The Best Oil Company You've Never Heard Of

The biggest of the biggest, Exxon Mobil XOM, announced third quarter earnings this morning. It was a decent report, as the world's largest oil & gas company reported quarterly revenues that were over $125 billion. Yet, just because it is the biggest, does not make it the best. That distinction might go to Occidental Petroleum OXY, which is highly levered to the price of oil, and reported third quarter earnings which blew out estimates. The Los Angeles, Ca.-based company reported third quarter earnings of $2.18 per share on $6.01 billion in revenues. Wall Street analysts had been expecting earnings of $1.95 per share on $5.70 billion in revenues. Shares are soaring this morning, up almost 3%, helped by a deal out of Europe, as well as the stellar earnings report. Occidental competes with the likes of Exxon, Conoco Phillips COP and Chevron CVX, yet Occidental offers one thing these oil behemoths do not. Growth. And lots of it. Last year, Occidental reported earnings of $1.47 per share on $4.90 billion in revenues. That means the company grew earnings 46% year-over-year, and revenues grew 22.6% year-over-year. For an exploration and production company valued over $70 billion, that is tremendous growth. You are not going to see that kind of revenue and earnings growth from the oil majors. Occidental also trades along with the price of oil. Oil looks like it's going to $100 per barrel oil, especially after Europe has started to really figure out some concrete plans to save the European Union. West Texas Intermediate oil is over $90 per barrel, and now that China has started to signal about doing something to help the economy, we could see $100 per barrel very soon. $100 per barrel oil is a psychological number that gets the media talking, although it does not slow consumption. However it does get people talking, but talk is different than action, and no action is good for Occidental. Occidental trades at an estimated 10 times 2012 earnings estimates, and sports a 2.2% dividend yield. For a company growing revenues at 22% year to year and earnings 46%, that does seem to be a bit on the cheap side. Yesterday, Goldman Sachs suggested buying straddles on Occidental going into earnings. The analyst, Arjun Murti, said that he saw 17% upside to his 6-month price target, and that buying straddles on the name would be a good way to gain exposure to oil shale in California. Occidental is growing extremely fast, and is highly levered to the price of oil, which looks to be in an uptrend. Very few people outside of Wall Street have heard of Occidental Petroleum, but with results like this quarter after quarter, it will definitely make people stand up and notice. ACTION ITEMS:

Bullish:
Traders who believe that oil will go higher might want to consider the following trades:

• Occidental is cheap on a valuation basis, if you believe the estimated earnings for 2012. Traders may want to consider positions in Occidental.

• This could also benefit names like Hess HES and Apache APA.

Bearish:
Traders who believe that Europe's plan will not really solve anything and take risk assets sharply lower may consider alternate positions:

• If oil goes lower, traders may want to look at going long Exxon or Chevron, which are less levered to oil, and shorting Occidental in a pairs trade. This provides income and some stability to a portfolio.
  
  

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.