Why Occidental Petroleum Is A Better Bet Than Exxon, Chevron

May 28:

Good news for investors looking to buy energy stocks: On Wednesday, Oppenheimer made the case for buying refiners, and today Morgan Stanley’s Phil Gresh and John Royallinitiated Occidental Petroleum Corp. (OXY) with an Overweight rating and $85 price target.
Reuters
Oil storage tanks
Gresh and Royall write that Occidental as a good mix of defensive and offensive businesses, which they see driving production growth at a compound annual growth rate of roughly 45% in the four-year period ending in 2018 in a world of $70 oil in 2016 and beyond.
They write that the firm’s dividend seems safe, and that the company’s lower-than-average leverage gives it the flexibility to return cash to shareholders at a ‘best in class’ rate.
More highlights form their note:
Following the CRC spin in 2014, the OXY portfolio is more streamlined, with a good mix of defense (Upstream MENA/EOR, Midstream/Chems generate FCF) and offense (Permian Resources). In our base case scenario using ~$70/bbl Brent post-2015, we estimate a ~4.5% 2014-18E production CAGR, which is favorable versus peers.
We estimate that OXY has a flat production (sustainable) capex requirement of ~$3.5-4B. Given that the company expects to be FCF positive in its Upstream MENA and Permian EOR businesses for the foreseeable future, we estimate a ~$60/bbl Brent price requirement to cover the dividend on a flat production capex basis.
Top tier balance sheet, favorable return of capital. OXY has the best balance sheet in the peer group, at ~8% net debt to cap in 2015E (group average ~22%). Factoring in ~3-5% annual dividend hikes and $600mm in annual share buybacks, we see 20% of market cap returned to shareholders from FY15-18E (group average 17%) and net debt to cap of ~12% in 2018E (group average ~22%).
Gresh and Royall write that on a free cash flow basis, the stock looks attractive, trading at 2018 estimated sustaining FCF and dividend yields of 6.1% and 4.5%, respectively. They call Occidental their top pick in their U.S. coverage group that includes ConocoPhillips (COP),Chevron (CVX) and ExxonMobil (XOM).


Source: http://blogs.barrons.com/stockstowatchtoday/2015/05/28/occidental-petroleum-is-a-better-bet-than-exxon-chevron-jpmorgan/?mod=BOLBlog


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