Occidental Petroleum Posts Loss of $8.35 billion in Q2 as COVID-19 Batters Oil Demand; Target Price $7

Occidental Petroleum, an international oil & gas exploration and production company, reported a loss of $8.35 billion in the second quarter, largely affected by the steep decline in energy prices due to significant drop in demand amid COVID-19 pandemic, sending its shares down about 6% in after-hours of trading on Monday.

The oil and gas producer said its net loss came in at $8.35 billion, or $9.12 per share, in the quarter ended on June 30, 2020, down from $635 million earnings, or 84 cents per share, a year earlier. Excluding one-time items, Occidental Petroleum lost $1.76 per share, compared with analysts’ average estimates of $1.68, according to Refinitiv IBES, Reuters reported.

“Occidental Petroleum’s 2Q EBITDAX was below our estimates on pricing but exceeded consensus. The focus will be on 2H20 guide that includes 3Q production 7% below our estimates given larger domestic declines and 4Q that is 10% below,” said David Deckelbaum, equity analyst at Cowen.

“Without asset sale clarity, Occidental’s declining asset base will be in focus, particularly as capex shifts domestically heading into 2021 w/ guided maintain capex of $2.9 billion that is in-line with our model.”

Occidental expects its oil and gas production to decline 13% in the ongoing quarter over last, and more 5% in the last quarter, to 1.16 million barrels per day. The average price Occidental received for crude oil plunged over 60% to $23.17 per barrel in Q2 as the coronavirus outbreak crushed demand for fuel.

Occidental shares slumped about 6% to $15.55 in after-hours of trading on Monday. The stock is down over 60% so far this year.

Executive comment

“We continue to make progress on our debt structure and have significantly exceeded our cost savings targets while delivering operational excellence across our business,” President and Chief Executive Officer Vicki Hollub said in a press release.

“These decisive financial and operational actions reflect our leadership as a low-cost operator, positioning us for success when market conditions improve.”

Occidental Petroleum stock forecast

Sixteen analysts forecast the average price in 12 months at $18.58 with a high forecast of $33.00 and a low forecast of $8.00. The average price target represents a 12.74% increase from the last price of $16.48. From those 16, four analysts rated ‘Buy’, six analysts rated ‘Hold’ and six rated ‘Sell’, according to Tipranks.

Morgan Stanley target price is $7 with a high of $29 under a bull scenario and $1 under the worst-case scenario. JP Morgan raised its price target to $19 from $17.

Several other equity analysts have also updated their stock outlook. Occidental Petroleum had its price target boosted by Piper Sandler to $20 from $13.00. Piper Sandler currently has a neutral rating on the oil and gas producer’s stock. Barclays decreased its price objective to $20 from $21 and set an equal weight rating on the stock. At last, SunTrust Banks increased their price objective to $25 from $13.

We think it is good to hold for now as 100-day Moving Average and 100-200-day MACD Oscillator signal a selling opportunity. However, can sell with a target price of $7 in a worst-case scenario.

Analyst comment

“Onerous debt maturity schedule. Occidental Petroleum has $11 billion of debt due over the next three years in a backdrop of limited free cash flow and capital markets access. The risk to asset sale execution. At current commodity prices, we see risk to additional proceeds from asset sales,” said Devin McDermott, equity analyst and commodities strategist at Morgan Stanley.

“Meaningful leverage reduction is challenged at current commodity prices. We project elevated leverage (includes 100% of preferred equity) of 5-6x net debt/EBITDAX over the next two years and 4.5-5x thereafter,” the analyst added.

Upside and Downside Risks

1) Higher commodity prices. 2) Service cost deflation. 3) Asset sale execution. 4) Upside to synergies associated with the acquisition of Anadarko Petroleum, Morgan Stanley highlighted as major upside risks to Occidental Petroleum.

1) Lower commodity prices. 2) Service cost inflation. 3) Regulatory risk in Colorado and global geopolitical risk. 4) Limited asset sale execution. 5) Potential to not achieve synergy targets associated with APC acquisition, are the major downside risks.