UBS Downgrades Occidental Petroleum, Recommends 3 Other Oil Stocks

Occidental Petroleum Corporation OXY shares are up 68% in the last month, and the stock’s big run triggered a Wall Street downgrade on Tuesday.

The Analyst: UBS analyst Lloyd Byrne downgraded Occidental from Neutral to Sell and raised the price target from $10 to $12.

Related Link: Why BofA Securities Is Overweight Energy Stocks In 2021

The Thesis: In the downgrade note, Byrne said the company’s debt concerns have been mitigated, but its recent rally has carried the stock too far too fast based on its valuation.

“We believe OXY is now discounting $53-55/bbl WTI going forward (significantly above the forward curve), and we see more compelling better risk/reward elsewhere in the group,” the analyst said. 

Occidental investors should consider rotating to oil stocks with more compelling valuations, such as Canadian Natural Resources Ltd CNQ, ConocoPhillips COP and EOG Resources Inc EOG, he said. 

Despite the recent bounce in oil prices, Byrne said he does not anticipate Occidental being under 3x leverage until 2025. Occidental’s capital spending cuts have reduced the production outlook in 2021 and beyond, which UBS projects will weigh on long-term EBITDA and free cash flow.

In the meantime, Byrne said he expects Occidental’s Colombia divestiture to close as expected and said investors should expect additional asset sales in the near-term.

These deals could serve as bullish catalysts for the stock depending on their valuation, the analyst said. 

For now, however, he said any incremental FCF that Occidental generates will go to debt reduction.

Benzinga’s Take: It’s not often an analyst will downgrade a stock to Sell and simultaneously raise their price target by 20%. Yet Occidental has rallied from under $9 in late October to above $15 in just over a month’s time.