Should You Buy or Hold Occidental Ahead of Q2 Earnings?

Occidental Petroleum Corporation OXY is expected to report an improvement in its top and bottom lines when it reports second-quarter 2024 results on Aug 7, after market close.

The Zacks Consensus Estimate for OXY's second-quarter revenues is pegged at $7.18 billion, indicating a 6.6% increase from the year-ago reported figure.

The consensus estimate for earnings is pegged at 77 cents per share. The Zacks Consensus Estimate for OXY's second-quarter earnings has decreased by 18.9% in the past 60 days. The estimate suggests year-over-year growth of 13.24%.

Image Source: Zacks Investment Research

Solid Earnings Surprise History

Occidental Petroleum's earnings beat the Zacks Consensus Estimate in three out of the trailing four quarters while lagging in one quarter, the average surprise being 11.45%.

Image Source: Zacks Investment Research

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for Occidental Petroleum this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. That is not the case here, as you can see below.

Factors Likely to Have Shaped OXY's Q2 Earnings

Occidental's second-quarter production volumes are expected in the range of 1.23 million to 1.27 million barrels of oil equivalents per day compared to the first quarter annual low of 1.17 million BOE per day. The sequential improvement in production volume in the second quarter is mainly due to the strong performance of its onshore assets, the completion of annual planned maintenance at Dolphin and the return of production in mid-April from the Gulf of Mexico outage.

Strong output from the Permian and Rockies is expected to have boosted performance in the quarter under discussion. OXY's performance is also expected to have been positively impacted by its routine flaring reduction initiatives.

Occidental's Chemical business is expected to have experienced modest price improvement and higher volumes post the usual period of seasonal subdued demand.

Strong cash flow generation allows Occidental to continue share buybacks, which are likely to have a positive impact on earnings. The repayment of outstanding debt might have reduced capital servicing costs. Also, it is expected to have boosted margins.

Price Performance and Valuation

OXY's shares have gained 2% in the past six months against the industry's decline of 0.6%.

Price Performance Chart (six months)

Image Source: Zacks Investment Research

Occidental's shares are somewhat expensive on a relative basis, with its current trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA TTM) being 5.92 compared with its industry average of 4.8.

Image Source: Zacks Investment Research

Other operators in the space, like ConocoPhillips COP and EOG Resources Inc. COP, are currently trading at a discount compared with Occidental Petroleum. EV/EBITDA TTM multiple of COP and EOG are currently pegged at 5.24 and 5.22, respectively.

Investment Thesis

Occidental Petroleum's strong domestic operation and focus on Permian resources have been beneficial for the company. The company's core development area in the Permian region has been recording solid results. Production from this region is expected to improve further from the current levels, courtesy of the new wells added in this region.

The company recently completed its large-scale asset divestiture program and utilized the net proceeds from asset sales and free cash flow to repay near and medium-term debt maturities. The company retired more than $10.5 billion in long-term debt and lowered its interest and financial expenses annually by $400 million.

Occidental's times interest earned ratio currently stands at 6.6, which indicates that the company has enough financial strength to meet its interest obligations.
However, exposure to commodity price fluctuation and a very competitive oil and gas industry are headwinds for the company.

Summing Up

Occidental's second-quarter earnings are expected to have benefited from strong production volumes coming from domestic operations.

Occidental's cash flow generation and ongoing initiatives to lower debts, strength in global operations and benefits from acquisition are expected to have boosted its performance.

However, its exposure to commodity price fluctuation and a very competitive oil and gas industry pose challenges.

Despite the headwinds, keeping this Zacks Rank #3 (Hold) stock in your portfolio is advisable, given its strong domestic operations, contribution from the chemical business and exposure to the prolific Permian Basin.

To read this article on Zacks.com click here.