Company Reports

Israel has launched strikes against Iran in retaliation for an attack on April 14 (see our April 15 note for more analysis). The limited scope of Israel’s attack, which also included targets in Syria and Iraq; Iran's subdued response; and the ample warning Israel provided confirm our view that both parties wish to de-escalate tensions. We’d characterize this as a de-escalation attack. This view is in line with broader US and Group of Seven goals.

We believe the Iranian drone and missile attack on Israel over the weekend places some additional stress on the oil markets. However, the ample warning from Iran ahead of time publicly and privately amid rising geopolitical tensions means the attack was already reflected via a higher geopolitical risk premium in oil prices, in our view. We attribute nearly all of the increase in oil prices to around $91 a barrel from the mid-70s in February to geopolitical concerns versus supply risks. On the supply side, Saudi Arabia and OPEC+ have about 5 million barrels per day of supply—if not more—that can be returned to the oil markets if prices were to overheat and spike well above $100 a barrel. We expect there to be more downside risks than upside at the moment to oil prices. In fact, we see higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel.

Each year, we reevaluate well productivity for our entire US shale coverage. For each covered company, we scrutinize third-party data on both a basin and region basis. As in prior years, our process prompted mostly modest valuation changes but left our moat, capital allocation, and uncertainty ratings unchanged.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the US, Middle East, and North Africa. It has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it holds a majority equity interest in Western Midstream, a remnant of the 2019 acquisition of Anadarko Petroleum. The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs, and profitability is determined by the strength of the broader economy.

OPEC announced that its voluntary cuts due to expire at the end of March have been extended until the end of June. Since oil markets remain weak, we had expected OPEC and its allies to extend the voluntary cuts for another quarter. The 2.2 million barrels per day in voluntary cuts, largely shouldered by Saudi Arabia and to a lesser extent Russia, were originally implemented as a temporary effort last year but have been extended several times as the market has remained oversupplied, in our view.

Nothing in no-moat-rated Occidental Petroleum’s latest results materially alters our long-term view. Results were broadly in line with our expectations, though earnings came in a bit above based on a lower tax outlay than we initially expected. While we model puts and takes in Oxy’s cost structure and expected Permian production, we maintain our $56 fair value estimate.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the U.S., Middle East, and North Africa. It also has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it holds a majority equity interest in WES Midstream (a remnant of the 2019 acquisition of Anadarko Petroleum). The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs and profitability is determined by the strength of the broader economy.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the U.S., Middle East, and North Africa. It also has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it separately holds an equity interest in WES Midstream (a remnant of the 2019 acquisition of Anadarko Petroleum). The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs and profitability is determined by the strength of the broader economy.

Angola announced that it will leave OPEC in what we think is more of a blow to the group’s unity than a material impact on the overall oil markets. The timing is not ideal, as OPEC+ is struggling to defend oil prices. Angola’s recent production level of about 1.2 million barrels per day is only about 2% of the total output of OPEC+. The imminent addition of Brazil (3.8 million bbl/d of oil production), while not subject to a quota, helps offset this loss. We had suggested in our Nov. 30 note that Angola's departure was a possibility, since the country had immediately said it would produce above the 1.11 million bbl/d quota set for it at the last OPEC meeting.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the U.S., Middle East, and North Africa. It also has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it separately holds an equity interest in WES Midstream (a remnant of the 2019 acquisition of Anadarko Petroleum). The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs and profitability is determined by the strength of the broader economy.

Occidental Petroleum announced the acquisition of CrownRock for a total value of $12 billion, the latest in a recent slew of combinations as North American producers seek to consolidate operations in pursuit of capital efficiency. The deal will add significant capacity in the Midland Basin that is expected to expand 2024 production by 170 thousand barrels of oil equivalent per day. The deal close is scheduled for the first quarter of 2024, and we don’t foresee any material roadblocks to the transaction proceeding as scheduled. We’ll incorporate the full anticipated deal impact shortly, but after this first look, we maintain our $61 fair value estimate and no-moat rating.

Our key takeaway from the latest OPEC meeting is that the internal member dynamics are highly divisive and chaotic. We don't anticipate this to bode well for the overall oil markets, as investors have less certainty and trust with regard to expected OPEC+ volumes delivered to the market, putting upward pressure on prices. However, even allowing for that uncertainty, we believe the production cuts of 896,000 barrels per day are likely to keep the market in a supply deficit or close to one, keeping prices in what seems to be OPEC+'s preferred band of $80-$100/bbl for the time being. However, we do expect Saudi Arabia will likely need prices to average $100/bbl over the next five years to support its more than $1 trillion investment in Saudi Vision 2030.

Occidental Petroleum’s oil and gas business delivered 1,220 thousand barrels of oil equivalent per day, exceeding the midpoint and top end of guidance by 2.8% and 1.1%, respectively. Following another quarter of strong performance, management has once again raised its full-year production outlook by 1% to 1,221 mboe/d at the midpoint. We maintain our no-moat rating and $61 fair value estimate following results.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the U.S., Middle East, and North Africa. It also has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it separately holds an equity interest in WES Midstream (a remnant of the 2019 acquisition of Anadarko Petroleum). The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs and profitability is determined by the strength of the broader economy.

The Hamas attack against Israel over the weekend should ultimately not be material for oil markets, in our view. Gaza produces no oil, while Israel produces only a small amount for its own use. However, oil prices were up as much as 5% at one point before retreating, as we think investors are concerned the conflict could destabilize the wider Middle Eastern region, which serves as a transit point for nearly one in every five barrels produced globally.

We have adjusted our valuation methodology for U.S. exploration and production companies. Our multistage DCF valuation incorporates five years of explicit projections for a fixed period, typically five years. Terminal values are derived by assuming firms eventually earn their cost of capital in perpetuity. This contrasts with our previous methodology, which modeled the harvesting of all company assets over a 30-year timeframe. The change brings our E&P valuations in line with Morningstar’s standard equity research methodology.

Occidental is one of the world's largest independent oil and gas producers. Its upstream operations are spread across the U.S., Middle East, and North Africa. It also has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it separately holds an equity interest in WES Midstream (a remnant of the 2019 acquisition of Anadarko Petroleum). The portfolio also includes a chemicals business, which produces caustic soda (an industrial alkali) and PVC (a construction material). The latter segment benefits from low energy and ethylene costs and profitability is determined by the strength of the broader economy.

Occidental Petroleum's oil and gas business delivered 711 thousand barrels of oil equivalent per day in the second quarter, exceeding the midpoint and top end of guidance by 3.6% and 1.8%, respectively. All domestic assets contributed to the outperformance, but the DJ Basin operations were particularly impressive. There was a nonrecurring royalty payment and an increase in nonoperated acreage, where Oxy holds a working interest but does not control activity. On top of that, the 2023 vintage of DJ Basin wells is dramatically outperforming prior vintages, with cumulative four-month recoveries almost double those of prior years. The 25-well sample is small and the final average could change, but the magnitude of the performance jump strongly suggests that Oxy's methodology (which it refined previously in the Permian) is working well.

On June 4, OPEC+ announced about 1.4 million barrels per day of production cuts. Saudi Arabia would cut 1 million barrels per day production cut in July 2023 for one month, though it can be extended, which we consider a realistic cut, while the remaining 400,000 net barrels are aligning quotas to actual production levels, and we’d consider paper barrels. The previously announced 1.6 million barrels per day cut (or about 600,000-700,000 barrels per day allowing for quota underproduction) by OPEC cut in April has now been extended through the end of 2024 from through the end of 2023. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag Equitrans and ExxonMobil as undervalued.

After incorporating Occidental's first-quarter results we are raising our fair value estimate to $56 per share from $53. The increase reflects stronger-than-expected oil and gas volumes and resilient markets for PVC and caustic soda, which benefit Oxy's chemical segment. These benefits offset the impact of near-term commodity prices, which have declined since our March update.