OXY

[David Randolph]

OXY is an oil company with an earnings multiple of 7.36 and super fast growth. Even if oil declines $20 this company will still enjoy fat profits.

The stock is near an all time high, I bet it will make that move soon.

I'll buy OXY at today's open for the 3 Stocks on Fire Portfolio, 6.66% of capital as always.

[David Randolph]

I just saw that XOM is now the largest company in the world, with $372B in market cap, surpassing GE's $371B  It goes to show the importance of oil & gas these days.

Anyway, let me give you some data and analysis on OXY, the cash machine !

1. Profile

Occidental Petroleum Corporation (OXY). The Group's principal activity is to explore for, develop, produce and market crude oil and natural gas. The operations are carried out through two segments: Oil and Gas and Chemical. The Oil and Gas segment develops, explores for, produces and markets crude oil and natural gas. The Group's domestic oil and gas operations are located in Elk Hills and other smaller locations in California, the Hugoton field in Kansas and Oklahoma, the Permian Basin in West Texas and New Mexico and the Gulf of Mexico. The Chemical segment manufactures and markets basic chemicals, vinyls and performance chemicals. Basic chemicals include chlorine, caustic soda, potassium chemicals and their derivatives. The Group operates in the United States, Colombia, Ecuador, Oman, Pakistan, Qatar, Russia, the United Arab Emirates and Yemen and other countries. In 2004, the Group acquired Millennium Chemicals Inc.

2. Technical Analysis

2.1. Long Term Chart



As predicted, OXY closed yesterday at a new all time high.

2.2. Medium Term Chart



The medium term trend is bullish, showing higher lows and higher highs. I wonder if these oil stocks will ever trade at above market multiples? Right now they trade at deep discount to the market valuation, perhaps because investors think oil won't hold up so well in the future.

2.3. Short Term Chart



Nice move from $80 to $90. Will it continue to $100? Well, the trend is my friend, and the trend says «yes».

3. Fundamental Analysis

3.1. Number of Shares Outstanding



Yes, the company acts a bit like a trader, buys back shares when the stock price is depressed and sells some shares when the price is trending higher. Well, this isn't an attitude that I welcome, since it dilutes shareholder value.

3.2. Working Capital



OXY's balance sheet, exclusively considering the current ratio, is getting stronger year after year.

3.3. Revenues



Revenues are growing, billion by billion, since 2002.

3.4. EPS



EPS for 2005 is expected to come in at $9.79, and for 2006 and this is just an estimate, expectations are for $10.65 in EPS. This means the forward earnings multiple is just 8.53.

3.5. Net Margin



This is why I call OXY the «cash machine», look at the incredible growth in net margins 

3.6. Competition



Look at the difference between OXY's margins and its competitors.

4. General Overview

OXY has plenty of fundamental positives and technically it is trading at a new all time high. I also pretty much enjoy the company's high margins and deep discount earnings multiple.

There are two negatives, however. The company is selling some shares in the open market, diluting shareholder value a bit, or EPS would explode even further. The second, more important in this case, is the uncertainty relative to the future price of oil and gas. Nobody knows if it will tank again to $10 - $20 or if it will go to $100. I've been more certain in the past that oil will come back down soon ... I don't know, oil being a natural resource with an end, I don't know if this time it isn't different than in all other oil bull markets. One day it will be a very scarce thing, won't it? Also you got renewables to worry about.

But these are all very long term issues. At this point, I think OXY is a a very attractive play.

5. Trading Plan

I believe OXY will outperform the oil sector, due to its higher gross and net margins, coupled with below average P/E Ratio. I would like to hold it for the long term, since I suspect it can be a multi-bagger from corrent levels, and if the oil price goes even higher than $70, this stock will certainly advance a lot.

But I fear the oil price collapses. Does it make sense to fear this? How can I hold OXY for the long term due to its intrinsic caractheristics and yet protect myself to volatility in the oil price, which I can't predict?

I'll think about this for the next update, for now I'll continue holding OXY without reserves.

[Jimbo]

Update: January 11,2006

Occidental Petroleum Corp. (OXY) downgraded from buy to hold by AG Edwards.

[David Randolph]

Update: January 11,2006

Occidental Petroleum Corp. (OXY) downgraded from buy to hold by AG Edwards.

Yes Jimbo, AG Edwards seems like a trader, upgrading and downgrading OXY. They downgraded the stock at Jun 15, when it closed at $78.80. Then they upgraded on August 11th when it was trading at $83.65. Now they downgrade again at $90.47.

If history is any guide, they will upgrade again at $100 

I'll continue holding OXY.

[David Randolph]

OXY came down with the general market, now I'm losing about 1% on this position. I was prepared for some back and forward movements before a definitive bullish trend starts again.

[David Randolph]

I still think OXY is a very attractive play on the oil&gas field, but I can't consider it for long term purposes, because the company's market cap is already $36B, and I don't want anything on the Long Term on Fire Portfolio with more than $10B in market cap.

On a trading perspective OXY is still nice and poised to move higher.

[David Randolph]

OXY will release its 4th quarter earnings results on February 7th. Analysts are expecting the company to earn $2.79 a share on revenues of $4.27B. If the company were able to earn those $2.79 a quarter going forward, it would then have an earnings multiple of $91/$11.16 = 8.15, which is an attractive valuation (I understand why oil stocks have these attractive valuations, there is risk oil goes down a lot if a severe global economic slowdown occurs - but there is also risk of further upside on the oil price, if the global war for energy resources really unfolds).

I don't see why I shouldn't hold the stock until it releases earnings. With the oil price this high OXY continues to be a nice pick on the Stocks on Fire Portfolio.

[mmcmanus]

OXY has very nice free cash flow that has been moving up at a nice rate over the last 3 quarters.  Its also is operatiing in blue sky territory (when looking only out to 10 yr chart) So I see no resistance there as long as it holds above $89.80.  Oil may pull back some here and so may this stock (daily shows some resistance at it aprooaches $93 to $95 level).  Mike

[David Randolph]

OXY has very nice free cash flow that has been moving up at a nice rate over the last 3 quarters. Its also is operating in blue sky territory (when looking only out to 10 yr chart) So I see no resistance there as long as it holds above $89.80. Oil may pull back some here and so may this stock (daily shows some resistance at it approaches $93 to $95 level). Mike

Thanks for your post Mike, the stock closed yesterday at $89.34, so below your support level. Also, this stock doesn't fit the new 3 Stocks on Fire criteria to find good stocks to trade, because it is already a $36B market cap, and I'm looking for stocks under $10B in market cap.

Moreover, oils are coming down in Europe today because Repsol is halted in Spain, due to doubts about its proven reserves. Anyway, I feel I should sell OXY now before I'm losing 10 or 15% on this trade (at this time I have a slim profit of 0.6%). And that's what I'll do, sell OXY around the open.