Occidental Petroleum (OXY 0.82%) is a large U.S. producer of carbon fuels. And yet there are material efforts afoot within the industry and outside of it to increase energy companies' exposure to cleaner alternatives.
This helps explain why Occidental has been talking up the carbon capture project it's working on. But don't let that news flow distract you: Occidental is and will long remain an energy producer. That has material implications today.
An interesting idea
As a company that produces carbon fuels, Occidental has its work cut out for it when it comes to dealing with the environmental impact of its business. The diehard ESG crowd would probably like to see the company pivot aggressively to alternative energy, but the reality is that oil and natural gas will remain vital parts of the global energy market for years to come. By some estimates, demand is likely to increase through at least 2040 and maybe even through 2050.
Image source: Getty Images.
A lot will depend on what governments and companies do to live up to their commitments to reduce greenhouse-gas production. Occidental wants to be a part of the solution, a fact that it has repeatedly highlighted with news releases around its 1PointFive business. This division is building a carbon capture facility that would help offset the impact of Occidental's energy production.
There are some pretty big caveats. For starters, carbon capture is really an untested technology. It's far from clear at this point whether or not Occidental can turn this into a profitable business. And second, it has only earmarked up to $600 million for this investment in 2023. (That figure could fall to $200 million if it can find additional financial partners.) By comparison, its oil and natural gas capital investment plan calls for spending of at least $4.3 billion.
Energy is still the king
In other words, Occidental is still a very long way from being anything close to a clean energy play. And given that its business is focused on energy production, it will remain highly dependent on the price of oil and natural gas when it comes to the revenue and earning lines of its income statement.
That has been a mixture of good and bad lately. For example, adjusted earnings in the first quarter of 2023 tallied up to $1.09 per share. That was down from the fourth quarter of 2022, when the company earned $1.61 per share. And this was down from the third-quarter's $2.44 and the second-quarter's $3.16. In other words, the company's financial results are going the wrong way.
The common theme here is that oil prices peaked in mid-2022 and have since been trending lower. The company's production has been relatively strong, but that isn't enough to make up for falling energy prices.
As long as oil prices continue to head lower, Occidental's biggest problem isn't cleaning up the atmosphere -- it's the impact of what will likely be an ongoing earnings decline. Energy prices are volatile, a fact that history suggests will remain the case in the future.
Higher energy prices would be a net benefit to Occidental's business, of course. However, for now, investors seem more worried about oil demand declines, driven by slowing global growth, than excited by a potential industry turnaround.
Even OPEC production cuts haven't been enough to calm investors' nerves. The big takeaway is that buying Occidental is a bet on the direction of energy prices, no matter how much the company tries to play up its clean energy bonafides.
The risks we take
Is Occidental worth buying? That depends on your view of the energy sector.
Even after material deleveraging (to clean up the balance-sheet mess left behind from an aggressive and, in hindsight, ill-timed acquisition), the company's debt-to-equity ratio is roughly three times as high as that of ExxonMobil and Chevron. This suggests that these two integrated energy giants are better positioned to deal with an industry downturn. Conservative investors will probably find either of those two energy stocks more attractive.
That said, if you believe energy prices are going to move higher again, then Occidental is probably a better call. The company is heavily focused on oil and gas production and likely to see a greater stock-price bounce amid rising commodity prices. That's basically what transpired during the energy rebound that followed the 2020 pandemic-led energy correction. (The successful effort to mend the balance sheet helped, as well.)
You just need to go in knowing that, if you're wrong about energy prices, you'll likely see a deeper drawdown with this relatively volatile stock. If you look at the company on a risk-adjusted basis, most investors will probably be better off elsewhere.
