Occidental Earnings: Higher-Than-Expected Uptime In Gulf of Mexico Drives Elevated Production

Key Morningstar Metrics for Occidental Petroleum

• Fair Value Estimate: $61.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Occidental Petroleum’s Earnings

Occidental Petroleum’s OXY oil and gas business delivered 1,220 thousand barrels of oil equivalent per day, exceeding the midpoint of guidance by 2.8% and the top end by 1.1%. 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 these results.

Production activity was strong across domestic assets, especially in the DJ and Delaware basins—two key drivers of management’s guidance raise. Improving well productivity in the Permian will also facilitate increased production through year-end. Well recoveries in the region are still tracking ahead of last year’s vintage on a cumulative basis, though the uptick approximately matches increased lateral lengths. Given the diminishing returns typically exhibited by longer laterals, we view the DJ basin as the larger driver behind Occidental’s upside potential moving forward.

Rebounding production activity in the Gulf of Mexico also contributed positively to Occidental’s third-quarter performance. A portion of planned maintenance activity originally slated for the third quarter was pushed to the fourth quarter, and favorable operating conditions facilitated higher-than-expected uptime. Oil production therefore increased by 11,000 barrels per day quarter over quarter, and we expect the region will maintain improved production levels through year-end.

Outlooks for Occidental’s midstream and chemical businesses remain intact for 2023. An unfavorable operating environment continues to weigh on the midstream segment, contributing to negative pretax earnings for the year. Meanwhile, chemicals remains on track to deliver pretax income exceeding $1.5 billion for the year, in line with the guidance midpoint. Markets for PVC and caustic soda remain constrained, and planned maintenance on an ethylene cracker, coupled with a typical seasonal demand slowdown, will likely temper fourth-quarter performance. We’re nevertheless optimistic that end markets will begin to recover in 2024, which will drive margin expansion in chemicals moving forward.