Occidental Petroleum (OXY, Financial), a $47 billion Houston-based oil company, reported a 30.6% rise in revenue to $2.98 billion and a 50% increase in profits to $117 million in the first quarter – a 3.9% margin compared to 3.4% in the same period last year.
According to filings, the change mainly reflected higher oil prices.
“Our focus remains on areas that generate the best returns, and we are seeing improvements in margins across all of our businesses.
“Permian Resources continues to be a growth engine for our company, with a 5% improvement in production this quarter, reflecting increased drilling activity and well productivity in the Delaware Basin.” – President and CEO Vicki Hollub
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Valuations
Occidental Petroleum is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 40.7 times vs. the industry median of 23.7 times, a price-book (P/B) ratio of 2.2 times vs. the industry median of 1.2 times and a price-sales (P/S) ratio of 4.2 times vs. the industry median of 3.6 times.
The company had a trailing dividend yield of 4.98% with 0% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 3.6 times and 60.4 times.
Total returns
Occidental Petroleum has failed to generate positive returns for its shareholders in the past five years with 2.4% total losses compared to the Standard & Poor's 500 index’s 15.3% total returns (Morningstar). So far this year, the company provided 12.2% in losses vs. the index’s 9.6% gains.
Occidental’s principal businesses consist of three segments: oil and gas, chemical and midstream and marketing.
Oil and gas
The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas.
Further, Occidental’s domestic upstream oil and gas operations are located in New Mexico and Texas. International operations are located in Bolivia, Colombia, Oman, Qatar and the United Arab Emirates.
In the first quarter, the segment’s revenue climbed by 48.5% to $1.89 billion (60% of total unadjusted sales) and delivered a profit of $220 million (11.6% margin) compared to $485 million in losses in the same period last year.
According to filings, the increase in oil and gas earnings was primarily due to significantly higher realized oil prices.
Chemical
The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls.
OxyChem owns and operates manufacturing plants at 23 domestic sites in Alabama, Georgia, Illinois, Kansas, Louisiana, Michigan, New Jersey, New York, Ohio, Pennsylvania, Tennessee and Texas and at two international sites in Canada and Chile.
In the recent quarter, revenue from chemical operations grew by 20% to $1.07 billion (33.7% of total unadjusted sales) and delivered a profit margin of 15.9% compared to 24% in the year-prior period.
OxyChem recorded a one-time $88 million gain in the first quarter brought by its chemical assets sale. Excluding this one-time gain, the company actually recorded higher earnings due to significant improvements in the segment’s caustic soda price and volume business.
Midstream and marketing
The midstream and marketing segment gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power.
The segment also trades around its assets, including transportation and storage capacity. Additionally, the midstream and marketing segment invests in entities that conduct similar activities.
In the first quarter, revenue in midstream and marketing grew 58.6% to $211 million (6.6% of total unadjusted sales). In addition, the division lost $47 million compared to $95 million in losses in the same period last year.
According to filings, the decrease in midstream and marketing losses reflected higher marketing margins, higher NGL prices impacting the gas processing business and higher transportation income from the new Ingleside Crude Oil Terminal.
Sales and profits
Occidental Petroleum averaged a sales decline of 26% in the past three years while recording losses since fiscal 2015 (Morningstar).
Cash, debt and book value
As of March Occidental Petroleum had $1.49 billion in cash and cash equivalents and $9.8 billion in debt with debt-equity ratio of 0.47 times compared to 0.32 times in the same period last year. The company’s equity dropped by $2.7 billion mostly from lower retained earnings while overall debt has climbed $2.2 billion.
The company’s book value declined by 11.4% to $21.1 billion on a year-on-year basis.
Cash flow
In the recent quarter, Occidental Petroleum’s cash flow from operations declined by 5.4% to $652 million compared to the same quarter last year. Capital expenditures were $722 million leaving the company with $70 million in free cash outflow compared to $43 million in first-quarter 2016.
Despite the free cash outflow for the period, Occidental Petroleum paid out $584 million in shareholder dividends. In the past three fiscal years, the company averaged a free cash flow payout ratio of 161%.
The company also issued $12 million in shares in the recent quarter.
Conclusion
Having seen a strong profit rise in Occidental Petroleum’s recent quarter operations further indicated that the company is more likely relying on stability and higher oil prices to maintain and even improve this business condition.
Both its chemical and midstream business (40% of total unadjusted sales), meanwhile, also exhibited nearly as impressive revenue growth rates. Nonetheless, the latter has failed to generate any profits for the company since 2015.
Despite the overall oil industry decline, Occidental Petroleum remained a little more leveraged compared to its year-over-year figures while having reduced its overall cash position secondary to its dividend payouts to its shareholders.
Twenty-five analysts have an average price target of $72.04 per share – an 18% upside from the price of $61 per share (at the time of writing). Applying a three-year P/S multiple and revenue growth averages followed by a 15% margin indicated a value of $23.5 billion – significantly less than the current market cap of $46.6 billion.
In summary, Occidental Petroleum is a pass.
Disclosure: I have shares in Occidental Petroleum.
