Shares of Occidental Petroleum Are Skyrocketing - Can This Trend Continue?

Shares of oil & gas company Occidental Petroleum climbed 10.1% to a price of $71.44 -- 5.23% below its average analyst target price of $75.38. The average analyst rating for the stock is buy. This could indicate that there is more upside potential for this stock, assuming analyst targets are a reliable measure, which is debatable. OXY has already had a very strong run so far this year, outperforming the S&P 500 by 199.1% over the last year with a return of 195.6%.

Occidental Petroleum is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.

The price to earnings, or P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2022, the energy sector has an average P/E ratio of 8.37, and the average for the S&P 500 is 15.97.

Occidental Petroleum's trailing 12 month P/E ratio is 7.0, based on its trailing Eps of $10.17. The company has a forward P/E ratio of 8.6 according to its forward Eps of $8.3 -- which is an estimate of what its earnings will look like in the next quarter.

In contrast to earnings, gross profit margins are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack therefor. OXY has gross profit margins of 66.7%, which usually would indicate a strong competitive advantage, but in this case it is largely attributable to windfall profits due to soaring oil prices.

The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. . We can see the effect of these additional factors in Occidental Petroleum's levered free cashflow of $11,093,250,048.

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in OXY have received an annualized dividend yield of 0.4% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts).. Occidental Petroleum's P/B ratio of 3.7 indicates that the market value of the company is almost four times its book value. This is much higher than the average P/B ratio of the Energy sector, which stood at 1.36 as of the second quarter of 2022.

Since it has a very low P/E ratio, excellent profit margins, an analyst consensus of some upside potential, and strong cash flows, Occidental Petroleum is likely a fairly valued stock at today's prices, despite its inflated P/B ratio. We hope you enjoyed this overview of OXY's fundamentals. Before you reach your own decision, be sure to check the numbers for yourself, especially focusing on their trends over the last few years. And be sure to subscribe to our free newsletter!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.