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Occidental Petroleum Pays Off Already

Yesterday I was writing about OXY and how undervalued it was based upon earnings. Well, they announced their earnings today and the stock took off. It was the catalyst for a turn in many energy stocks to the upside after several down days.

Enjoy the story below from Gary Dvorchak.

Don’t you wish they all turned out like this one?


OXY Surprises to the Upside
By Gary Dvorchak

7/24/2008 2:21 PM EDT

Amazingly, an oil company is actually getting rewarded for putting up good numbers. Occidental Petroleum’s (OXY) shares are up nearly 2% in a very down market after beating EPS estimates by 4 cents and providing an upbeat outlook for the third quarter and beyond.

Revenue was up 61% year over year and handily beat the consensus, coming in at $7.12 billion vs. the Street’s $6.77 billion. While the flow-through of higher oil prices was expected, of course, the interesting upside surprise was increased production, since analysts were actually looking for a small decline.

Prices and production actually accounted for over 100% of the earnings increase in the oil and gas segment but was offset slightly by higher operating expenses and depletion. (How ironic that the 14% increase in production cost per barrel of oil equivalent, or BOE, was due to energy costs!) Occidental realized $110 on oil and $9.99 on gas, numbers that the company expects to exceed in the third quarter.

Management presented an aggressive plan to continue to boost production. The company noted that CO2 flooding of wells is creating great productivity gains, describing it as “low-hanging fruit.” In fact, Occidental is building a CO2 plant in Texas for use in its Permian plays.

The company also bought a Canadian oil sand player, which put 370 million BOE into reserves. Canada is a long-term play that Occidental wants to develop slowly, but management pointed out the optional nature of the company’s work there — Canada is so hot right now that Occidental could flip the property easily if it loses interest.

Most interesting, management noted that the company is initiating work to enter Iraq next year, contingent on security issues. In all, management is boosting capex by 17% this year, reflecting a surplus of both opportunity and cash flow.

Management does not offer forward guidance for EPS, but it did offer significant detail on production plans for the third quarter. The outlook was very positive, with third-quarter production estimated at 590 million BOE to 600 million BOE per day, ahead of the second-quarter rate. Argentina and Libya should both be up meaningfully. The company noted that each $1 swing in oil price moves $37 million on or off the bottom line.

Despite the strong report and bump in the stock price, over the intermediate term, the stock will still be tied to oil movements. Occidental is one of the most pure oil/gas plays in the exploration and production space, and the bottom-line swing factor is large enough that the stock will be very sensitive. An investor’s position on the stock depends nearly 100% on their position on the next move in oil.