So far in June, like most stocks, Occidental Petroleum (NYSE:OXY) has moved lower, even as the price of crude oil remains at elevated levels. Granted, crude oil has pulled back since climbing above $120 per barrel earlier this month, but the double-digit drop in OXY stock appears to be an overreaction to this and to other market uncertainties.
Instead of being a sign that things are topping out and it’s time to sell, you should view its latest price action a different way: as an opportunity to start building, or add to, a position in this oil and gas company.
Why? The market right now is focusing too much on the future price of oil and not enough on other catalysts that will help send it to higher prices. While up 100% so far this year at the time of writing, it has plenty more runway.
OXY Stock and the Next Move for Oil Prices
More bullish predictions of $150 or even $200 for oil prove remain to be seen. Having said that, there’s much to suggest oil prices could stay elevated over the next year. For instance, the current forecast from the U.S. Energy Information Administration (EIA) calls for West Texas Intermediate (WTI) oil to trade for an average of $93.24 per barrel in 2023. It may be a while before oil falls back to levels last seen at the start of 2022, which were around $75 per barrel. So, what could this mean for OXY stock?
For one, the company’s profitability stands to remain at levels well above its reported earnings in the preceding years, even if oil moves slightly lower. This is likely to enable it to maintain a valuation at or near current levels. The market has already heavily discounted future earnings, as seen in the stock’s low forward multiple of 5.9x.
That’s not all. Occidental Petroleum has two places it can put these elevated earnings to work. By doing so, it would give the stock long-term upside potential that doesn’t hinge completely on oil prices hitting new highs.
Two Non Oil-Price Catalysts for Occidental
OXY stock has two catalysts beyond just the possibility of crude oil prices continuing to surge. First, something that’s already playing out: the deleveraging of this company’s balance sheet.
Per FitchRatings, in the recent upgrade of its debt, Occidental Petroleum reduced long-term debt by $8.1 billion year-to-date. That’s on top of the $6.4 billion in debt reduction achieved in 2021. This reduces interest costs and increases cash flow. It also opens the door for increased dividends and share repurchases. All of this will have a positive impact on its stock price performance.
Second, something that could help move the needle in the long-term: its big move into carbon capture. The company plans to spend up to $1 billion to build a direct air capture (DAC) facility. Monetizing this technology through the sale of carbon credits, Occidental Petroleum Chief Executive Officer Vicki Hollub has said it “can […] be another value-adding business” for the energy giant.
Moving into DAC decarbonization provides it with another benefit: the ability to sell “net zero oil.” Like I discussed back in March, net zero oil could end up being in high demand as businesses look to stay in compliance with carbon neutrality regulations.
The Verdict on OXY Stock
Occidental Petroleum currently earns an “A” rating in my Portfolio Grader. Among the scores of stocks that have gone on sale lately, this is a key one to consider. At first glance, you may think that after more than doubling in the first half of 2022, it has topped out.
If oil prices fall you may think shares will, as well. Yet, besides the fact that oil prices have a good chance of remaining at elevated levels for longer than expected, long-term upside doesn’t hinge solely on crude oil going on another epic run.
Oil prices could slide a moderate amount more from here and the company would still be generating much higher earnings than it did just a few years prior. It’s putting these profits to work. Through its deleveraging and its clean energy efforts, there’s a lot in play that could enable OXY stock to move higher.
— Louis Navellier and the InvestorPlace Research Staff
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Source: Investor Place