Shares of Occidental Petroleum Corporation (OXY 4.07%) plunged 19.3% in October, according to data provided by S&P Global Market Intelligence, wiping away roughly $20 billion of the oil giant's market value. Weighing on the stock was its decision to walk away from an oil field in Qatar, as well as a double-digit sell-off in oil prices.
Crude prices tumbled more than 10% last month, marking the worst percentage drop in more than two years. That's after investors started growing concerned about rising oil production and the potential for a slowdown in demand, which could cause crude to once again begin filling up storage tanks. Those renewed worries weighed on most oil stocks since lower oil prices would cause their cash flows to decline.
In addition to the renewed turbulence in the oil market, Occidental Petroleum confirmed last month that it would no longer pursue a contract extension for the Idd El-Shargi North Dome Offshore Field in Qatar. The contract, which expires next October, entitles it to a share of the field's output. In 2018, Occidental expects to receive 51,000 barrels of oil equivalent per day from the agreement and generate around $300 million in free cash flow. However, given the major infrastructure investments required as part of an extension, the company estimates that it would have only generated $70 million in annual free cash flow in each of the next five years. That's why it won't pursue the extension and instead plans to reallocate the capital it would have invested into the field to other developments, which should replace the lost production and cash flow by 2020.
Occidental Petroleum's plunge last month seems excessive. While lower oil prices will cut into its cash flow, Occidental Petroleum recently achieved its breakeven plan, which will enable the company to run its business on $40 oil, well below its current mid-$60-a-barrel price. Meanwhile, the company believes it can quickly replace the lost output and cash flow from Qatar. Because of those factors, last month's sell-off makes Occidental Petroleum look like an even more compelling oil stock to consider buying right now.