Introduction
The American company Occidental Petroleum Corporation, frequently referred to as Oxy, is involved in global hydrocarbon exploration. It primarily operates in a number of industries, including the chemical and oil and gas sectors (Oxy, n.d.a). Around the world, particularly in the Middle East, Africa, and Latin America, Oxy manages the highest-ranking energy and chemical assets (Oxy, n.d.a). The corporation established a sizable infrastructure of globally interconnected activities that provide dependable energy and necessary goods over the course of its 100-year history (Oxy, n.d.a).
Oxy considers it its duty as a global leader in the energy industry to actively pursue a sustainable, long-term approach to carbon management (Oxy, n.d.a). The president and chief executive officer of Oxy is Vicki Hollub, who joined the board of directors of Oxy in 2015 (Oxy, n.d.a). Considering the geopolitical and commodity price and demand risks, Occidental Petroleum’s stock is still undervalued and can be projected to grow, meaning it is worth buying.
Financial Ratio Analysis
Current Ratio
In order to analyze Occidental Petroleum, it is crucial to compare the firm’s results to those of its peers in the same industry. The peer of Occidental Petroleum in the gas and oil industry is Chevron Corporation, which is an American transnational energy company. First, liquidity ratios should be considered. The current ratio can be used to determine the financial health of the company and whether it has enough cash (Franklin et al., 2019). Usually, a ratio above 1.5 is considered sufficient. After reviewing the results of Oxy and Chevron in Table 1 and Table 2, it is obvious that the latter is in a better position and has more cash to ensure its liquidity.
Table 1 – Current Ratio of Occidental Petroleum.
Source: Oxy, 2022.
Table 2 – Current Ratio of Chevron Corporation.
Source: Chevron, 2022.
Return on Assets (ROA)
Another measure, Return on Assets, used in analysis comes from profitability ratios. ROA is an indicator of business efficiency and shows how effectively the company converts its assets into income (Franklin et al., 2019). Evidently, the higher the metric result, the better (Franklin et al., 2019). Here, as seen in Table 3 and Table 4, Oxy has a better profitability position, experiencing a change of 490% in one fiscal year, while Chevron only had a change of 112%.
Table 3 – ROA of Occidental Petroleum.
Source: Oxy, 2022.
Table 4 – ROA of Chevron Corporation.
Source: Chevron, 2022.
Return on Equity (ROE)
ROE is an additional metric that comes from profitability ratios. The given ratio is crucial since it demonstrates the efficiency of investments (Franklin et al., 2019). Table 5 and Table 6 show, once again, a more favorable position of Oxy. Having similar results in the fiscal year of 2021, Oxy nearly tripled its results. Meanwhile, Chevron’s results only doubled during the same period.
Table 5 – ROE of Occidental Petroleum
Source: Oxy, 2022.
Table 6 – ROE of Chevron Corporation.
Source: Chevron, 2022.
Debt-to-Equity Ratio
Another category of financial ratios is solvency ratios, including Debt-to-Equity and Debt ratios. The significance of these metrics is that they allow an investor or other shareholder to gain deeper insights into the company’s long-term financial stability and ability to meet long-term debt obligations (Franklin et al., 2019). As for the Debt-to-Equity ratio, the lower result is preferred since it demonstrates lower debt (Franklin et al., 2019). As seen in Table 7 and Table 8, both companies were successful in reducing their financial burdens.
Table 7 – Debt-to-Equity Ratio of Occidental Petroleum.
Source: Oxy, 2022.
Table 8 – Debt-to-Equity Ratio of Chevron Corporation.
Source: Chevron, 2022.
Debt Ratio
As for the Debt ratio, one might use the metric to see whether the company has more debt than assets. Evidently, the bigger the ratio, the bigger the debt, meaning that lower results are preferred (Franklin et al., 2019). Table 9 and Table 10 demonstrate that both Oxy and Chevron made efforts to reduce their debt to focus on growing assets to invest in further operations.
Table 9 – Debt Ratio of Occidental Petroleum.
Source: Oxy, 2022.
Table 10 – Debt Ratio of Chevron Corporation.
Source: Chevron, 2022.
Asset Turnover Ratio
Lastly, efficiency ratios must be taken into consideration when conducting a financial analysis. Asset turnover ratio can be used to determine the effectiveness of assets held by the company, with a higher ratio indicating a more effective use (Franklin et al., 2019). Here, although Oxy has a lower result than Chevron, its percentage change is 0.6, while Chevron’s is 0.5. Thus, Oxy has a better performance in terms of asset turnover.
Table 11 – Asset Turnover Ratio of Occidental Petroleum.
Source: Oxy, 2022.
Table 12 – Asset Turnover Ratio of Chevron Corporation.
Source: Chevron, 2022.
Based on the results of Occidental Petroleum’s ratio analysis, one can identify potential strengths and weaknesses. For example, the first strength of the company is its profitability, as seen from ROA. The metric suggests that the company is effectively utilizing its resources to generate profits.
Another result, in terms of ROE, indicates that Oxy is efficient in generating profits for its shareholders. Finally, Debt-to-Equity Ratio illustrates a conservative capital structure of the organization and that, instead of relying on debt, the company finances its growth through equity. Nevertheless, there are specific weaknesses that Oxy must address. For instance, a current ratio of 1.1 is indicative of the fact that Oxy has a relatively low liquidity position.
Although the organization has a significant amount of assets, it might only be sufficient for short-term obligations. Similarly, its Debt Ratio shows that an increase in debt can lead to financial risk and interest expense. Finally, while the asset turnover ratio has increased, it remains low, meaning that it needs to maximize the productivity of its operations.
Risks
As for the risks of the company, there are several major ones. First, the actions and policies of numerous federal, state, municipal, and worldwide authorities and political interests may have a negative impact on Occidental’s operations (Oxy, 2022). In such a case, Occidental runs the risk of being subject to new or modified laws and regulations, as well as novel or unique applications or interpretations of already-existing laws and regulations (Oxy, 2022). These might include those pertaining to drilling, production, taxes, imports, exports, and the use of raw materials, labor, machinery, and other items, among other things (Oxy, 2022). In order to avoid such risks and maximize returns, the company might consider safety protocols, insurance coverage, and portfolio diversification in order to not be dependent on a specific region or country.
Another risk to which Occidental Petroleum is exposed is commodity price fluctuations. The effects of OPEC members and those producing countries outside of OPEC that might consent to and sustain output levels (Oxy, 2022). Due to higher or lower demand for oil and gas, the company’s revenues will either increase or decrease, respectively. To minimize risks, the company can hedge against them with the use of futures contracts.
Finally, it is necessary to look into the environmentally friendly trends that are prevalent nowadays and can disrupt Oxy’d business. The operations and commercial results of Occidental could be negatively impacted by climate change, additional regulations on GHG emissions, and other air pollution (Oxy, 2022). Global commitments and laws that are currently in effect or that are pending to reduce emissions of greenhouse gases are the consequence of ongoing political, social, and industry attention to climate change (Oxy, 2022).
In order to prevent or limit oil and gas extraction activities in specific locations, the Biden administration has highlighted climate change as a top concern (Oxy, 2022). In this case, Occidental Petroleum needs to focus on sustainable energy sources in order to diversify its product portfolio. By investing in renewable energy and proactively engaging with stakeholders in terms of environmental initiatives, risks can be avoided.
Company’s Stock and Recommendations
According to NYU Stern (2023), the current PE ratio of oil and gas companies is 18.92. Meanwhile, with the current price being $65.84 and trailing 12-month Earnings per Share (EPS) being $8.7, the PE ratio of Occidental Petroleum is approximately 7.56 (Yahoo Finance, n.d.). This indicates that the company is undervalued. Moreover, given the rising prices of oil and gas, the company will have increased revenue. Therefore, when considering the geopolitical risks associated with the stock, Occidental Petroleum has potential and is worth buying.
Conclusion
Hence, Occidental Petroleum’s stock is still undervalued and is expected to increase, meaning that it is sensible to purchase, despite the risks. The risks of the company include regulatory and environmental ones and the risks connected to price fluctuations. These can be easily mitigated by risk hedging and diversification. After developing deeper into the stock possibilities, it becomes evident that Oxy can be profitable in the short term due to rising oil and gas prices and its undervalued stock price in comparison with the benchmark metric. Thus, one can consider purchasing the stock, given its potential price growth.
References
Chevron. (2022). 2022 annual report. Web.
Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting. 12th Media Services.
NYU Stern. (2023). PE ratio by sector (US). Web.
Oxy. (2022). 2022 annual report. Web.
Oxy. (n.d.a). About. Web.
Oxy. (n.d.b). Leadership. Web.
Yahoo Finance. (n.d.). Occidental Petroleum Corporation (OXY). Web.