High-return Assets And DAC Projects Will Secure Future Resilience

Key Takeaways

• Occidental's focus on efficient, high-return assets and operational improvements is boosting production, enhancing margins, and driving revenue growth.
  
• Strategic reserve increases and initiatives like DAC technology support long-term growth, sustainability, and attract new market opportunities.
  
• Exposure to oil price fluctuations, project delays, policy uncertainties, and high capital expenditure challenge Occidental's revenue, margins, and profitability.

Catalysts

Engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally.

• Occidental's focus on short-cycle, high-return assets and increased exposure in profitable basins like the Delaware, DJ, Midland, and Powder River Basins are expected to drive revenue growth, as they lead to higher production levels that exceeded guidance at 1.33 million BOE per day in 2024 and anticipate further oil volume growth in 2025.
  
• Operational efficiencies and cost reductions, such as a 9% reduction in lease operating expenses and a 12% reduction in well costs, have enhanced net margins and are projected to continue improving earnings, with a 7% further reduction in well costs expected in 2025.
  
• The significant increase in Occidental's proved reserve balance to 4.6 billion BOE in 2024, coupled with a strong reserve replacement ratio, supports long-term earnings growth and operational sustainability, offering robust future revenue streams at lower costs.
  
• The anticipated completion and subsequent operations of the Stratos and Battleground projects in 2025 and 2026, respectively, are positioned to improve cash flow and margins, particularly in OxyChem, through improved cost efficiency and product volume increases.
  
• The integration of direct air capture (DAC) technology within ongoing operations with expectations for carbon neutrality initiatives is likely to attract new market opportunities and enhance long-term revenue projections, as DAC advances support both enhanced oil recovery and future sequestration projects.

Occidental Petroleum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Occidental Petroleum compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Occidental Petroleum's revenue will grow by 3.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.9% today to 19.5% in 3 years time.
• The bullish analysts expect earnings to reach $6.0 billion (and earnings per share of $5.91) by about July 2028, up from $2.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, down from 18.2x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Occidental Petroleum Future Earnings Per Share Growth

Risks

• Occidental's exposure to fluctuations in oil and gas prices could significantly impact their revenue and net margins, as their performance is closely tied to these commodity markets.
  
• Delays or cost overruns in major projects like the STRATOS and Battleground could negatively affect cash flow and reduce anticipated earnings growth.
  
• The uncertainty surrounding government policies like the 45Q tax credits could impact the economic viability of their carbon capture initiatives, posing a risk to future revenues derived from this segment.
  
• High capital expenditure requirements, particularly for maintaining and expanding operations in regions like the Permian, could strain cash flows and reduce net margins if productivity doesn't increase proportionately.
  
• Increased competition and potential overcapacity in the U.S. onshore market might pressure prices received for oil and gas, thus impacting revenue and profitability.

Valuation

• The assumed bullish price target for Occidental Petroleum is $65.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Occidental Petroleum's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $30.6 billion, earnings will come to $6.0 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.1%.
• Given the current share price of $45.46, the bullish analyst price target of $65.0 is 30.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.