Shares of Occidental Petroleum Corp. fell Tuesday, missing out on the rally in the energy sector and the broader stock market, after JPMorgan turned bearish on the oil and gas production company, as it had “no easy way out” of the risk it took on to buy Anadarko.
After a period of restriction, analyst Phil Gresh resumed coverage of Occidental with an underweight rating and $50 stock price target. Before Gresh had moved to “not-rated” in May, he had a neutral rating on the stock and a $74 price target.
The stock OXY, -0.86% slumped 1.9% in afternoon trading, which put it on track to close below the $45 mark for the first time since December 2008. Meanwhile, the SPDR Energy Select Sector exchange-traded fund XLE, +1.18% climbed 1.1%, with 25 of 28 equity components gaining ground, and the S&P 500 index SPX, +1.62% surged 1.5%.
Occidental shares have now tumbled 29% since the company swooped in with its first bid to buy Anadarko, that trumped what Chevron Corp. CVX, +0.72% had agreed to pay to buy Anadarko. Over the same time, Chevron shares have inched up 0.1%, the energy ETF (XLE) has lost 16% and the S&P 500 has eased 0.2%. Read more about how Occidental sweetened its buyout bid.
See related: Chevron wins Wall Street praise after walking away from Anadarko deal.
After the Anadarko acquisition closed last week, Gresh said the stock’s total-return potential this year is roughly half its peer group, and that the 2021 free cash flow (FCF) over enterprise value yield of about 5.2% at $60 a barrel of Brent “is not compelling enough to compensate investors” of the elevated dividend as a percent of FCF, which limits the company’s ability to pay down debt.
Brent crude-oil futures BRNV19, -0.05% rose 2.9% to $60.30 a barrel.
Occidental’s current annual dividend rate of $3.16 a share implies a dividend yield of 7.16% at current stock prices, compared with the XLE dividend yield of 3.61% and the implied yield for the S&P 500 of 1.99%.
Gresh said he believes Occidental’s “key financial goal” with the Anadarko deal was to protect its dividend over the long term, by effectively buying more FCF by leveraging up its balance sheet. “However, we think the company took on material balance sheet risk in doing so,” Gresh wrote in a note to clients, which he believes will weigh on the stock’s valuation.
That risk includes the deal it made with Warren Buffett’s Berkshire Hathaway Inc. BRK.B, +1.20% , in which Berkshire provided $10 billion in financing in exchange for 100,000 shares of cumulative perpetual preferred stock with a liquidation value of $100,000 a share warrants to buy 80 million common shares at $62.50 each.
Also read: Warren Buffett took Occidental CEO ‘to the cleaners,’ says Carl Icahn.
In terms of “self-help” levers the company can pull to boost potential returns during the current uncertain macroeconomic environment, Gresh said he believes the options are “limited,” given the promises management has made about postmerger cost savings.
“Bottom line, we believe that there is ‘no easy way out’ of this financial predicament, absent a higher oil price case,” Gresh wrote. Even if oil prices do rise, Occidental investors may benefit less than investors in its peers, because Buffett’s warrants potentially creates a cap in the stock at $62.50.
Since the Buffett deal was announced, Occidental shares have shed 26.6% and Berkshire’s stock has lost 7.7%.