Long Occidental Petroleum (OXY)

by Cylex12

TL;DR: Reduced liquidity risks, increasing oil prices, heavily discounted.

Occidental Petroleum ($OXY) is a heavily discounted oil company, with backing by major instititutional investors like Warren Buffet and Carl Icahn.

Breakeven Oil Price

OXY’s breakeven oil price is around $40 per barrel, ignoring OXY’s oil hedges which would further reduce the breakeven to $20-30 per barrel. On Friday, oil was trading at $39 per barrel. However, OPEC+ decided to extend oil supply cuts further into July, including some Setember deadlines for certain countries such as Iraq and Algeria. This will most definitely cause oil prices to rally to the mid $40’s for the short term, increasing OXY’s margins to generate positive cash flows.

Oil demand will also rise in the next few months, following the United States’ rapid reopening which began mid May. Payroll and unemployment data released last Friday reflect a recovering jobs market, with many previously closed businesses reemploying workers. This will increase economic activity in the U.S., further driving oil prices up.

www.wsj.com/articles/opec-finalizes-deal-to-extend-oil-output-cuts-11591456992

Strong Institutional Backers

Major instituational investors such as Warren Buffet and Carl Icahn both have major stakes in Occidental Petroleum, with Icahn even owning 10% of the company. Many funds are heavily invested in the growth and success of OXY, backing the company as a result. In mid 2019, Buffett helped finance OXY in their acquisition of Anadarko Petroleum, helping expand their oil ventures in the U.S. In May 2020, three of Icahn’s associates were elected to OXY’s board, expanding investor interests within the company’s management. With such strong backing, OXY has the resources to plow through any liquidity concerns.

Heavy Discount

OXY is heavily discounted relative to its peers, in part due to its significant financial leverage. This is in part due to their pre-COVID acquisition of Andarko Petroleum, mentioned earlier. With their high debt levels, OXY has faced many liquidity issues in the past few months, driving down their stock price.

However, OXY’s liquidity risks are mostly moot, due to many new developments in the company’s environment. One key driver in financial health has been the increasing oil prices, mentioned beforehand. Oil prices increasing past their breakeven has allowed the company to regenerate positive cash flows. Additionally, OXY is an asset-heavy company, with numerous valuable resources around the world. In liquidity crises OXY has the ability to sell off these assets, allowing them to resume their activities and pay off debt.

There are many other reasons why OXY can survive liquidity risks, including cutting capital expenditures, refinancing debt, etc. Unfortunately, these factors are not accounted for in articles on such risks, meaning the stock price of OXY is significantly undervalued. Leveraged companies generate the highest returns.

See chart for further info.

Disclaimer: I hold $46,000 worth of positions in Occidental Petroleum calls.

Proof: imgur.com/zDareMw

TL;DR: Reduced liquidity risks, increasing oil prices, heavily discounted.

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Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.