OXY - Occidental Petroleum: Valuation Premium To Peers Not Justified

2024-02-21 16:52:29 ET

Summary

• Occidental Petroleum is the second largest, independent US E&P operator, owning significant acreage domestically and in the Middle East.
• Lower margins and a bloated balance sheet since the Anadarko acquisition have cut ROCE to just 9% vs. E&P peers at ~16% and majors at ~14%.
• OXY also has significantly higher per barrel expenses and breakeven prices while cutting down on Capex with the lowest replacement ratio among NA Oils.
• With a weak current balance sheet and additional debt from CrownRock, I estimate FY24/25 FCF to be fully allocated towards delevering vs. peers committing to 50%+ FCF payout rates.
• With shares trading at ~10-20% premium to peers and offering just a 1.5% yield in near-term shareholder returns, I see limited upside and initiate at Underweight (PT $58).

Occidental Petroleum Corporation ( OXY ) has made significant headlines over the past years, beginning with its transformative $57B acquisition of Anadarko Petroleum in 2019. Beating out Chevron Corporation's ( CVX ) offer by more than $7B, this deal had in large parts been enabled by Warren Buffett committing ~$10B in financing to OXY through the issuance of new preferred equity. Continuously increasing his stake in the company, in the Summer of 2023, Buffett reportedly crossed the 25% barrier, however consistently denying any claims of seeking full ownership....

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