An Oil Stock That's Pumping

 | Oct 05, 2012 | 11:30 AM EDT
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One energy name we have not discussed before, but which we think merits serious consideration, is Occidental Petroleum (OXY).

The thrust of our interest here is, in part, the company's leading growth trajectory in developing U.S. oil properties. Another is its relatively secure international portfolio -- which is also going to be expanding significantly -- and a shareholder orientation, as reflected in a rising dividend that's intended to return more to shareholders and to grow faster than the yield of its peers.

Occidental is led by president and CEO Stephen Chazen, who has a strategy of growing oil-and-gas production by 5% to 8% per year. This is primarily as U.S. oil company: 60% of its production is based domestically, with substantial positions in California and the Permian Basin. Outside of the U.S., 4% of production is in Latin America and 36% is in the Middle East.

Most Middle East production comes from somewhat more stable and reliable areas, such as Qatar, Bahrain and Oman. However, about 14% of area production comes from the higher-risk areas of Yemen, Iraq and Libya. Fortunately, these less-stable areas only equate to about 5% of Occidental's total production.

This company is one of the best-capitalized oil-and-gas names, with a net debt-to-total-capital ratio of 5%. The company's capital program is well-funded by internally generated cash flow. Its strong balance sheet allows it to make opportunistic acquisitions. Also important is that Occidental is perceived more as an exploiter than as an explorer, preferring to develop proven reserves rather than take the riskier route of exploration.

The company's largest capital-spending program is the development of the Shah sour gas project in Abu Dhabi, which is expected to be completed near the end of 2014 at a cost of nearly $4 billion. Occidental recently noted that the project is on budget -- and, once up and running in 2015, this project alone could add 0.75 to $1 to earnings per share.  Thomson Reuters consensuses estimates for this year and next are $6.96 and $7.68, respectively, so the Shah project could have a materially positive impact on earnings.  Further, at a reasonable 11.1x next year's earnings, Occidental's price is likely to benefit quite directly once Shah comes on line.

One other attractive aspect of the company has been its intention to reward shareholders with a rapidly growing dividend. Admittedly, Occidental started from a low level, but since 2002 it has grown its dividend by a compound annual rate of just under 16%. Currently, this translates into a 2.5% yield, quickly approaching many of its peers. The payout should look increasingly attractive, assuming the company maintains its robust dividend growth policy. We expect a healthy double-digit increase when the company reviews its dividend in February of 2013.

In many respects, the wind is increasingly at Occidental's back. It enjoys a strong, reliable expansion in the secure U.S. market, a major boost project moving toward completion and shareholder-oriented management that wants to keep growing dividends rapidly.

For all these reasons, we are buyers of the stock.

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