Is Occidental Petroleum Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Occidental Petroleum (NYSE: OXY  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Occidental's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Occidental's key statistics:

OXY Total Return Price Chart

OXY Total Return Price data by YCharts

Passing Criteria

Three-Year* Change

Grade

Revenue growth > 30%

44.9%

Pass

Improving profit margin

(16.0%)

Fail

Free cash flow growth > Net income growth

(68.6%) vs. 21.7%

Fail

Improving EPS

22.2%

Pass

Stock growth + 15% < EPS growth

17.6% vs. 22.2%

Pass

Source: YCharts. * Period begins at end of Q1 2010.

OXY Return on Equity Chart

OXY Return on Equity data by YCharts

Passing Criteria

Three-Year* Change

Grade

Improving return on equity

(12.8%)

Fail

Declining debt to equity

115.1%

Fail

Dividend growth > 25%

68.4%

Pass

Free cash flow payout ratio < 50%

127.6%

Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we're going
Occidental could be doing a little better today, as it's only mustered four out of nine possible passing grades. A big source of that weakness is the company's falling free cash flow, which has diverged markedly from its net income over the past two years, and which may not be able to support its current dividend payouts if this trend continues. Will Occidental be able to move ahead, or are rising drilling costs going to undermine its long-term potential? Let's dig a little deeper to find out.

Occidental plans to sell some assets in the Middle East, Asia, and North Africa to repurchase shares in 2014. The total estimated assets are worth $25.7 billion, with total production capacities of approximately 270,000 barrels of oil equivalent per day. Despite these divestitures, Occidental retains significant assets under development or in current production. Its Permian holdings produced roughly 150,000 barrels per day at the end of last year.

Qatar Petroleum and Occidental's Qatari subsidiary are also moving forward with a development plan for a major Qatari offshore field. This plan, first devised in the mid-90s, involves drilling over 200 wells, and also requires the installation of facilities required to support the additional wells. The development activities are expected to necessitate investments of over $3 billion. The work has already begun, and will add about 100,000 barrels per day to Occidental's bottom line over the next six years.

Investors might be in for some upheaval beyond the major asset sales, as CEO Steve Chazen has made some noise about breaking the company up into smaller parts. The company is somewhat in the middle of the pack valuation-wise, which indicates that investors see some growth, but not much, when compared to its peers. Splitting up the company could drive gains as each sector will be freed for more aggressive moves, but it also poses a bit of a risk -- the energy economy is littered with the corpses of smaller oil and gas drillers who pushed too far, too fast just before prices moved in the wrong direction.

Putting the pieces together
Today, Occidental has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 29, 2013, at 10:28 PM, Mayvau wrote:

    With the political winds shifting in Mexico as to the future of Pemex, Oxy should seriously consider a reverse merger with Pemex. The deal would be predicated on the near 3 to 5 year term ability of upper Oxy management to cut the massive waste in the Pemex structure. An outside core group could do it much easier than long entrenched insiders.

    Oxy's North American fields are very close to Mexico. Oxy's current and former skill in offshore could serve Pemex well in the also near future in the Gulf of Mexico. Finally the asset sales in the MENA and Asia could go a long way towards financing such exploration and upgrades to the Pemex well head to market corp structure.

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