Occidental Petroleum (NYSE:OXY) announced its Q1 earnings on May 5 after the market closed. The COVID-19 pandemic as well as the result of the price war between Saudi Arabia and Russia have caused oil stocks to plunge. In 2020, OXY stock has tumbled about 66%.
Yet that price decline shows only half the story. In recent weeks, markets have been rising on days we get optimistic headlines regarding the end of the lockdowns and the stabilization of oil prices. On such days, OXY stock has climbed. On March 18, the shares hit a multi-year low of $9. Now they are hovering around $14.
So should investors commit new capital to the embattled energy company? I believe any potential short-term recovery has already been priced into OXY stock. Therefore, if you do not yet own the shares, you may want to wait for a pullback of the stock before buying it. Here’s why.
The past several weeks must have been among the most challenging in Occidental Petroleum’s recent history. Since early March, the price of oil has plummeted. The price of West Texas intermediate (WTI) is used as a benchmark for U.S. oil. In early January, it was around $60. By late March, it was down to $20.
In March, the company’s board decreased the stock’s quarterly dividend to 11 cents per share from 79 cents per share, effective July 2020. Management also agreed to reduce Occidental’s 2020 capital spending to $3.5 billion – $3.7 billion from $5.2 billion – $5.4 billion and to implement additional operating and corporate cost reductions.
“Due to the sharp decline in global commodity prices, we are taking actions that will strengthen our balance sheet and continue to reduce debt,” said CEO Vicki Hollub. “These actions lower our cash flow breakeven level to the low $30s WTI, excluding the benefit of our hedges, positioning us to succeed in a low commodity price environment.”
However, on April 21, the price of WTI turned negative for the first time in history. Put another way, oil producers were paying buyers to take the commodity off their hands. They were afraid to run out of storage capacity in May. Now WTI is hovering around $24.
Analysts see low demand as a big risk facing oil stocks. Globally, airlines are not flying, and manufacturing plants have been shut down for weeks. So major buyers are not consuming much oil. As a result, oil has been accumulating in storage facilities in the U.S.
And Occidental’s recent quarterly results show the impact of these difficulties.
Occidental’s Q1 Results
Occidental just released its first-quarter results. Its net loss came in at $2.2 billion, or $2.49 per diluted share. Its loss, excluding certain items, was $467 million or 52 cents per diluted share.
Occidental stated that, “first quarter results were impacted by the steep decline in oil prices in March triggered by a significant drop in oil demand.” And that is why it reported a substantial loss. One positive highlight was that it had $1 billion of mark-to-market gains on crude oil hedges, which helped reduce its losses.
By comparison, in late February, when the company released its Q4 results , its net loss was $1.3 billion, or $1.50 per diluted share.
It is easy to see the adverse impact that macro issues had on Occidental’s earnings. My main takeaway from the firm’s quarterly results and its conference call is that business prospects may not return to their pre-outbreak levels for some time. Oil companies’ losses may be even worse when they report their Q2 results this summer.
Can OXY Stock Reach Its Pre-Coronavirus Highs Soon?
In conjunction with the plunge in the price of oil, oil stocks have plummeted. I don’t expect OXY stock to go back to its 2019 highs or even its January 2020 levels anytime soon.
A year ago, OXY stock hit a 52-week high of $60.73. It began 2020 around $45. In late February, the shares’ current decline started.
In March, activist investor Carl Icahn increased his stake in Occidental from 2.5% to almost 10%.
OXY stock, like other oil names, will be quite volatile in the near-term. Given the significant risk facing oil producers now, the stock is likely to be volatile for some time.
Occidental Petroleum has already cut its dividend. It is quite difficult to make an immediate and strong bullish case for Occidental after that move.
Currently, the company is cutting its expenses and decreasing its capital spending. Yet it has around $40 billion of debt. If there is another setback for the industry in general or for Occidental in particular again soon, there’s a good chance that the Street will become concerned about the company’s debt and its balance sheet.
The Bottom Line on OXY Stock
Occidental’s Q1 results showed how difficult the rest of the year may be for the energy company and its peers. On paper, all oil stocks, including OXY, look cheap. But they may be cheap for a good reason.
At this point, I would not yet commit new capital to OXY stock. We simply don’t know when oil demand will rebound further. However, if the shares decline, I would look to be a buyer of the stock between $10 and $12.
If you already own OXY stock, you may want to wait and ride out the choppy waters. Alternatively, you may consider initiating an ATM covered call position with, for example, a horizon of over two months. A covered call that expires on July 17 would decrease the volatility of your portfolio, offer some protection against declines by the stock and enable you to participate in a potential rally of the shares.
On a final note, I would continue to watch moves that Icahn and, potentially, other activist investors make vis-a-vis the shares. There may be a takeover bid for Occidental Petroleum, possibly by Chevron (NYSE:CVX) or another large oil firm.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil has OXY covered calls (May 8 expiry).