Despite Earnings Beat, Occidental Hurt By Proxy Fight

Occidental Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="OXY" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] just reported earnings. However, the fireworks may start in this quarter. The proxy fight with activist investor Carl Icahn continues as he tries to block the company’s takeover of Anadarko Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="APC" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"]. Now not only must investors deal with stagnant oil and natural gas prices, they must also contend with turmoil on the company’s board.

Falling Profits Hurting OXY and Its Industry

For its second quarter, OXY stock reported profits of 97 cents per share. This came in three cents per share ahead of estimates. Despite coming in ahead of expectations, profits fell short of the $1.10 per share the company earned last year. Occidental also brought in revenues of $4.48 billion, $90 million more than Wall Street had forecast. The company earned $4.13 in the second quarter of 2018.

Occidental has suffered over the last year. However, the drop has accelerated. Stagnant oil prices and rock-bottom natural gas prices have weighed on OXY stock as well as peers such as Encana (TSE: ECA.TO, NYSE: ECA), Devon Energy (NYSE: DVN) or EOG Resources (NYSE: EOG).

Cost of Anadarko May Also Weigh On OXY Stock

However, Occidental must also contend with an activist investor. Occidental won the bidding war over Chevron (NYSE: CVX) to acquire Anadarko. This did not sit well with Carl Icahn, who owns more than 4% of Occidental.

Icahn feels $59 per share is too high of a price for Anadarko. He launched a bid to remove four directors from the board to kill the deal. For its part, Occidental is moving quickly to close the agreement and plans to do so soon after Anadarko shareholders vote on the deal on Aug. 8.

Mr. Icahn may well have a point. Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) will loan Occidental $10 billion to help get the deal done. This will be on top of current long-term debts of $10.15 billion and could strain Occidental, who holds around $21.35 billion in book value.

However, what could cause more worry for investors is the falling profits. Analysts predict the company will earn $3.38 per share this year, down from $5.01 per share in fiscal 2018. In 2020, Wall Street forecasts earnings will fall further, to a consensus $3.05 per share. This will occur even as revenues rise by an estimated 43.2% in 2020 from the Anadarko deal.

This makes this stock look more expensive than it appears as the current price-to-earnings (P/E) ratio stands at 10.5. It may also appear more expensive as a drop in profits takes the forward P/E to around 17.4.

Should I Buy OXY Stock?

I would hesitate to buy OXY now with the merger turmoil and the added debt burdens.

This deal will make Occidental one of the larger upstream oil companies in the U.S. Since both companies perform the same function, I would expect few issues with the companies fully integrating.

However, falling profits remain a concern. Moreover, once Occidental takes on the existing long-term debt of Anadarko, just under $18 billion, this will weigh down the company for some time.

Investors have many choices in the upstream oil space. All these companies may suffer in the near-term with current pricing. However, I would hesitate to buy OXY now with the merger turmoil and the added debt burdens. While I expect Occidental will eventually return to profit growth, investors might want to consider other oil equities besides OXY stock.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.


Will Healy is a freelance business and financial writer based in the Dallas area. In addition to marijuana, energy, and mining stocks, he has also written about real estate, insurance, personal finance, and macroeconomics. In addition to Capital 10X, his articles have appeared on sites such as InvestorPlace, Yahoo! Finance, MSN Money, Kiplinger’s Personal Finance, GOBankingRates, and Seeking Alpha. Will holds a B.S. in Journalism from Texas A&M University, an M.S. in Geography from the University of North Texas, and an MBA from the University of Texas at Dallas. Phone: 416-721-8257. Address: 682 Indian Road Toronto, Ontario M6P 2C9.


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