Occidental Petroleum (OXY) ranks among the largest independent oil producers with a market cap of $50 billion, and it sells at a premium multiple in its peer group. Our target for OXY stock is $89 per share, a 37% increase from current prices, based on a $60 per barrel WTI oil price in 2018 and its seven-year average 10.6x cash flow multiple on 2018 estimated cash flow of $8.41 per share.
In the past, it relied heavily on its enhanced oil recovery success in the Permian Basin and California to gain access to new projects while minimizing geologic risk. It solicited projects in old, partially developed oil fields operated by national oil companies or others in the Middle East, and required terms in the form of production sharing contracts that provided incentives for the production increases it achieved while protecting host governments from any risk. Management’s goal was to capture enhanced oil recovery projects with large volumes of oil and gas remaining in place and upside potential.
In an effort to improve shareholder returns, it initiated a major restructuring program in 2012 with a goal of consistent dividend growth superior to its peer group. Asset sales to date approximate $16.9 billion, including $6.1 billion from the spin-off of California Resources Corp. (CRC) to shareholders in 2014. It also divested its assets in the Bakken, Piceance Basin and the Hugoton gas field, as well as midstream assets.
In Q2 2017, it sold its south Texas operations for $500 million. In the Middle East, it exited Bahrain, Yemen and Iraq, as well as Libya to minimize its exposure to geopolitical risk.
Nearly two-thirds of OXY’s 2017 proven reserves of 2,472 million equivalent barrels (MMEB) were located in the United States; the rest largely in the Middle East.
The 2017 cash flow from operations nearly doubled to $5 billion with U.S. upstream cash flow before corporate expenses of $2.38 billion, Latin America cash flow of $228 million and a Middle East cash flow of $1.4 billion; with its chemicals segment producing $1.17 billion and midstream operations of $422 million.
Asset sales of $1.4 billion helped fund 2017 capital spending of $3.6 billion, with $1.1 billion in acquisitions and dividends of $2.3 billion.
OXY’s 2018 capital spending is expected to be $3.9 billion with projected cash flow from operations of about $6.5 billion.
Its balance sheet remains strong with a debt ($9.3 billion)/debt + equity ratio of 31%, compared to a peer group average of 41%. In addition, it has $1.2 billion cash on hand net of short-term debt.
OXY was up 2% during the last 12 months compared to a 10% decline in the SPDR S&P Oil & Gas Exploration and Production exchange-traded fund (XOP), while the SPX increased 14%. OXY hit a low of $57 per share in May (see “Beating the benchmark,” below). Its 2014 high was $101.
The Permian Basin accounted for 27% of U.S. oil production in Q4 2017. Production was up 27% year-over-year. It is projected to grow 41% in Q4 2018. Located in west Texas and New Mexico, the Permian Basin covers a 100,000 square mile area that includes more than 1,500 oilfield operators and more than 10,000 oilfield interest owners. It holds about 150 billion barrel of equivalents recoverable resources split between the eastern Midland sub-basin and the western Delaware sub-basin. The cost per well continues to decline and wells are increasingly more productive, significantly improving return on investment and reducing the oil price needed to break even. The average breakeven oil price in both the Delaware and Midland is now in the $33 to $35 per barrel range.
OXY holds the dominant position in the Permian with 2.5 million net acres, including 450,000 net acres under development in the Delaware and 200,000 in the Midland. It has an additional 750,000 net acres with unconventional resource potential under evaluation.
Its total Q4 2017 Permian oil production is 8% of total Permian production. Its total net production is substantially larger than its closest competitors.
It divides its operations in the Permian Basin into two business units: Permian EOR focused on enhanced oil recovery using waterfloods and CO2 floods, which generate substantial free cash flow; and Permian Resources, its growth component focused on unconventional resources.
The Permian Basin accounted for 48% of OXY’s 2017 production and generated about 44% of its cash flow from operations.
OXY has a leading position in the Permian Basin. Its Permian Resources segment production will be up 44% this year to account for 31% of OXY’s worldwide production. After a 4% decline in 2017, total 2018 production is expected to grow 8%. OXY is targeting high single-digit long-term growth at a $50 per barrel WTI oil price.
The downside is limited thanks to its 4.7% dividend yield. OXY has a bullish outlook with a strong position in one of the more profitable production regions in the United States.