Deep Dive into OXY -- Are These Shares Fairly Valued?

Occidental Petroleum (OXY) stock climbed 0.8 % this afternoon. According to our metrics, the company seems undervalued at today's prices. In the below analysis, we will put Occidental Petroleum's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

Occidental Petroleum Corporation, together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, North Africa, and Latin America. The large-cap Energy company is based in Houston, United States and has 11,973 full time employees.

OXY's P/E Ratio Is Better Than the Sector Average

Compared to the Energy sector's average of 7.54, Occidental Petroleum has a trailing twelve month price to earnings (P/E) ratio of 6.6 and an expected P/E ratio of 10.4. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $8.75 and $5.53 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Occidental Petroleum's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Occidental Petroleum Has a Negative Rate of Expected Growth

P/E ratios are falling out of favor as a means of valuing stocks for a number of reasons. Earnings are subject to manipulation, and the P/E ratio is static in time, in the sense that it doesn't take into account expected long term growth of the company. Although estimated long terms growth rates are just as easily manipulable as earnings, dividing Occidental Petroleum's P/E ratio by its expected growth rate can tell us the relative market valuation of the company in relation to expected earnings growth.

The resulting metric, called price to earnings growth (PEG) is -0.72 for Occidental Petroleum. Since the PEG ratio is negative and the company's reported earnings per share are positive, we can deduce that the company's expected growth rate is negative. Needless to say, this is a red flag for investors with a long term horizon.

OXY Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Occidental Petroleum, the P/B value is 2.52 while the average for the Energy sector is 1.68.

Investors Stand to Gain from OXY's Cash Flows

Occidental Petroleum has strong cash flows. With a coefficient of variability of 107.8% and an average growth rate of 116.6%, the company is effectively turning its revenue into cash. We calculate Occidental Petroleum's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a -10.0% rate, versus 23.6% for operating expenses:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 16,810,000 -4,350,000 12,460,000 66.58
2021-12-31 10,253,000 -2,773,000 7,480,000 849.24
2020-12-31 3,842,000 -3,054,000 788,000 39.22
2019-12-31 7,203,000 -6,637,000 566,000 n/a

Occidental Petroleum Is Not a Profitable Business

If you are looking to make OXY a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Occidental Petroleum's management may be able to make the business profitable in the future.

Occidental Petroleum's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-12-31 36,634,000 18,989,000 48.17 59.29
2021-12-31 25,956,000 18,106,000 30.24 332.62
2020-12-31 17,809,000 16,565,000 6.99 -76.54
2019-12-31 20,393,000 14,318,000 29.79 n/a

Occidental Petroleum's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 36,634,000 3,980,000 37.3 107.57
2021-12-31 25,956,000 3,185,000 17.97 354.53
2020-12-31 17,809,000 2,502,000 -7.06 -151.16
2019-12-31 20,393,000 3,260,000 13.8 n/a

Occidental Petroleum's cost of revenue is growing at a rate of 7.3% in contrast to 5.1% for operating expenses. Sales revenues, on the other hand, have experienced a 15.8% growth rate. As a result, the average gross margins growth is 12.8 and the average operating margins growth rate is 28.2, with coefficients of variability of 58.6% and 117.4% respectively.

We See Mixed Market Signals Regarding OXY

Occidental Petroleum has an average rating of buy and target prices ranging from $93.0 to $50.0. At its current price of $57.66, the company is trading -18.32% away from its target price of $70.59. 9.7% of the company's shares are linked to short positions, and 82.4% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Berkshire Hathaway, Inc 24% 211,707,119 $12,207,053,446
2023-03-31 Dodge & Cox Inc 10% 92,156,069 $5,313,728,064
2023-03-31 Vanguard Group, Inc. (The) 7% 59,473,542 $3,429,250,321
2023-03-31 Blackrock Inc. 5% 47,416,283 $2,734,027,573
2023-03-31 State Street Corporation 5% 46,942,316 $2,706,698,589
2023-03-31 FMR, LLC 3% 26,152,243 $1,507,940,921
2023-03-31 Geode Capital Management, LLC 1% 13,039,195 $751,841,274
2023-03-31 Morgan Stanley 1% 8,853,348 $510,484,922
2023-03-31 Northern Trust Corporation 1% 8,621,171 $497,097,573
2023-03-31 Dimensional Fund Advisors LP 1% 7,823,268 $451,090,407
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.