Petroleum and chemical producer Occidental Petroleum (NYSE:OXY) announced fourth-quarter results today that fell just short of analysts' estimates. Despite higher prices and demand across the board, the company posted adjusted earnings of $1.84 per share (below the $1.92 Wall Street estimate).
Oxy (which is a nickname even management uses) also announced that production increased by 3.5%. If that production increase seems small, investors should remember that most energy companies produce at a continuous level -- turning wells off or on is an expensive and time-consuming process, and most companies elect to run at full capacity. As a result, even when prices soar, there is little that a company can do to dramatically hike its production level. Coincidentally, this is why companies such as CarboCeramics (NYSE:CRR) can post such solid results during petroleum booms -- companies get anxious to squeeze every drop out of their properties to exploit high prices.
Looking ahead, there are reasons for optimism. Production from Oman has just begun, and the company is looking to get back into Libya now that the U.S. government has lifted sanctions. As Brian Gorman discussed last year, Oxy had at least 300 million barrels of oil lying beneath Libya's sands when the embargo went into effect. While that's not a huge amount of oil, in the absence of a new major discovery every little bit helps.
Oxy is not just a play on oil and gas; the company has a chemical business as well. Strong demand for products such as caustic soda and vinyl products pushed up sales by 81%. A little snippet of Oxy's conference call brings that demand into sharper focus -- prices for caustic soda have risen from about $115/ton a year ago to $300/ton, and the company expects another $10/ton price increase for the March quarter. While that's all well and good, total chemical sales are still only about one-third of the business, so oil is still king for Oxy.
Even though Oxy is a well-run company (as supported by a ROE of 25.9% and a ROA of over 11%), top-line growth has long been a challenge (revenue in 1994 was $9.2 billion, just 24% below 2004's amount). What's more, the trailing P/E of less than 10 times looks enticing, but analysts are generally expecting lower earnings for 2005. Consequently, this stock may be appealing to those who believe higher oil prices are here to stay, but those lacking a firm conviction on oil might do better to look for stocks with a little more sustainable punch in their revenue.
Fool contributor Stephen Simpson holds a CFA. He has no ownership interest in any stocks mentioned.
