We reiterate our Neutral recommendation on Occidental Petroleum Corporation (OXY).
Another Look – 1st Quarter Results
Occidental reported first quarter 2010 net income from continuing operations of $1.32 per share, below the Zacks Consensus Estimate of $1.35 but substantially higher than last year’s net income of 45 cents. Occidental’s better-than-expected performance was mainly driven by higher production volumes.
Revenues increased 55% year over year to $4.8 billion in the first quarter. Revenues for the quarter advanced over last year due to increased production and higher realized crude oil prices, partially offset by lower natural gas prices.
Future Prospects
We believe Occidental has successfully repositioned itself by divesting non-core assets and focusing its attention on the upstream business. The resulting portfolio of low-risk and long reserve-life properties provides the company a steady production-growth profile and an above peer-group crude oil leverage.
In our view, Occidental is poised for future growth driven by robust performance at its existing properties. The company continues to focus on improving its reserve base through a strong pipeline of projects. In the next five years, the company expects an annual production growth rate of at least 5% to 8% from existing properties.
Going forward, the company expects maximum growth to come from its stable domestic production, limited U.S. natural gas exposure and its Middle East growth potential. On the domestic front, the company expects to record at least 6% to 11% of production growth over the next five years. Internationally, production is expected to grow from an estimated 365 MBoe/d in 2010 to a range of 453- 486 MBoe/d in 2014.
Furthermore, we remain positive on the company’s solid financial discipline, with greater emphasis on efficient capital allocation. The company’s balance sheet remained strong with roughly $1.9 billion in cash on hand and $1.5 billion of available credit lines.
Through 2014, the company plans to spend roughly $27.5 billion towards its capital program, with 55% planned for U.S. projects and 45% for international projects. The company expects its capital expenditures for 2010 to reach the targeted $4.5 billion.
Maintain Neutral
Occidental is successfully building a compelling long-term growth profile through its discoveries in the U.S. and outside, and a relatively strong balance sheet.
However, the volatility of oil and gas prices together with the uncertainty regarding the successful completion of its growth projects continues to be a concern for the company’s future. Moreover, we believe the synergies of the company’s development projects and its strong cash flows have already been reflected in the company’s valuation, leaving little room for upside. Thus, we maintain our Neutral recommendation on Occidental.
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