Occidental Petroleum’s stock fell on Wednesday after the company received a rare bearish rating from JP Morgan Chase analyst Phil Gresh, who cited concerns about the price of oil needed to cover capital expenditures.
Gresh downgraded the oil and gas exploration and production company OXY’s rating,
He was underweight and raised his rating to neutral four months ago. Among the companies covered by JP Morgan Chase, only 14% of the stocks are rated as “underweight”, while 6 of the 26 analysts surveyed by FactSet rated the West as “sell”.
The downgrade came after Occidental Petroleum reported on Monday evening that the company’s rating was downgraded after its third-quarter loss exceeded expectations due to a more-than-expected decline in revenue. This is the fourth time in the past five quarters that the company has not met its final expectations.
Gresh said he was still “satisfied” with the “debt maturity barrier issue”, which was a factor in his previous escalation. However, the guidance proposed by CEO Vicki Hollub in 2021 pointed out that to achieve “break-even” free cash flow, maintaining capital expenditure requires a “$30 higher” oil price “than our model Not bad”. He said the guidance would mean that West Texas Intermediate (WTI) prices as low as $40 would need to be paid for preferred stock dividends.
Occidental Petroleum’s stock fell 2.8% in midday trading. Throughout Tuesday, when it closed at a 10-week high, the stock had soared 39.4% since closing at a 20-year low of $8.88 on October 28. At the same time, crude oil futures CL00
It rose 2.1% in midday trading on Wednesday to a 10-week high and has risen 12.9% since October 28.
The company also stated that it should not expect other large asset sales plans to repay debt.
Occidental Petroleum disclosed in its tenth quarter financial report submitted to the US Securities and Exchange Commission that as of September 30, its long-term debt was $35.9 billion, while Occidental’s market value was $11.2 billion. In contrast, Exxon Mobil Corp. XOM,
The company said that as of September 30, its long-term debt was $46.89 billion, but Exxon Mobil’s market value was $155.51 billion.
Moody’s Investors Service has set the credit rating of Western Credit as Ba2, which is two levels of speculation or “junk” to reflect the company’s acquisition of Anadarko Petroleum Corp. last year. “Extremely high debt levels.”
JP Morgan’s Gresh said that based on free cash flow/corporate value, the valuation of stocks in Western countries looks “expensive,” especially given their high debt levels.
He concluded that Occidental Petroleum’s stock is mainly an “oil beta story”, which means betting on oil prices.
“[W]e believes that there are other stocks that have enough oil beta and less debt, and they have similar exposure in the 2021 COVID-19 recovery transaction,” Gresh wrote in a report to customers.
He said that the main risk of his bearish view on stocks is the rise in oil prices, but he believes that oil prices must rise above $60 a barrel.
So far, Occidental Petroleum’s share price has plummeted by 70.8%, while the exchange traded fund XLE of the SPDR Energy Select Division,
Fell 43.7%, the S&P 500 index SPX fell,
Has risen by 10.6%.