Are the shares of Occidental Petroleum fully valued?
According to first trimester statements, Occidental Petroleum (NYSE: OXY) still has $ 2 billion to $ 3 billion in assets to sell and cash flow relief for shareholder returns. The company incurred $ 10 billion in asset impairment charges last year and reduced its asset base by nearly 25%. However, the recent surge in benchmark prices has pushed the stock of OXY higher despite concerns about the continued demand crisis and the easing of OPEC + supply restrictions during the second half of the year. ‘year. Currently, the company has not fully restored the dividend as the first quarter operating cash flow has just reached the capital expenditure target. In addition, long-term debt of $ 36 billion, above the current market value of the stock, is another factor weighing on long-term capital gains. Thus, broader macroeconomic factors coupled with high leverage should dampen investor returns. Our interactive dashboard analysis highlights Occidental Petroleum’s stock market performance during the current crisis with that during the 2008 recession.
Timeline of the 2020 crisis so far:
- 12/12/2019: Coronavirus cases first reported in China
- 01/31/2020: WHO declares a global health emergency.
- 02/19/2020: Signs of effective containment in China and hopes of monetary easing from major central banks help S&P 500 reach record high
- 03/23/2020: S&P 500 34% drop of the maximum level observed on February 19, as cases of Covid-19 accelerate outside China. Doesn’t help that oil prices collapse in mid-March amid Saudi-led price war
- From 03/24/2020: S&P 500 recovers 92% from lows on March 23, as the Fed’s multibillion-dollar stimulus package removes short-term survival anxiety and injects liquidity into the system.
On the other hand, here is how OXY and the market at large behaved during the crisis of 2007/2008.
Timeline of the 2007-08 crisis
- 01/10/2007: Approximate pre-crisis peak of the S&P 500 index
- 09/01/2008 – 10/01/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
- 03/01/2009: Approximate low point of the S&P 500 index
- 01/01/2010: Initial recovery to pre-accelerated decline levels (around 09/01/2008)
Occidental Petroleum Stock vs. S&P 500 Performance During the 2007-08 Financial Crisis
OXY stock rose from levels of around $ 63 in September 2007 (pre-crisis peak) to levels of around $ 50 in March 2009 (as markets bottomed out), implying that OXY stock is down 23% from its approximate pre-crisis peak. It recovered from the 2008 crisis to levels of around $ 78 at the start of 2010 – up 57% between March 2009 and January 2010. By comparison, the S&P 500 index initially fell by 51%. % following the recession before recovering by 48% in January 2010..
Huge pile of debt hinders shareholder returns
Occidental Petroleum’s revenues fell 14%, from $ 18.9 billion in 2018 to $ 16.3 billion in 2020, as the pandemic resulted in lower demand and lower benchmark prices. The Anadarko acquisition burdened OXY’s balance sheet with $ 28 billion in long-term debt in 2019. Thus, annual interest expense of over $ 1 billion weighs on shareholder returns. Additionally, falling demand for oil reduced OXY’s asset base by 25%, as the company incurred $ 11 billion in depreciation charges in 2020. Improving the company’s finances depends on improving proper execution of the asset disposal plan and improved operating cash flow.
Phases of the Covid-19 crisis:
- Beginning to mid-March 2020: Fear of the rapid spread of the coronavirus epidemic is reflected in reality, the number of cases accelerating in the world
- End of March 2020: social distancing measures + confinements
- April 2020: Fed stimulus suppresses short-term survival anxiety
- May-June 2020: Resumption of demand, with a gradual lifting of confinements – no more panic despite a steady increase in the number of cases
- Since the end of 2020: Weak, but persistent quarterly results demand improvement and advances in vaccine development boost market sentiment
While the company plans to maintain a cautious capital investment plan as well as divestments, Trefis believes that the stock could face another downside, as benchmark prices observe a correction following the increase in production of the company. ‘OPEC + during the second half of the year.
Is Exxon Mobil a better choice than Occidental Petroleum? Check Comparison of Exxon Mobil Shares with Peers to see how XOM stacks up against its peers on the metrics that matter. You can find other useful comparisons at Peer comparisons.