Occidental Petroleum: Don’t Get Fooled Again (NYSE:OXY)

Finished At The Top Of S&P 500 Gainers In 2022

Occidental Petroleum Corporation (NYSE:OXY) investors have had much to celebrate in 2022. After notching a 2022 total return of nearly 120%, OXY also claimed the honor of finishing at the top of the S&P 500 largest gainers, capping a marvelous year after a decade of underperformance (10Y total return: 2.4%).

Therefore, with 2022 done and dusted, could OXY continue on another rampaging run in 2023, even as macroeconomic headwinds are expected to intensify?

WTI crude oil (CL1:COM) futures have continued to struggle for upward momentum after losing their bullish bias in October. However, it has managed to hang on above its December lows, as oversold conditions likely attracted buyers to return.

Is China The Critical Factor In Lifting OXY Higher?

Energy bulls argue that China’s reopening could lift oil demand in 2023 after it passes its initial COVID resurgence phase. Moreover, Chinese President Xi Jinping also lifted that outlook as he raised hope of a return to growth in 2023, as he emphasized: “Everyone is holding on with great fortitude, and the light of hope is right in front of us.”

Fund managers are also sanguine about China’s long-term consumption and industrial prospects, as they expect its COVID opening wave to peak in the near term.

Therefore, China’s growth algorithm could lift energy’s structural outlook, even as it continues to underpin Russia’s oil exports. Hence, investors need to grapple with global macroeconomic headwinds and assess whether the potential liftoff from China’s reopening could be sufficient to mitigate the recessionary impact.

Moreover, we noted that NYMEX natural gas futures (NG1:COM) have already collapsed back below their October lows. We had already cautioned members in a July 2022 update articulating that natural gas prices are primed for a further downfall as we updated in a recent commentary:

Natural gas [prices] collapsed. Was it surprising? Members following our discussion on NG1 know that we have highlighted umpteen times it was due for a massive collapse. For example, see our warning in July 2022 and [another] in October. You don’t have to read the news to assess what’s “likely” to happen. For NG1:COM, the writing has been on the wall since July 2022. Yes, that’s even before those massive spikes in Europe in August/September. Market operators used these opportunities to prick the bubble in gas bulls. By the time you read the news in the media, it’s often too late. It’s like an “after the fact” thing. – Ultimate Growth Investing December 29 pre-market briefing

So, underlying prices in WTI crude and NYMEX natural gas futures have likely reflected the macroeconomic headwinds as the world adjusts toward a global recessionary environment.

But, has OXY’s valuation and price action reflected such weakness?

OXY Still Priced At A Premium

Note that OXY still traded at a premium against its oil and gas peers. According to S&P Cap IQ data, OXY’s NTM EBITDA multiple of 4.53x is still more than 22% over its peers’ median.

Analysts’ estimates are still optimistic about the energy industry’s growth prospects for 2023, with 63% maintaining buy ratings, the highest-ranked sector in the S&P 500. So with analysts still on cloud nine, investors also need to be more cautious about over-optimism.

In addition, Occidental is projected to post an adjusted EPS decline of -23.8% for FY23 as it deals with more challenging comps.

As such, with underlying energy markets continuing to face headwinds, we believe Occidental could stumble in attempting to replicate its 2022 performance. Hence, a further de-rating in the oil and gas stocks could hit OXY harder than its less expensive peers, given its premium.

Consequently, investors need to remain cautious about adding OXY even though it has pulled back from its recent highs.

Takeaway

We cautioned in our previous update, urging investors to use its November highs to take some exposure off the table. Accordingly, OXY has underperformed the SPX since our previous update, posting a total return of nearly -12% against the SPX’s 4% downtick.

With OXY entering oversold zones, we believe a near-term consolidation could follow, in line with its price action, as market operators look to attract buyers to buy the dips.

Hence, we move to the sidelines from here as we assess the strength of the expected consolidation first.

Rating: Hold (Revise from Sell)