Why Occidental Petroleum Is a Good Buy

Occidental Petroleum (OXY) announced second quarter ended June 30, 2016 net sales of $1.6 billion, up 28 percent sequentially from $1.3 billion in first quarter of 2016 but, down 31 percent year-over-year from $2.3 billion in second quarter of 2015.

Occidental Petroleum declared second quarter of 2016 net loss of $139 million or $0.18 of loss per diluted share compared to the first quarter of 2016 net income of $78 million or $0.10 per diluted share and second quarter of 2015 net income of $176 million or $0.23 per diluted share.

The independent oil and gas company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment, eating into the margins of the key energy explorer.

Looking to improve production  

Occidental is believed to be well on track for achieving upper end of 4% to 6% production expansion guidance for complete fiscal year 2016 production in the range of 590 to 600 MBOED.
In addition, the company is expected to achieve an optimal approximately $3 billion of 2016 capital budget schedule with superior cost leadership and a healthy balance sheet with a significant $3.8 billion net cash by quarter end coupled with dividend growth.
Why Occidental Petroleum Is a Good Buy
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A significant 10% year-over-year growth in net company production along with nearly 19% year-over-year decline in production costs signifies attractiveness of the company operations focused on maximizing production while minimizing costs.

Moving ahead, Occidental seems keenly focused on achieving highest production from the wells currently under operation through targeting superior return, fast settlement projects having low development expenditures, gaining extra knowledge of key reservoirs to improve prospective growth opportunities and projecting 2016 yearly average raising of more than 6,000 consolidated BOEPD. Also, Occidental is keen on minimizing field operational costs for 2016 including, 43% of year-over-year reduction in surface costs in $/boe, 22% year-over-year reduction in downhole expenditure and company driven operational costs declining 29% in $/boe over the same period last year.

The ongoing focus on increasing year-over-year energy production while optimizing the cost structure though reducing non-core expenses is expected to drive significant long-term company growth while offering attractive shareholder returns.

Occidental has an industry-leading position as an energy miner with improved oil recovery for second quarter of fiscal year 2016. Further, Occidental is seen as the biggest producer of CO2 across the Permian basin, injecting 1.9 billion cubic feet of CO2 per day and operating 31 key CO2 EOR projects. The company is continuing to develop its key operations in South Hobbs and uniquely began the injection of CO2 in phase 1 during September 2015 and much ahead of the program. Both phases 1 and 2 are estimated to generate 28 MMBOE of CO2 at somewhat more than $10 per BOE during the period. Also, the four pattern early growth in Residual Oil Zone (ROZ) is expected to start during 2016 with complete ROZ development to deliver approximately 50 patterns and 80 MMBOE.

Improvements in the end market

WTI and Brent benchmark price indices improved sequentially but, declined significantly year-over-year due to the impact of weaker global demand for key commodities, driving down their key costs while forcing the energy producing companies to curtail production. During the second quarter of 2016, Occidental strategically extended the new issuance of the dollar-bound average debt maturity by more than 5 years and achieved a stable growth outlook from each of the key rating agencies including, S&P, Fitch and Moody’s.

Going forward, Occidental expects third quarter of 2016 total production to be in the range of 600,000 to 605,000 BOED, domestic production is forecasted to fall by about 10,000 BOED including, Permian EOR remaining flat compared to second quarter of 2016 with Permian Resources of nearly 116,000 BOED. Further, global production growth is expected to be in 6,000 to 8,000 BOED range and allowed by production expansion at Oman Block 62.

The independent oil & gas producer is expected to continue to curtail third quarter of 2016 total production to minimize losses owing to the consistently expanding exploration expenditures but weaker fuel pricing. Still, a majority of key rating agencies are extremely positive about the long-term growth prospects of the company and giving it a topnotch rating.

Conclusion

Overall, the investors are advised to “Hold” their position in Occidental Petroleum Corporation considering the company’s significant long-term growth prospects but, currently weaker financial position with notable total debt of $8.33 billion against smaller total cash position of $3.75 billion only thus, restricting the company to continue with its daily operations profitably. The profit margin of -74.21% is disappointing and indicate no profit but loss. The PEG ratio of -0.68 appears misguiding and signifies no near-term growth but decline.
Published on Aug 22, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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