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Valuation: Occidental Petroleum (OXY) is Defensive but Overvalued

moneyCompany Profile (obtained from Google Finance): Occidental Petroleum Corporation (Occidental) conducts its operations through various subsidiaries and affiliates. The Company operates in three segments: oil and gas segment; chemical segment, and midstream, marketing and other segment. The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas. The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls. The midstream, marketing and other segment (midstream and marketing) gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power. It also trades around its assets, including transportation and storage capacity, and trades oil, NGLs, gas and other commodities. The segment also invests in entities that conduct similar activities. On December 31, 2012, it acquired Eagle Ford Shale.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $78
MG Opinion Overvalued
Value Based on 3% Growth $93
Value Based on 0% Growth $55
Market Implied Growth Rate 3.09%
Net Current Asset Value (NCAV) -$18.25
PEmg 14.68
Current Ratio 1.35
PB Ratio 1.78

Balance Sheet – 9/30/2013 

Current Assets $11,938,000,000
Current Liabilities $8,842,000,000
Total Debt $6,961,000,000
Total Assets $69,437,000,000
Intangible Assets $0
Total Liabilities $26,647,000,000
Outstanding Shares 806,060,000

Earnings Per Share – Diluted

2013 (estimate) $6.90
2012 $5.71
2011 $8.16
2010 $5.61
2009 $3.59
2008 $8.33
2007 $6.05
2006 $5.15
2005 $6.45
2004 $3.25
2003 $2.06
2002 $1.56

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $6.44
2012 $6.24
2011 $6.45
2010 $5.64
2009 $5.74
2008 $6.50

Conclusion:

Occidental Petroleum is a solid company based on its financial history.  The company passes all of the requirements for the Defensive Investor, except for the current ratio requirement.  As a result, the company is by default also suitable for the Enterprising Investor.  The company’s earnings have fluctuated significantly from year to year, but the overall trend is one of slow growth.  From a valuation standpoint, the market is currently implying a growth rate of 3.09%, which is a little higher than what’s been seen during the historical period we’ve reviewed.  As a result, based on the historical achievements of Occidental Petroleum, the market price seems slightly overvalued right now.  However, Defensive Investors and Enterprising Investors alike should keep the company on a watch list to see if the price becomes a little more attractive.  When it does, those investors should feel comfortable conducting further research to determine whether Occidental Petroleum is right for their individual portfolios.

What do you think?  Do you agree that Occidental Petroleum is overvalued?  Is the company suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Nucor at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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