Can Occidental Petroleum shares reach $100? Monitor capital allocation (NYSE:OXY)

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I maintain my buy investment rating for Occidental Petroleum Corporation (NYSE: OXY) shares.

I previously rated OXY as a safe dividend stock in my previous update for the stock written on April 7, 2022. Over the past five months, Occidental Petroleum equities outperformed in absolute and relative terms. OXY’s share price has increased by +25% since the publication of my previous article according to Looking for Alpha data, while the S&P 500 fell -12% during this period.

I believe there is even more potential for Occidental Petroleum stock, which supports my buy rating for OXY. Occidental Petroleum shares could potentially hit the $100 mark in the future, either via a takeover bid from Buffett or via a valuation reassessment driven by reduced leverage and improved return on capital shareholders.

Key OXY Stock Metrics

In this section of the article, I highlight some of the key OXY stock metrics disclosed as part of the company’s second quarter 2022 financial results released on August 2, 2022. Some metrics may provide clues about the how Occidental Petroleum’s shares could potentially behave in the future. .

As revealed in its Q2 2022 results presentation, Occidental Petroleum’s non-GAAP adjusted earnings per share or EPS jumped +888% YoY and increased +49% QoQ to 3, $16 in the last quarter. OXY’s Q2 actual normalized EPS came in +5% higher than the Wall Street consensus estimate of $3.02.

The company’s chemicals and midstream businesses were OXY’s main outperformers in the second quarter of 2022. Occidental Petroleum’s chemicals business, otherwise known as OxyChem, saw its pre-tax (EBT) segment profit increase of +19% QoQ and +156% YoY to $800 million in Q2 2022. This exceeds OXY’s Q2 pretax revenue forecast of $775 million for OxyChem, and is also the highest EBT in the chemicals segment in its history. OXY’s media and marketing segment also performed well in Q2 2022, with the company’s EBT increasing +31% yoy and +14% qoq to $168 million during the quarter. last trimestre.

More importantly, Occidental Petroleum’s free cash flow increased by +26% quarter-on-quarter and +108% year-on-year to reach a new record quarterly free cash flow of $4,176 million in the second quarter of 2022 OXY met market expectations with the company’s free cash flow generation last quarter, as sell-side analysts had previously forecast an estimated free cash flow in the second quarter of 2022 of $4.16 billion. dollars for Occidental Petroleum based on data obtained from S&P Capital IQ. Occidental Petroleum’s substantial free cash flow provides the company with significant opportunities to enhance shareholder value through its capital allocation initiatives, which are the subject of the next section of this article.

Can Occidental Petroleum shares reach $100?

I am of the opinion that Occidental Petroleum shares may eventually break through the $100 mark in the future. A price target of $100 equates to +40% capital appreciation from OXY’s last stock price of $71 as of August 31, 2022.

Future moves by Warren Buffett and Occidental Petroleum’s progress in terms of capital allocation initiatives are the main potential catalysts for a revaluation that could push the company’s stock up to $100.

In a August 19, 2022 CNBC news article, fund manager Cole Smead was quoted as saying that Warren Buffett “will likely continue to buy as much as he can get below $70 or $75 (current OXY stock price levels)” assuming that would like to (eventually) buy it (Occidental Petroleum) at 95 or 100 dollars. Smead’s comments on a potential $100 takeover bid for OXY in the future came after “the Federal Energy Regulatory Commission approved an application from Berkshire Hathaway (BRK.A) (BRK.B) of Warren Buffett to accumulate up to 50% of the capital of” OXY as reported by Looking for new Alphas on August 19, 2022. Recent revelations suggest that Berkshire Hathaway held a 20.2% stake in Occidental Petroleum as of early August 2022.

Berkshire’s past revelations about its initial stake and subsequent purchases in OXY have led to a sharp revaluation in its share price, and there’s reason to believe the same will happen in the future. Berkshire’s initial 10% stake in Occidental Petroleum was revealed in early March 2022, and OXY’s share price rose +30% from $46.79 on March 1, 2022 to $60.96 as of March 21, 2022. After Berkshire disclosed that its interest in OXY increased further to 16.3% at the end of June 2022, Occidental Petroleum shares rose +20% in the last two months (July and August 2022 ). It is clear that Berkshire intends to continue to buy shares of OXY in the future, as evidenced by the application to the Federal Energy Regulatory Commission mentioned earlier, and this will be a key catalyst for share price revaluation. for Occidental Petroleum.

Moving on to capital allocation, I noted in the previous section that OXY generated nearly $4.2 billion in free cash flow in the second quarter of 2022 alone. There’s a lot of things Occidental Petroleum can do with the huge cash inflows to create value for the company’s shareholders.

According to its Q2 2022 financial results presentation slides, OXY’s near-term capital allocation targets include $3 billion in buybacks and a $5 billion debt principal reduction for this year. Occidental Petroleum has made good progress in terms of share buybacks, having already spent $1.1 billion in buybacks as of August 1, 2022. OXY has done even better in terms of deleveraging, considering it has repaid up to 4, $8 billion in debt (as compared to its target of $5 billion) in the second quarter of 2022.

Going forward, a faster pace of debt repayment and more excess capital being returned to its shareholders are the main capital allocation drivers for Occidental Petroleum. It is reasonable to assume that OXY will be able to achieve a higher valuation as a shareholder-friendly company with lower leverage.

In the next section, I discuss what the future of Occidental Petroleum might look like, which confirms the idea that OXY shares can eventually trade up to $100.

What is the future of OXY shares?

Occidental Petroleum’s future is bright.

In terms of the company’s financial outlook, the market consensus financial forecast as obtained S&P Capital IQ indicate that OXY’s net debt will be reduced to approximately $1.4 billion by the end of fiscal year 2024. This translates to a very low net debt to EBITDA ratio or net leverage ratio of 0.08 times for Occidental Petroleum in fiscal year 2024.

At the same time, Wall Street analysts see OXY returning more capital to the company’s shareholders. As for dividends, consensus financial projections for OXY suggest quarterly dividends per Occidental Petroleum share will drop from $0.13 currently to $0.155 in fiscal 2024.

As I explained in the previous section, Occidental Petroleum should become an even more attractive name for investors in the future as a stock with a lower financial risk profile and a higher level of return on shareholder capital. raised.

As for Buffett’s future moves, I think it’s likely that Berkshire will make a buyout offer for Occidental Petroleum in the future.

A key factor to consider is that Berkshire Hathaway also holds a stake in Chevron Corporation (CVX), which is its fourth largest position at the end of Q2 2022, while Occidental Petroleum is Berkshire’s seventh largest position in its wallet. Another thing to note is that OXY and CVX are the two main players in the Permian Basin in terms of land holdings, and there will be opportunities for the realization of significant cost synergies in the event of a merger between the two.

As such, it’s not a stretch to assume that Warren Buffett would like to have full control of OXY at some point, and possibly push for a merger between Chevron and Occidental Petroleum at some point.

Is OXY stock a buy, sell or hold?

I rate OXY as a buy. I view better-than-expected progress on the company’s capital allocation initiatives (e.g. return on shareholder capital, deleveraging, etc.) and a potential takeover bid from Berkshire Hathaway as the main catalysts for revaluation to drive up Occidental Petroleum’s share price.

About Myra R.

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