On Jan 9, 2014, we have reiterated our Neutral recommendation on Occidental Petroleum Corporation (OXY). The company currently has a Zacks Rank #3 (Hold).
Why the Reiteration?
The reiteration is primarily based on the company’s over-dependence on commodity price movement, increasing competition from other operators in the sector and risks associated with damages of exploration and production infrastructure. However, we have pointed out several catalysts, including the company’s strong financial position, a well-diversified assets portfolio and disciplined investment strategy, which may help to mitigate those negatives.
In the third quarter of 2013, Occidental’s pro forma earnings surpassed the Zacks Consensus Estimate. Quarterly earnings jumped 15.9% year over year, primarily on the back of an increase in revenues and lower interest expenses as well as operating expenses.
We believe that Occidental’s over dependence on crude oil price movement may be affecting its anticipated growth, as it is a crude oil-levered organization with no refining activities.
In addition, the company’s businesses operate in highly competitive environments and face strong competition from the state-owned foreign oil companies, major integrated oil companies and independent producers of oil and natural gas. The growing competition could negatively impact the company’s profitability and growth trajectory.
On the positive side, we view Occidental as an organization with a systematic capital spending program and higher operating efficiencies on the back of strong financial position, which will subsequently increase its future reserves.
In addition, a steady production growth of Occidental’s diversified assets located at different resource-rich locations and scheduled progress at the Al Hosn gas project in Abu Dhabi are expected to play an important role to boost the company’s future performance.
Occidental has a steady dividend payment record. During the first nine months of 2013, the company paid approximately $1.0 billion as cash dividend. The practice of returning wealth to shareholders will help it to attract investors.
Other Stocks to Consider
Some better-ranked stocks in the same sector include Athlon Energy Inc. (ATHL), Harvest Natural Resources Inc. (HNR) and Devon Energy Corporation (DVN). While Athlon Energy and Harvest Natural Resources carry a Zacks Rank #1 (Strong Buy), and Devon Energy holds a Zacks Rank #2 (Buy).
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