CrownRock Integration And Low-Carbon Initiatives Will Increase Operational Efficiency

Key Takeaways

• Integration of CrownRock assets boosts operational efficiency, reducing costs and enhancing production, positively impacting revenue and margins.
  
• Advancements in low-carbon technology and strategic projects aim to drive future revenue and improve financial stability through debt reduction.
  
• Commodity price volatility, weather disruptions, and integration risks challenge Occidental Petroleum, potentially affecting revenue, earnings, and financial flexibility.

Catalysts

Engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, and North Africa.

• Occidental's integration of CrownRock assets has led to operational efficiencies and cost reductions, notably in supply chain management and water integration, which are expected to enhance production and improve cash margins. This will likely impact revenue and net margins positively.
  
• By enhancing well productivity and reducing costs through optimal geologic targeting and infrastructure utilization, Occidental aims to improve drilling efficiency and reduce lease operating expenses, potentially enhancing profitability and net margins.
  
• Ongoing advancements in direct air capture technology, such as the STRATOS project, are expected to lower operating expenses and increase operational reliability, positioning Occidental as a leader in the low-carbon market and potentially driving future revenue streams.
  
• Upcoming projects like the Battleground expansion in the OxyChem division are anticipated to generate additional cash flow and higher earnings, as seen with increased capacity slated for completion by mid-2026.
  
• Debt reduction efforts backed by strong operational cash flow and strategic divestitures bolster Occidental's balance sheet, reducing financial risk and potentially increasing earnings per share by lowering interest expenses.

Occidental Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Occidental Petroleum's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $4.4 billion (and earnings per share of $4.2) by about December 2027, up from $3.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.1 billion in earnings, and the most bearish expecting $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2027 earnings, up from 12.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 3.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Occidental Petroleum Future Earnings Per Share Growth

Risks

• Commodity price volatility poses a risk to Occidental Petroleum, as sustained low oil prices could negatively impact revenue and earnings. The company is particularly concerned about downside risk in oil prices for 2025.
  
• Hurricane-related disruptions and other adverse weather events can impact production levels and operational expenses, potentially affecting net margins if costs rise significantly.
  
• The integration of the CrownRock acquisition carries execution risks, such as realizing anticipated synergies and maintaining operational performance, which could impact earnings if these objectives are not met.
  
• The company's significant capital expenditure plans, particularly in the chemical and direct air capture businesses, require careful management to prevent overstretching financial resources, which could affect cash flow and debt reduction efforts.
  
• Occidental Petroleum's debt reduction goals are contingent on continued strong cash flow generation and successful asset divestitures. Failure to achieve these goals could limit financial flexibility and impact net margins or earnings.

Valuation

• The analysts have a consensus price target of $62.59 for Occidental Petroleum based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $89.0, and the most bearish reporting a price target of just $51.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $30.5 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of $48.47, the analyst's price target of $62.59 is 22.6% 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.