Argus is reaffirming its BUY rating on Occidental Petroleum Corporation (NYSE:OXY) with a target price of $83. Although this financially strong company is operating in a difficult industry environment, the firm believes that it is well positioned to weather challenging market conditions. Occidental has completed a series of asset divestitures, which have boosted cash and increased its exposure to higher-returning assets. In addition, Occidental Petroleum’s U.S. onshore business, Permian Resources, continues to exceed management’s expectations and should be a major growth driver over the next several years. The recent acquisition of additional acreage should further strengthen the company’s position in the Permian basin.
Occidental Petroleum shares have underperformed since the beginning of 2017, falling 14.3% while the S&P 500 Energy index has declined 12.3%. The shares have also underperformed over the past year, falling 18.9% while the Energy index has decreased 2.9%. On May 4, Occidental reported an adjusted 1Q17 net profit of $117 million or $0.15 per share, compared to an adjusted net loss of $426 million or $0.56 per share in the prior-year quarter. EPS missed Argus' forecast of $0.23 but beat the consensus estimate of $0.08. The swing to an operating profit was largely the result of lower DD&A costs, higher commodity price realizations, and stronger caustic soda prices and sales volume. Average realized prices rose 67% for crude oil, 99% for NGLs, and 79% for natural gas.
Occidental management adjusted its production outlook to reflect both recent asset purchases and portfolio divestitures. The company now anticipates total production of 595,000-615,000 boe/d, down from 625,000-645,000 boe/d. Occidental Petroleum still expects capital expenditures of $3.0-$3.6 billion, up from $2.9 billion in 2016. Argus is lowering its 2017 EPS estimate to $1.06 from $1.38 to reflect Occidental Petroleum's revised production guidance, 1Q17 financial results and its revised crude oil price forecast, which goes from $56 per barrel to $52 per barrel. This had the effect of lowering the firm's full-year revenue forecast to $12.851 billion, which is 8.4% lower than its previous estimate. The 2017 consensus forecast is $1.02.
The firm rates Occidental’s financial strength as High, the top of its five-point scale. The company’s debt is rated A/stable by Standard & Poor’s and A3/stable by Moody’s. Fitch rates Occidental’s debt at A/stable. At the end of 1Q17, Occidental Petroleum’s total debt/capitalization ratio was 31.8%, up from 24.2% a year earlier. The debt/cap ratio is below the peer average. It has averaged 19.6% over the past five years. Total outstanding debt at the end of the quarter was $9.822 billion, up from $7.608 billion in 1Q16, which included $2.00 billion of short-term borrowings . Occidental had cash and cash equivalents of $1.49 billion at the end of 1Q17, compared to $3.18 billion at the end of 1Q16. Cash from operating activities was $652 million in 1Q17, compared to $689 million a year earlier. The company has an undrawn $2.0 billion revolving credit facility.
Occidental Petroleum shares appear attractively valued at current prices near $61, toward the low end of the 52-week range of $57.20- $78.48. The shares have continued to move lower since mid-December 2016 on concerns about oil price volatility and the company’s near-term earnings prospects. From a fundamental standpoint, Occidental Petroleum shares trade at 57.6-times Argus' 2017 operating EPS estimate and at 34.9-times its 2018 estimate, compared to a normalized six-year historical average range of 31-73. The shares also trade at a trailing price/book multiple of 2.1, near the high end of the historical range of 1.6-2.2, and at a trailing price/sales multiple of 4.0, near the high end of the range 3.0-4.4. The price/cash flow multiple of 13.4 is above the high end of the historical range of 7.7-11.6, and the enterprise value/EBITDA multiple of 16.5 is above the high end of the historical range of 11.0-14.3.