Hot Research: Occidental Petroleum Stock Could Reach $77 -- Barrons.com
DOW JONES & COMPANY, INC. 1:21 PM ET 3/15/2017
Symbol Last Price Change
OXY 64.979down +1.939 (+3.08%)
QUOTES AS OF 03:22:16 PM ET 03/15/2017
(The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Some of the reports' issuers have provided, or hope to provide, investment-banking or other services to the companies being analyzed. Share prices at the time the report was issued and the date of the report are in parentheses.)
Occidental Petroleum (OXY) By Credit Suisse ($62.88, March 14, 2017)
We upgrade Occidental Petroleum(OXY) to Outperform from Neutral. Our target price rises to $79 from $77.
Energy has performed poorly against the Standard & Poor's 500 this year after a decent performance off 2016 lows. While our U.S. strategist observes that near-term large-cap Energy valuations look expensive relative to the S&P 500, we believe Occidental is towards the low end of a reasonable net asset value range of $58 a share (at $50-a- barrel West Texas Intermediate (WTI)) to $86 a share at our $62.5-a-barrel WTI longer-term forecast. Occidental's good inventory of low-cost Permian reserves is not reflected in its valuation (nor for its Permian peers). If your portfolio does not have enough (Permian) cowbell, then Occidental's combination of 4.8% dividend yield plus headline 5%-8% growth looks attractive. Part of our call is that Energy, having underperformed thus far in 2017, is due a catch-up.
The upside to $86 a share would reflect a 15% bump in Permian well productivity and lower wells costs on Occidental's technology gains (our model currently assumes 15% higher total well costs in 2018 due to inflation). EPS increases slightly in 2017/2018/2019 to 49 cents/$1.31/$1.54, respectively, from 48 cents/$1.28/$1.50, respectively. The key risk would be lower oil prices caused either by a recession or another flip-flop from OPEC reverting back to a policy of maximizing current production.
Occidental has a differentiated competitive advantage in the Permian, which is already a low cost area for the industry. The company can further lower costs via its new logistics hubs and/or new technology (e.g., multilaterals, subsurface modeling, Oxy Drilling dynamics, big data). Occidental's inventory is not reflected in current valuations and continues to grow.
-- Edward Westlake -- Ben Combes -- Chandra Meenaga
Comments: E-mail online.editors@barrons.com
