Occidental Sells Off Despite Slightly Outperforming in Third Quarter

Occidental (OXY) shares lagged the sector after the firm announced third-quarter results amid a broad selloff in crude oil and upstream stocks, but the stock still looks rich at the current level. We believe market optimism about long-term oil prices explains the premium. The marginal cost of production for crude is still around $55 a barrel for West Texas Intermediate, supporting our midcycle forecast. In contrast, the market price for Occidental appears to be discounting a long-term average of about $65, which we think is too high. Essentially, this assumes global supply will keep lagging demand indefinitely, despite slowing demand growth now that the COVID-19 recovery is underway (other than in some zero-COVID-policy Asian countries, most notably China).

Firmwide production was 1.18 million barrels of oil equivalent per day in the period, slightly above the high end of the guidance range. Management attributed this to lower-than-expected downtime in the Gulf of Mexico, record output at Al Hosn in the Middle East, and improved decline rates in the DJ Basin. The Gulf of Mexico was the main driver, and the impact of atypically mild hurricane activity was probably already digested by the market. The outperformance was marred by weaker-than-expected Permian volumes, though these were third party-related and the Permian wells brought on line in the period were actually very impressive. Management expectations for full-year volumes and capital spending were basically unchanged, making Oxy one of the few exploration and production firms not to increase spending in the last two quarters despite inflation. The firm has yet to announce 2023 guidance.

We intend to incorporate these results shortly, but after this first look, our fair value estimate is unchanged. Our no-moat rating is unchanged as well.