3 Reasons Occidental Petroleum Stock Could Fall

Oil and gas exploration and production major Occidental Petroleum (NYSE: OXY  ) is having a great run lately. Production is ramping up, thanks to its premier asset footprint in some of the best oil fields in the United States, including the Permian Basin. This led to double-digit earnings growth in the last quarter.

Occidental Petroleum's share price has performed well, as you'd expect. However, no stock is completely without risk. In the energy world, things can (and often do) go wrong. In that light, here are three reasons why Occidental Petroleum stock could fall.

Declining oil prices
As an exploration and production company, Occidental Petroleum is highly dependent on supportive oil prices for growth. When these prices are favorable, revenue and earnings per share get a boost. The other side of this coin is that the company is vulnerable to a downturn in petroleum prices.

Recently, this has played out, enough that it is a concern going forward. The price of West Texas Intermediate crude in the United States in just a few weeks has fallen from over $100 per barrel to its current level near $93 per barrel.

That price of oil is below Occidental's average realized price. Last quarter, Occidental realized an average price of $97.48 per barrel in the United States. This development will affect Occidental's results this quarter, and the impact could be more significant if the trend continues.

Any production disruption in the Permian Basin
Occidental Petroleum has planted its flag in the Permian Basin in a big way. Of course, there's good reason for this, since the Permian Basin is one of the most productive oil fields in the United States. In fact, the U.S. Energy Information Administration said the Permian is one of only three domestic onshore oil fields that produces at least 1 million barrels of oil per day.

However, it's worth noting that Occidental Petroleum generated more than half of its oil production last quarter from the Permian. If there's any sort of disruption there, Occidental would be really exposed.

Other exploration and production companies, such as Anadarko Petroleum (NYSE: APC  ) , have more diversified portfolios. For instance, Anadarko holds onshore operations across the U.S. in fields such as the Eagle Ford and Marcellus shales. Anadarko is also active in the deepwater Gulf of Mexico and holds considerable interests in international developments in Algeria and Ghana. Moreover, Anadarko has built a large liquefied natural gas project in Mozambique, which holds a lot of potential.

This helps insulate Anadarko from unexpected events in any one area. Occidental Petroleum is doing just fine, to be sure, because the Permian is a hugely productive field. But being so dependent on one basin could backfire if things go wrong.

Increasing capital spending
Most oil companies are busy cutting capital spending in light of lackluster returns on new projects over the past year. Instead, they're allocating more capital to increasing cash returns to shareholders. Occidental isn't following suit. Rather, the company continues to allocate more capital into acquiring new acreage and developing existing projects.

This year, Occidental plans to spend $10.2 billion on capital projects. This is up 16% from the $8.8 billion spent last year. This approach could pay off if the new projects work out in the company's favor, but if that is not the case, investors will likely question the higher capital expenditures.

The Foolish takeaway
No company is a risk-free investment, and that's especially true in the energy space, where things can change quickly. Occidental Petroleum is highly dependent on oil prices, and is also overly reliant on one oil-producing area of the country. In addition, it is breaking from the mold of other exploration and production companies by significantly increasing capital spending this year.

These decisions could strike gold for the company if everything materializes as planned, but if not Occidental stock could hit a rough patch in the days ahead.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (3)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3077454, ~/Articles/ArticleHandler.aspx, 8/28/2015 6:45:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:05 PM
APC $70.94 Up +1.93 +2.80%
Anadarko Petroleum… CAPS Rating: ***
OXY $71.84 Up +1.28 +1.81%
Occidental Petrole… CAPS Rating: ****