Favorable growth and returns, but shares fairly valued versus peers - Goldman Sachs - October 25, 2007
What's changed
Occidental Petroleum (OXY) reported adjusted 3Q2007 EPS of $1.45, ahead of our $1.30 estimate and the $1.31 First Call consensus, with the positive variance versus our estimates driven by higher chemicals earnings and a lower tax rate. Production of 570 MBOE/d was lower than both our 589 MBOE/d estimate and the company’s 585-590 MBOE/d guidance range, though we think this is largely forgivable given several moving parts in the quarter including the ongoing ramp-up of the company’s Dolphin project, which importantly is still on track to reach full capacity early next year. Updated production guidance was consistent with our expectations. We have made modest adjustments to our EPS estimates and are introducing 2008 quarterly estimates.
Implications
We continue to have a fundamentally favorable view of Oxy, due to the company’s asset base, strong returns on capital and growth potential. While we recently downgraded Oxy to Neutral, we also recognize that the thesis behind our original recommendation of Oxy shares remains intact- namely, that Oxy’s leverage to crude oil prices, strong balance sheet and continued commitment to return cash to shareholders would position it well among the super-cap oils against the backdrop of our bullish crude oil view. Given Oxy’s recent performance and current valuation, however, we believe this is largely reflected in the shares and currently see more upside in shares of other integrated oils including Marathon Oil and Hess (both Buy-rated).
Valuation
OXY is trading near our $73 12-month target price (based on asset value, P/E and cash flow valuation analyses).
Key risks
Key risk is a sharp, sustained fall in crude oil prices. |
