petroleum managed to reduce its overall costs by a margin of roughly 19% on a year-over-year basis. Its year-over-year cost reduction helped soften the blow that was felt by a decline in both oil and gas prices.
Oxy, a relatively mature stock with a reasonable valuation can achieve meaningful growth due to a renewed focus in the Permian Basin, as well as efficiency implementations. The company seems to ward off market volatility with a solid 3% growing yield. If one is looking for a relatively safe oil and gas stock with a decent dividend payout, then this is it. The returns on capital should remain high. Dividend investors will continue to enjoy outsized increases.
Since March 6, 2009, OXY has increased its quarterly dividend a total of five times by an average of $0.064 each time. From an income perspective, the company's forward yield of 2.83% coupled with its continued annual increases could equate into a very viable income option for long-term investors in search of a moderate dividend play.
Stocks Discussed: OXY, CVX, XOM,