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Elevator Pitch
My investment rating for Occidental Petroleum Corporation’s (NYSE:OXY) stock is a Hold.
My prior September 1, 2022 write-up for Occidental Petroleum focused on how the company’s “capital allocation plans and Warren Buffett’s potential actions” with regards to OXY’s shares.
I analyze Occidental Petroleum’s prospects in 2023 with this latest article. On the positive side of things, OXY has signaled that it will return a greater proportion of excess capital to the company’s shareholders in the coming year. On the negative side of things, Occidental Petroleum’s Permian production growth in the next year might disappoint the market.
Considering both the potential positives and negatives for OXY in 2023, I have decided to lower my rating for Occidental Petroleum from a Buy to a Hold, which I think is fair.
OXY Stock Key Metrics
Occidental Petroleum’s key metrics suggest that it was a mixed performance for OXY in the most recent quarter.
On one hand, it was encouraging that OXY’s cash flow generation for the third quarter of 2022 came in above analysts’ expectations.
At the company’s Q3 2022 earnings briefing, Occidental Petroleum highlighted that it delivered “$3.6 billion of free cash flow before working capital” for the most recent quarter. This represented a significant improvement as compared to OXY’s free cash flow of $2.3 billion for Q3 2021. OXY’s actual third quarter free cash flow turned out to be approximately +3% better than the sell-side’s consensus forecast, according to data sourced from S&P Capital IQ.
The company’s above-expectations free cash flow was the result of higher-than-expected operating cash flow (before working capital) and lower-than-expected capital expenditures. Specifically, Occidental Petroleum’s Q3 2022 operating cash flow (before working capital) was +1% above the market’s consensus projection, while OXY’s third quarter capital expenditures were -2% below the sell-side’s consensus estimate, as per S&P Capital IQ’s consensus data.
On the other hand, Occidental Petroleum’s Q3 2022 non-GAAP adjusted earnings per share or EPS wasn’t as good as what the market had anticipated earlier.
OXY’s non-GAAP EPS decreased by -23% QoQ from $3.16 in the second quarter of 2022 to $2.44 for the third quarter of this year. Moreover, Occidental Petroleum’s Q3 2022 adjusted EPS was around -1% lower than the sell-side analysts’ consensus projection.
As indicated in its Q3 2022 earnings press release, Occidental Petroleum’s lease operating expenses on a per BOE (Barrel Of Oil Equivalent) basis for its US upstream business increased by +28% YoY and +5% QoQ to $9.41 in the recent quarter. In other words, higher upstream operating costs led to an earnings miss for OXY in Q3 2022.
In the next section, I touch on both potentially positive and negative catalysts for OXY.
What Are Occidental Petroleum’s Catalysts To Watch For?
There are both positive and negative catalysts relating to Occidental Petroleum that investors should keep a close eye on.
The key negative catalyst for OXY is that the actual increase in Permian production in 2023 might fail to meet the market’s expectations.
Occidental Petroleum’s actual Q3 2022 Permian production of 523 kboe/d was at the lower end of the company’s earlier guidance in the 523-533 kboe/d range. Specifically, OXY attributed the weaker-than-expected Permian production growth in Q3 to “higher-than-expected third-party downtime” at its most recent quarterly investor briefing. Occidental Petroleum also mentioned at its Q3 2022 investor briefing that “we have revised our fourth quarter (2022) Permian guidance down slightly from the implied guidance we provided last quarter.”
It is noteworthy that one of OXY’s peers, ConocoPhillips (COP) noted at its Q3 2022 earnings call that “it’s prudent right now to keep (or expect) a steady amount of (production) activity (for Permian) going into next year (2023).” Separately, a November 7, 2022 Argus Media (energy-focused research firm) commentary also highlighted that “Exxon Mobil (XOM) and Chevron (CVX) are scaling back their most bullish growth expectations for this year from the top-performing US oil play (the Permian basin), which has been plagued by inflation and supply-chain bottlenecks.”
On the flip side, there are signs that Occidental Petroleum is very likely to achieve larger-than-expected share buybacks for next year, which will be a major positive catalyst for the stock.
OXY revealed in its Q3 2022 financial results presentation slides that it has already “completed >85% of $3B share repurchase program” as of early-November 2022. More significantly, Occidental Petroleum stressed at its recent third quarter results call that it expects to “have significantly more capital available to buy back shares” in 2023, and it guided that “any free cash flow that’s available next year will be allocated mostly to share buybacks.”
What Is The Forecast For 2023?
The sell-side’s 2023 consensus financial forecasts for Occidental Petroleum are aligned with my views regarding the positive and negative drivers for OXY next year.
Based on S&P Capital IQ’s consensus data, OXY’s topline, normalized net income, and free cash flow, are expected to decline by -12%, -25%, and -22%, to $32.9 billion, $7.5 billion, and $10.6 billion, respectively. As I discussed earlier, the 2023 growth expectations for Permian production are muted, and this will be one of the key factors resulting in a weaker set of financial results for Occidental Petroleum in 2023.
However, there is expected to be a big shift in Occidental Petroleum’s capital allocation priorities in the following year. The analysts see OXY’s dividend per share jumping by +50% to $0.75 for 2023 as per S&P Capital IQ data. I have also noted in the preceding section that Occidental Petroleum has expressed its intention to engage in more substantial share repurchases in 2023. This suggests that OXY will place a much stronger emphasis on shareholder capital return in the year ahead.
What Do Analysts Believe About Occidental Petroleum?
Wall Street analysts believe that the risk-reward for Occidental Petroleum is fair, which is the same as my current views about OXY.
The consensus sell-side rating for OXY is a Hold, and the average analyst target price of $76.62 implies a capital appreciation potential of +11% for Occidental Petroleum’s shares. A potential upside of +11% is insufficient to justify a Buy rating for Occidental Petroleum, as most investors will expect a one-year (typical timeframe for analysts’ ratings) return of at least 15%-20% for any potential investment candidate.
Is OXY Stock A Buy, Sell, Or Hold?
I have OXY stock rated as a Hold now, versus a Buy previously. Occidental Petroleum’s 2023 outlook is mixed, taking into account the key potential positive and negative catalysts which could materialize for OXY next year.
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