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We have maintained our Neutral  recommendation on Occidental Petroleum Corporation (OXY - Analyst Report), as the company faces pricing pressure across its product line, cost overruns, and interruption in development and production activities related to political instability in Latin America.

However, we have identified a few positive indicators that might mitigate these negatives. These positives include Occidental Petroleum’s strong balance sheet and its presence in the Middle East, along with its mature domestic asset bases.

In the second-quarter 2012, Occidental Petroleum’s earnings were higher than the Zacks Consensus Estimates,  while revenue missed. Both revenue and earnings were below year-ago numbers due to lower contribution from its operating segments, and lower pricing of oil, natural gas and natural gas liquids.

Occidental Petroleum is a company with a strong balance sheet, a steady capital investment program and high operational efficiency. We expect the company to generate steady production growth in the coming quarters with its diversified asset base in different geographical territories. This will enable Occidental Petroleum to strengthen its operational performance while enhancing its financial flexibility.

On the negative side, Occidental Petroleum is a crude oil-levered organization with no refining operations. The company’s over-dependence on  the movement in crude oil prices is an important threat for its future financial performance.

In addition, political instability and natural calamities are also a vital challenge to the oil and gas industry. The companies operating in this sector often face a major risk of damage to their oil exploration and production infrastructure.

Despite facing several challenges, Occidental Petroleum has successfully repositioned itself by divesting its non-core assets and focusing on the upstream business. The resulting portfolio includes low-risk and long reserve-life properties that provide a steady production-growth in the future.

Zacks Consensus Estimates call for $1.61 in the third quarter and $6.91 for full-year 2012. Occidental Petroleum Corporation currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

Los Angeles-based Occidental Petroleum Corporation along with its subsidiaries engages in the exploration, development, production and marketing of crude oil, natural gas liquids and natural gas. The company has operations in the United States, Middle East/North Africa and Latin America. The company competes with ConocoPhillips (COP - Analyst Report).

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