Oil and gas company Occidental Petroleum Corporation (OXY) in Houston, Tex., conducts exploration and production activities in the United States. The energy company’s strong operational performance in its last reported quarter helped generate its highest level of free cash flow for the second consecutive quarter in a decade. So far this year, the stock has surged 94.3% in price as the demand for petroleum products rebounded.

Furthermore, oil prices hit a three-year peak on October 4 after OPEC+ confirmed it would stick to its policy of increasing output gradually. OXY’s continued improvement in average global production should position it to capitalize on the growing demand.

However, an unexpected increase in U.S. crude inventories has caused oil prices to decline recently. And even though investors’ increasing risk-tolerance in the energy space bodes well for the stock, concerns related to the volatility in crude oil prices and Hurricane Ida-induced oil production losses could lead to OXY suffering a price pullback in the near term.

Here’s what could influence OXY’s performance in the coming months:

Volatility in Energy Industry

The price of Brent crude oil fell 0.2%, to $80.92 per barrel, on October 7, extending its losses from the previous session and pulling back from multi-year highs as the United States considers selling oil from its strategic reserves and Russia announced that it could stabilize the natural gas market to help cool off the surge in prices. Moreover, the surprising increase in U.S. crude inventories could weigh on prices.

An OPEC+ source recently said that the oil market is still “fragile” and there is “no guarantee” of stability in crude prices. In addition, fears surrounding the fourth wave of COVID-19, which could threaten the global demand and pace of economic recovery, might further trigger volatility in the energy sector. This could add to investors’ concerns surrounding OXY.

Mixed Growth Estimates

Analysts expect OXY’s revenues to increase 87.9% in the next quarter (ending December 2021) and 51.2% in the current year. But it is estimated to decline 1% in its fiscal year 2022. The company’s EPS is expected to rise 176.9% year-over-year to $0.6 next quarter and 134.8% from its year-ago value to $1.36 in 2021. However, OXY’s EPS is expected to decline at a 5.2% rate per annum over the next five years.

Robust Financials

OXY’s non-GAAP operating cash flow before working capital rose 361.7% year-over-year to $2.71 billion in the second quarter, ended June 30, 2021. The company’s net sales for the quarter totaled $6.01 billion, up 101.9% from the year-ago value. Furthermore, its cash and cash equivalents came in at $4.77 billion, representing a 292.9% increase from the prior-year quarter. In addition, OXY’s non-GAAP free cash flow stood at $2.01 billion, up 849.1% year-over-year.

Bullish Analyst Sentiment

Of the 24 Wall Street analysts that provided ratings for the stock, 11 rated it Buy, and 13 rated it Hold. A $34.4 consensus price target represents a 2.3% potential upside from yesterday’s $33.63 closing price.

POWR Ratings Reflect Uncertainty

OXY has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. OXY has a C grade for Quality. The stock’s negative ROE and ROA of 47.2% and 5.9%, respectively, are in sync with this grade.

Moreover, the company has a D Stability grade, which is in sync with a relatively high 2.34 beta. In terms of Momentum Grade, OXY has an A. The stock’s price return year-to-date is consistent with the grade.

In addition to the grades I’ve highlighted, one can check out additional OXY ratings for Growth, Value, and Sentiment here. OXY is ranked #24 of 89 stocks in the C-rated Energy – Oil & Gas industry.

Note that OXY is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

Bottom Line

OXY’s stock price has surged significantly year-to-date on the back of a massive increase in oil prices, gradual demand recovery, and OPEC+’s decision to raise production. However, fears surrounding the fourth wave of COVID-19 in several countries and a larger-than-expected rise in the U.S. crude stockpile could lead to a fall in oil prices. This might cause the oil and gas company’s shares to retreat in the coming months. So, we think investors should wait for the situation to stabilize before investing in the stock.

How Does Occidental Petroleum Corporation (OXY) Stack Up Against its Peers?

While OXY has an overall C (Neutral) rating in our proprietary rating system, one might want to consider taking a look at its industry peers, SilverBow Resources, Inc. (SBOW) and Apache Corporation (APA), having an A (Strong Buy) rating.

Note that SBOW is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

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