What will oil cost tomorrow -- more or less? How about in three to five years? From what I have seen, analysts are estimating a barrel of oil in 2010 to cost anywhere from $50 to $150. And that's only what I have seen; I am sure the actual range is even wider.
The problem is that these estimates are about as useful as using a crystal ball to determine oil prices. It doesn't seem like a prudent way for an investor to value an oil-and-gas company, let alone for an oil-and-gas company to determine its own capital budget. But all of that the uncertainty makes me all the more impressed with Occidental Petroleum's
With third-quarter operations completed, Occidental continues its success in free cash flow generation, which I roughly estimate at $933 million for the three-month period. As for other key results for the quarter, revenues rose 17% and benefited from an increase in production, from 516,000 barrels of oil equivalent per day in Q3 2005 up to 587,000 in Q3 2006. Revenues also got a boost from an increase in the net realized price of oil at $60.52, up from $55.97 in Q3 2005. Net realized gas prices, however, did fall to $6.33 per mmcf (million cubic feet) from $7.09 mmcf in Q3 2005.
On the whole, core earnings, a non- GAAP apples-to-apples comparison, were up 15% quarter over quarter. On the balance sheet, we see that long-term debt decreased slightly and management repurchased 6.6 million shares at an average cost of $47.98.
Getting back to long-term results, Occidental has managed positive free cash flow for eight out of the past 10 years. This is impressive when compared with some of Occidental's peers. XTO Energy
Finally, using a crude valuation metric, enterprise value-to-EBITDA, shows Occidental trading at the lower range of its peers at 4.1. Anadarko has the lowest measure at 4 and XTO the highest at 5.5. Combining a low relative valuation, consistent free cash flow generation, and a strong balance sheet makes Occidental a compelling investment story.
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