Energy Business

Why Occidental's Biggest Bull Is Even More Bullish After Earnings

The oil and gas industry has seen its shares of ups and downs in 2020, but some companies were in trouble long before the emergence of the COVID-19 pandemic. Occidental Petroleum Corp. (NYSE: OXY) has been troubled since it paid far too much ($55 billion, all in) to acquire Anadarko in 2019. Now that its shares have come down so far from the peak, even after the bounce from the panic-selling lows in March, the investing community has started to show less disdain for Occidental.

One firm that has remained positive is BofA Securities. Keep in mind that analyst Doug Leggate is actually the most bullish of all major analysts on Wall Street when it comes to Occidental. Most analyst target prices were closer to the current share price, rather than calling for massive upside.

BofA Securities reiterated its Buy rating on the shares after earnings, and Leggate raised his price objective to $30 from $28, which was the highest price target of the major firms covering Occidental.

Occidental was characterized as having a solid operational quarter, with the attention turning to the company’s updated guidance, specifically on maintenance capital listed as $2.9 billion. The price target took that and expected asset sales in the second half of 2020 into consideration.

One word of caution: Occidental’s debt load remains. Leggate noted that liquidity should not be an issue at this time, and he sees Occidental now running at break-even, even if West Texas Intermediate crude dips under $35 per barrel.

Leggate also noted that using discounted cash flow remains the only way to assess a depleting resource business with no terminal growth. With the break-even under $35 per barrel, this is expected to leave Occidental with significant oil leverage, which positions it as one of the biggest beneficiaries of an oil recovery. Long and short, the worst is now expected to have passed, and Occidental is seen as a deep value and rehabilitation play against the large-cap oil giants.

BofA’s investment rationale said:

The recovery at the front end of the oil curve allows us to move up the risk curve. Our Buy rating on Occidental is based on oil price leverage, underpriced disposal opportunities to reduce leverage and management changes that better align the perception of interests between the company and shareholders.

24/7 Wall St. regularly reminds investors that no decision to buy or sell a stock should ever be made just on the bias of a single research report. That must be considered no matter how positively or negatively the case is made.

Occidental Petroleum stock down 1% at $16.31 on Tuesday morning. Its 52-week trading range is $9.00 to $48.85, and Refinitiv’s consensus analyst price target was $15.95 ahead of earnings.