Occidental Petroleum stock (NYSE: OXY) has faced challenges this year. The stock has declined by 9%, while the S&P 500 rose by 18%. This stark difference raises questions among investors regarding the reasons behind it. The explanation is straightforward: declining oil prices and significant debt are undermining investor confidence, which pulls the stock down despite the company’s solid operational performance.
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Why Is OXY in Focus Now?
The appeal of Occidental stems from its operations, discipline, and strong backing. The Permian Basin is a source of high-margin production due to faster and more cost-effective drilling. The company is prioritizing debt reduction over acquisitions, which helps stabilize cash flow. Increased efficiency has enhanced free cash flow, providing OXY with the financial agility to handle fluctuating oil markets.
However, the associated risks cannot be overlooked. Declining oil prices can rapidly diminish revenue, environmental liabilities remain a significant concern, and policy changes around fossil fuels can occur unexpectedly. Revenue has fluctuated across different quarters, which is typical for a commodity business.
Oil Price Backdrop
Looking ahead, average oil prices are predicted to range between $60 and $70 per barrel in 2025. However, OPEC+ has already disclosed plans to boost supply by 137,000 barrels per day starting in October, coinciding with a time when demand growth is slowing. This increases the likelihood of lower prices even as the consortium works to maintain market share amid a changing energy landscape.
How OXY Performs in Numbers?
Over the past three years, Occidental Petroleum (OXY) has experienced a revenue decline at an annual rate of -6.8%, with the most recent quarterly revenue dropping by 5.9% to $6.4 billion. Despite the downward pressure on revenue, the company remains fairly profitable, generating $5.5 billion in operating income over the last 12 months (20% margin), a cash flow margin of 44.7%, and $2.4 billion in net income (8.8% margin). On the balance sheet, OXY has $24 billion in debt compared to a market cap of $46 billion, resulting in a debt-to-equity ratio of 53%. Its cash reserves of $2.3 billion are modest when set against $84 billion in total assets, indicating a leveraged yet liquid position. For further information, see: OXY Revenue Comparison and OXY Operating Income Comparison
Downturn Resilience
Historically, Occidental has shown the ability to recover from market shocks, although the journey can be volatile. During the inflation surge in 2022, the stock dropped by 33% but bounced back within two months. In the 2020 COVID-induced crash, it plummeted 81% before fully recovering by March 2022. Even in the financial crisis of 2008, OXY fell 58% and only regained its footing by late 2010. The key takeaway is that the company does recover but often experiences significant swings.
Bottom Line
Occidental is regarded as a high-quality energy firm with robust operations in the Permian and an improving free cash flow. Nevertheless, fluctuations in oil prices, debt levels, and regulatory risks render it somewhat risky. While Occidental might not be suitable for every investor, those who are confident about an energy sector recovery and are comfortable with market variability may find this stock worthwhile to watch.
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