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 (NYSE:OXY) ability to consistently manage positive free cash flow.
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 (NYSE:XTO) was the worst, with only two positive years of free cash flow. Next was Anadarko Petroleum (NYSE:APC), with four positive years. Apache (NYSE:APA) was slightly better, with five. And the closest to Occidental was EOG Resources (NYSE:EOG), with six positive. At the same time, Occidental has used its free cash flow to reduce debt and operate with a below-industry debt-to-capital ratio of 13.7%.
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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Fool contributor Matthew Crews does not have a financial position in any company mentioned. He welcomes your feedback -- really! The Motley Fool has a disclosure policy.
