Analyst Note
| Dave Meats, CFA |After taking a second look at Occidental's first-quarter operating and financial results we have raised our fair value estimate to $32 per share (from $27). The increase makes the stock look more or less fairly valued at the current price. The main driver was a slight reduction in our weighted average cost of capital estimate, to 7%, reflecting the ongoing progress the firm is making on the deleveraging front. The firm has now shed some $9 billion of obligations since the 2019 acquisition of Anadarko, bringing its leverage ratios closer to normal levels (net debt to annualized first quarter EBITDA was just over 3 times). But there's more work to do. Management is aiming to retire another $20 billion of outstanding debt and preferred equity combined. There's line of sight to accomplishing that over time: the firm is capable of generating $1 billion-$2 billion free cash quarterly, at midcycle prices, and it anticipates another $1.5 billion-$2.5 billion in asset sales during 2021. But because its excess cash is mainly directed to the balance sheet, the firm cannot yet hop on the same bandwagon as many of its E&P peers by bolstering shareholder distributions via fixed, variable, or special dividends.