Calculated Moves And CrownRock Acquisition Propel Growth In Permian Portfolio

Key Takeaways

• Expansion through CrownRock's Midland Basin assets enhances Occidental Petroleum's portfolio, promising revenue growth and improved profitability via high-margin production.
  
• Strategic divestitures and operational efficiencies aimed at debt reduction and lowering production costs could favorably impact the company's net margins and financial health.
  
• Strategic divestitures, high debt levels, operational integration challenges, efficiency reliance, and low carbon venture risks create uncertainty for future financial health and growth.

Catalysts

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

• The addition of CrownRock's assets in the Midland Basin, which further strengthens Occidental Petroleum's portfolio and enhances its premier Permian portfolio with high-margin production and low breakeven undeveloped inventory, may contribute to revenue growth and improve profitability by leveraging subsurface expertise and workflows to generate maximum value.
  
• Strategic divestiture programs aimed at meeting debt reduction targets, coupled with robust organic cash flow driven by operational excellence, are expected to improve the company's financial health by directly reducing debt, potentially affecting net margins favorably.
  
• Achieving approximately 10% improvement in unconventional well costs through increased operational efficiencies and facilities optimization lowers production costs and can lead to enhanced net margins by decreasing the time to market and increasing free cash flow.
  
• Midstream business outperformance, particularly in domestic gas marketing, has realized significant pretax income above guidance, illustrating Occidental's ability to capitalize on market conditions and infrastructure advantages to drive earnings.
  
• Advancements in low carbon ventures, notably the construction of STRATOS, the first direct air capture facility, and securing sales agreements for carbon dioxide removal credits, position Occidental Petroleum to pioneer in the emerging market for decarbonization solutions, potentially opening up new revenue streams and contributing to long-term growth.

Assumptions

• Analysts are assuming Occidental Petroleum's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.6% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $5.03) by about August 2027, up from $3.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $7.0 billion in earnings, and the most bearish expecting $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, up from 14.1x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.4x.
• Analysts expect the number of shares outstanding to grow by 2.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Risks

• The strategic divestiture program, while progressing, introduces uncertainty regarding the expected tangible benefits and impacts on future revenue streams, net margins, and financial stability.
  
• Significant debt levels, despite aggressive reduction targets and plans, present a risk to the company's overall financial health, potentially impacting net margins and earnings should market conditions change or divestitures underperform.
  
• Operational integration challenges with the CrownRock acquisition could delay or reduce the expected capital efficiency and production uplift, affecting earnings and revenue growth prospects.
  
• Reliance on improvements in operational efficiencies and capital cost reductions to drive profitability may be jeopardized by unpredictable operational challenges or increases in service and material costs, impacting net margins.
  
• The strategy to leverage low carbon ventures and carbon capture projects like STRATOS faces execution risk and market adoption challenges that could affect long-term revenue and earnings growth if these initiatives do not scale or become commercially viable as planned.

Valuation

• The analysts have a consensus price target of $71.17 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 $85.0, and the most bearish reporting a price target of just $58.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $31.7 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $57.61, the analyst's price target of $71.17 is 19.1% 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.