Time to Buy Occidental Petroleum

The oil price downturn of late 2018 hit Occidental Petroleum hard. The stock is down nearly 20% in the past six months despite a terrific performance last year, but oil prices have ticked up nicely so far this year. Will oil’s latest rally be enough to help Occidental make a comeback on the stock market? Let’s find out.

Coming Off a Terrific Year

Occidental Petroleum’s 2018 net income came in at $4.13 billion, which was a massive jump over the 2017 figure of $1.31 billion. Its adjusted profit increased from $686 million in 2017 to $3.84 billion last year. This impressive increase in the company’s net income was driven by a combination of higher production and stronger pricing.

Occidental’s annual production averaged 658,000 barrels of oil equivalent per day in 2018 as compared to 602,000 BOE/day in the preceding year. At the same time, the company enjoyed an average oil price of $60.64 per barrel as compared to $48.93 in 2017. But investors were more concerned with the oil price decline and the potential impact it might have on the company’s performance.

However, investors who had pressed the panic button earlier should now focus on the fact that oil prices are rallying, and they might rise further. WTI oil is now trading at about $62 per barrel, while Brent crude has touched nearly $70 per barrel. Given the supply constraints being witnessed around the globe, Occidental investors can expect prices to increase in the future as well.

In such a scenario, buying shares of Occidental Petroleum looks like a smart thing to do considering its outlook for 2019.

Focusing on Efficient Production Growth

Occidental’s 2019 capital expenditure was nearly $5 billion. This year, the company plans to keep its capital expenses at around $4.5 billion as a preventive measure. Of the planned capital expenditure, Occidental will direct $2.6 billion toward its Permian acreage to achieve production growth in the range of 30% to 35% from those assets.

More specifically, Occidental was planning to deliver production growth in the range of 5%-8% in case oil prices average $50 per barrel this year. On the other hand, under Occidental’s best oil pricing scenario of $60 per barrel, it was planning to boost production in the range of 11% to 13%.

So, with oil prices hovering close to what Occidental recorded last year, it won’t be surprising to see Occidental Petroleum deliver a better financial performance in 2019 on account of its higher production and a potential uptick in prices.

Analysts, however, are not anticipating any improvement in the company’s financial performance this year. Occidental’s revenue is expected to drop around 12% in 2019, while earnings will go down from $5.01 per share to $3.45 per share.

But Occidental is quite capable of upstaging those numbers thanks to the operational improvements it could deliver in 2019. If Occidental remains on top of its execution game and delivers the improvements it is promising, the stock could easily deliver upside as the year progresses.