Occidental Petroleum Corp. (OXY): Strong returns and resource base, but shares appear fairly valued - Goldman Sachs - April 25, 2008
What's changed
Occidental Petroleum reported adjusted 1Q2008 EPS of $2.20, ahead of the $1.98 both we and the First Call consensus forecast. Higher chemicals earnings (+$0.08) and a lower tax rate (+$0.04) together accounted for nearly half of the variance versus our estimate, with the remainder driven by higher E&P earnings. Total production of 611 MBOE/d was in line with our 612 MBOE/d estimate, while higher realized international gas prices drove most of the E&P earnings upside. The company also provided initial 2Q production guidance of 610-620 MBOE/d and slightly increased its 2008 capital budget to $4 billion from $3.8 to $3.9 billion previously. We have modestly boosted 2008-2012 EPS.
Implications
We continue to have a favorable view of Oxy given the company’s strong returns on capital, high-quality resource base, and leverage to our bullish commodity price outlook, all of which were evident in its solid 1Q results. However, following the successful ramp-up of the company’s Dolphin project, Oxy’s production growth outlook slows meaningfully as we look to 2009 and beyond. Given Oxy’s strong position in the Middle East and cash flow generation potential we are less concerned about its less visible growth outlook, though believe that some combination of favorable project announcements, select acquisitions, or exploration success will likely be necessary to achieve a mid-single digit long-term volume growth rate. We currently see a more favorable risk/reward in shares of ConocoPhillips (Conviction Buy) among integrated oils and Valero Energy (Conviction Buy) among refiners.
Valuation
Oxy shares currently trade 5% above our unchanged $78, 12-month target price, which is based on asset value, P/E and cash flow valuation analyses.
Key risks
Key risk is sustained lower commodity prices. |
