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Occidental Petroleum (OXY) Hurt by Volatility in Oil Prices

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On Aug 29, 2016, we issued an updated research report on Occidental Petroleum Corporation (OXY - Free Report) . Occidental Petroleum’s focus on the Permian assets and a systematic capital investment plan are expected to boost the company’s performance going forward. However, stiff competition in the oil and gas space and commodity price volatility are primary concerns.

Recently, Occidental Petroleum reported second-quarter 2016 loss of 18 cents per share, narrower than the Zacks Consensus Estimate of a loss of 20 cents. However, the company had generated earnings of 21 cents in the year-ago quarter. Occidental Petroleum's total revenue came in at $2,558 million, lagging the Zacks Consensus Estimate of $2,700 million by 5.3%. Revenues also tanked 27.2% from $3,514 million a year ago primarily due to lower contributions from all three of its segments.

Occidental Petroleum follows a systematic capital investment program to boost reserves in the U.S. and the Middle East. Due to persistent softness in commodity prices, the company projects 2016 capital expenditure to be $3 billion, down nearly 50% from the 2015 level.

Despite a substantial reduction in capital investment, the company has maintained its 2016 oil and gas production growth outlook at 4–6% for production of 590,000–600,000 BOE per day. Production in the third quarter is expected to be between 600,000 and 605,000 BOE per day. We believe preserving liquidity without sacrificing production is an excellent effort on the part of the company.

Meanwhile, Occidental Petroleum’s focus on the Permian Resource assets is yielding solid results. On a year-over-year basis, production in the Permian Resources increased by 17,000 BOE per day to 126,000 BOE per day in the second quarter of 2016. In addition, operating expenses were down 27% in the second quarter.

Nonetheless, ongoing volatility in crude oil prices is a cause of concern for energy companies like Occidental Petroleum, which generate a substantial portion of their revenues from oil and gas operations. In the second quarter of 2016, the company’s total revenue went down 27.2% year over year despite a 10.3% improvement in production. There seems to be no respite from the low commodity price scenario in the near term as the crude oil glut still looms large. The ongoing volatility in commodity prices is preventing the company from realizing the full benefits of higher production of oil and gas.

Zacks Rank and Key Picks

Occidental Petroleum carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the Oils-Energy sector include Cloud Peak Energy Inc. , Devon Energy Corporation (DVN - Free Report) and Gulfport Energy Corp. (GPOR - Free Report) , each sporting a Zacks Rank #1 (Strong Buy).

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