STRATOS Project Launch Set To Transform Carbon Capture In 2025

Key Takeaways

• Occidental's enhanced production efficiency, strategic acquisitions, and integration of advanced technology may significantly boost margins, revenue, and long-term growth.
  
• Initiatives in carbon capture and increased reserve replacement highlight promising future revenue streams and sustainable production growth, supporting shareholder value.
  
• Occidental Petroleum faces revenue volatility due to fluctuating oil prices, increased capital expenditures, and potential setbacks in technology deployment and legal liabilities.

Catalysts

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

• Occidental's focus on increasing production efficiency and operational excellence, as demonstrated by lowering well costs by roughly 12% and the ability to rapidly ramp up operations with a 10% improvement in time to market, is expected to boost net margins and earnings.
  
• The strategic CrownRock acquisition in the Midland Basin, which outperformed financial and production expectations, enhances Occidental's access to high-quality unconventional oil and may significantly drive future revenue growth through increased production.
  
• The development and expected commercial operation of the STRATOS project, focusing on direct air capture (DAC) technology, expected to start in 2025, represents a potential future revenue stream and positions Occidental to benefit from carbon capture initiatives, impacting long-term revenue growth potential.
  
• The integration of advanced technology and increased focus on artificial intelligence within operations, such as improving supply chain management and reservoir characterization, may support increased operational efficiencies and higher profit margins.
  
• Increased reserve replacement with lower-cost production and a 230% all-in reserve replacement ratio in 2024 indicates potential for future sustainable production growth, which could lead to revenue stability and increased shareholder value.

Occidental Petroleum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Occidental Petroleum's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $4.05) by about March 2028, up from $2.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.2 billion in earnings, and the most bearish expecting $2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2028 earnings, up from 20.7x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 5.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.55%, as per the Simply Wall St company report.

Occidental Petroleum Future Earnings Per Share Growth

Risks

• Occidental Petroleum’s exposure to fluctuating commodity prices, such as lower realized oil prices impacting cash flows, can lead to revenue volatility and affect overall earnings.
  
• Increased capital expenditures, including a $7-$7.2 billion investment plan in 2025 and specific high outlays like the Battleground project, may strain cash flows and potentially reduce net margins if returns do not meet expectations.
  
• The company’s strategy to align its debt reduction with divestiture proceeds, and fluctuations in asset sales could directly impact debt levels, thus influencing net margins and shareholder returns.
  
• Potential setbacks in the deployment of new technologies such as the Stratos project or direct air capture could delay anticipated earnings growth and pressure long-term financial stability.
  
• Exposure to unfavorable legal outcomes, such as increased long-term environmental remediation liabilities can affect future profits and create unexpected expenses impacting net margins.

Valuation

• The analysts have a consensus price target of $59.004 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 $73.0, and the most bearish reporting a price target of just $47.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $29.9 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $49.01, the analyst price target of $59.0 is 16.9% 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.