Occidental Petroleum Corp.
Ticker (OXY)
Domonic Zarrini
Presentation Outline
• Portfolio Information
• Stock Discovery Process
• Sector/Industry Overview & Analysis
• Company Overview & Analysis
• Company News
• Earnings Analysis
• Valuation Analysis
• Recommendation
Current Portfolio Holdings
Stock Discovery Process
• Focusing on domestic Financial stocks
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Industry Classifications: Oil, Gas and Consumable fuels (Primary) (12233)
Index Constituents: S&P 500 Index (^SPX) (31)
Market Capitalization: (Latest) Ranks in the 1st-4th decile (13)
Forward P/E- Capital IQ (NTM): Ranks in the 3rd-7th decile (5)
Est. Annual EPS Growth – 1yr %: Ranks in the 2nd-4th decile (3)
Stock Discovery Process
• Apache Corp. (APA)
• Occidental Petroleum Corp. (OXY)
• Exxon Mobile Corp (XOM)
• ConocoPhillips (COP)
• Chevron Corp (CVX)
Sector Overview
• Largely mature industry
• Great competition and margin pressures
• Theoretically vast growth potential
• Easy to value firms
• Heavily interconnected industry groups
• Energy Sector rated to “OutPerform”!
Sector Overview
S & P 500, Sector, Sub-sector Chart
Company overview
• OXY is the largest producer of oil in Texas
• OXY is the largest producer of natural gas in California
• OXY is the number one company in Operating Income per BOE for 11
Consecutive years
• Ranked 13th in 10 year EPS Growth (25.7% per year) – Top 500
• OXY is ranked number 1 in “fortune most admired” crude oil
production companies
Company overview
• Q3 2014 record domestic oil production of 282,000 barrels per day
• Q3 2014 Permian Resources year over year quarterly oil growth in
excess of 26%
• Q3 2014 core income of $1.2 billion, or $1.58 per diluted share
OXY SWOT Analysis
Weaknesses
Strengths
Legal proceeding
Geographically Diverse Business
Overleveraged Acquisitions
Incremental Increase in Supply
Unsuccessful Acquisition Business Model
Strong performance by its subsidiaries like Oxychem in helps
drive the top line growth of the company
Opportunities
Increase in natural gas demand in the US Market can help
the company to drive top-line growth and strengthen the
revenue contribution from the US market
Strategic initiatives as the Al Hosn gas project at Abu Dhabi
(to develop one of the largest natural fields in the Middle
East) and a new Membrane Cell Chlor-Alkali plant in
Tennessee will help it diversify its portfolio further and bring
in higher revenues
Threats
Political Action
Windfall Tax
Exploration Risks common to drilling and other exploratory
activities can make the company incur significant losses
What Makes OXY Attractive?
• Management plans to spend cash on buying back stock and
increasing dividends 18%.
• Pays dividend of 2.88%
• 5 year dividend growth rate of 17.2% increased consecutively for 11
years
• Oxy will buy back 10% of outstanding shares while increasing
dividend in anticipation of a spinoff into 3 independent companies
What Makes OXY Attractive?
• 2014 OXY announces spinoff of its California Divison, doing so will
allow the company to focus on its core business.
• In Regards to declining oil prices, OXY is still profitable with prices
under $50
What Makes OXY Attractive?
• Next Generation shale technology yet to be used in fields:
• Automated Drilling
• MicroDrilling (allows faster deployment with smaller rig footprint)
• Big Data Analytics (Maximizes yields by tapping into the surprising volume of
data from complex shale operations)
• NanoTechnology (radically improving chemical formulations and safety)
What Makes OXY Attractive?
• Raising the Dividend is an important goal for
management. OXY’s Board agreed to raise
the dividend 2013 from $2.16 to $2.56 18.5%
increase
• Feb 2014 board allowed another 12.50%
increase in dividends of $0.72 a share
• Competitors of OXY cant not compete to
such increases (XOM, IMO, HESS)
What Makes OXY Attractive?
• Capital Expenditure (CAPEX) biggest user of cash in energy
companies.
• FCF = OCF – CapEx remainder from which DIV can be paid
• OXY forsee’s major jump in FCF in 2014
3 Factors that will drive jump of CF
• Improvement in drilling efficiencies
• MicroDrilling, NanoTechnology, Automated Drilling, Data Analytics
• CapEx Reductions
• Production Growth
Valuation – earnings & projected earnings
OXY
2012
2013
2014
2015
2016
EPS Normalized
$5.66
$7.32
$7.17
$7.56
$7.97
29.33%
-2.05%
5.42%
5.42%
EPS Growth
HES
2012
2013
2014
2015
2016
EPS Normalized
$5.11
$4.69
$3.45
$3.66
$3.88
-8.22%
-35.94%
6.00%
6.00%
2013
2014
2015
2016
$ 0.71
$ 1.02
$ 1.22
$ 2.10
43.66%
19.61%
72.13%
EPS Growth
COG
EPS Normalized
EPS Growth
2012
OXY
HES
COG
XOM
Dividend Growth Rate Forecast
Year
Value
g(T)
1
g1
9.22%
2
g2
10.18%
3
g3
11.14%
4
g4
12.09%
5 and there after
g5
13.05%
Intrinsic Value of OXY Share
Intrinsic Stock Valuation
Year
DIV
DPS Value
PV
16.32%
0
d0
2.56
1
d1
2.8
$2.41
2
d2
3.08
$2.28
3
d3
3.42
$2.17
4
d4
3.84
$2.10
5
d5
4.34
$2.04
5
TV(5)
150.04
$70.46
Intrinsic Value of OXY Share
$81.45
Current Stock Price
$85.23
Capital Asset Pricing Method
CAPM
Rate of Return
E(RM)
Beta OXY
RF
E(RM)
B(OXY)
Required Rate of Return
r(OXY)
2.76%
13.49
1.5
20.22
OXY Recommendation
• Impressive Future Cash Flows
• OXY 2014 appears to have growth drivers necessary to expand
• Efficient E&P
• Low cost producer allowing OXY to have lowest cost per barrel
permitting highest profit per barrel
• Room for growth!
• Undervalued, market realizing only half its value, potential
• RE BUY!!