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Other Solid Stock in a Promising Industry

August 12, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Occidental Petroleum Corporation (OXY), a $77.63 billion market cap company, which is an integrated oil and gas company, with significant exploration and production exposure.

Future Actions

The company plans to sell a portion of its Mid-Continent assets. Also, it will spin off its California business and sell a minority interest in its Middle East/North Africa operations. Because of this, the Permian will be the main driver of the firm's portfolio.

New source of growth will come in the future from unconventional resources. In that sense, the firm is making investment this year to drill and develop its 1.9 million net acres that are prospective for unconventional plays. Despite the investments, it must maintain cost control to ensure the profitability of its acreage.

Business model

In order to have the largest acreage holder in the state, Occidental has acquired leases systematically. These acquisitions were at good prices which made them attractive. The firm focuses on exploration activities which could generate additional opportunities for growth.

What differentiates the company from competitors is the ability to focus on a few core areas that allows Occidental to leverage assets and experience.

Risks

The principal and obvious risk is a drop in oil and natural gas prices, which significantly affect the profits. Some exploration projects can become unviable when commodity prices drop below.

Further, the company is exposed to political risks due to its international expansion.

Cash dividends

Dividend-payment history affirms its commitment to maximize shareholder wealth. In February 2014, the company raised its quarterly dividend by $0.08 to $0.72 per quarter, or an annual rate of $2.88 per share. Occidental has now increased its dividend every year for 12 consecutive years and a total of 13 times during that period. The total increase in the annual dividend rate from 2002 is 476%. The company has paid quarterly dividends continuously since 1975.

Revenues, margins and profitability

Looking at profitability, the revenue growth of 5.24% has outpaced the industry average. The gross profit margin is very high (48.97%), but it has decreased from the same quarter the year before. However, the net profit margin of 22.8% is higher than the industry average. Earnings per share increased in the most recent quarter compared to the same quarter a year ago. The net income increased by 8.2% when compared to the same quarter one year prior, going from $1,322.00 million to $1,431.00 million.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

OXY

Occidental Petroleum Corp.

13.69

COP

ConocoPhillips

17.58

APC

Anadarko

3.66

 

Industry Median

9.09

The company has a current ROE of 13.69% which is higher than the one exhibited by Anadarko Petroleum (APC) and the industry median, but lower than the one of ConocoPhillips (COP). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment so the latter looks attractive. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1407851831751.png

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 13.2x, trading at a discount compared to an average of 15.4x for the industry. To use another metric, its price-to-book ratio of 1.80x indicates a premium versus the industry average of 1.5x while the price-to-sales ratio of 2.98x is above the industry average of 0.63x. These ratios indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $15.385, that is a 9% compound annual growth rate (CAGR).

1407851753447.png

As we can appreciate, the stock has risen over the past year.

Final comment

As outlined in the article, actions include selling Middle East assets and spinning off its California business. Further, its well-consolidated business model would benefit from higher production growth.

I feel bullish on these future actions, so I would recommend fundamental investors to consider this attractive option for their long-term portfolios.

Hedge fund gurus like Jean-Marie Eveillard (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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