Occidental Petroleum Corp. (OXY): Remains favorite super-cap oil and would add on further pullback - Goldman Sachs - July 24, 2007
What's changed
Occidental Petroleum (Oxy) reported adjusted 2Q 2007 EPS of $1.18, just ahead of our $1.13 estimate and the $1.11 First Call consensus projection. There were a number of moving pieces in the quarter in terms of asset acquisitions, sales, and swaps. Updated production guidance was consistent with our expectations. Our updated EPS for Oxy is as follows: $1.18 ($1.20 before) for 3Q 2007E, $1.27 ($1.24) for 4Q2007E, $4.61 ($4.55) for full-year 2007E, $5.75 (unchanged) for 2008E, $6.60 ($6.55) for 2009E, and $4.55 ($4.45) for 2010 normalized.
Implications
We have a favorable fundamental view on Oxy (Buy) owing to its strong returns on capital employed, free cash flow potential, E&P volume growth outlook, and crude oil leverage. We continue to prefer Oxy over other lower-beta super-cap oils, such as Chevron, ConocoPhillips, and Exxon Mobil (all are Neutral rated). While Oxy has traditionally been thought of as a "domestic integrated oil", we think its ROCE, ROCE volatility characteristics, and balance sheet strength compares favorably to many of theuper-cap oils. We are bullish on the outlook for crude oil prices over the remainder of 2007 and through 2008. However, given the strong rally in the sector year-to-date, we recognize that a further correction is possible, if not inevitable, and we would rather buy Oxy and the sector in general on a further pullback.
Valuation
Oxy is trading near our revised $61 ($58 before), 12-month target price (based on updated asset value, P/E and cash flow valuation analyses). However, we think additional upside could exist toward our $75 "high-end" value to the extent crude oil prices continue to surprise to the upside.
Key risks
Key risk is a sharp, sustained fall in crude oil prices. |
