Occidental Petroleum’s best quarter sweeps the stock market

(Bloomberg) — Occidental Petroleum Corp., buoyed by its leverage in the face of rising oil prices and a big push from the world’s top investor, doubled this quarter and is the best performer in the S&P 500.

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It’s a big change for the oil explorer, who has struggled for years. The shares have soared 101% in the past three months, marking the best quarter in the company’s history as oil topped $100 a barrel. The next closest stock in the S&P 500 index in the first quarter was Halliburton Co. with a jump of 70%.

“I don’t think there’s a precedent for this,” Cowen & Co. analyst David Deckelbaum said in an interview.

On Wednesday, Raymond James analyst John Freeman raised his target for Oxy to $85 from $60, setting a new Wall Street high for stock expectations. The average target price is $60 and the stock is trading at around $58.

The list of first-quarter winners in the broad market benchmark is full of oil’s rising beneficiaries, with Halliburton, Marathon Oil Corp., APA Corp. and Baker Hughes Co. all up more than 50%. But the main reason for Oxy’s outperformance goes beyond crude prices and concerns the company’s ability to return cash to shareholders.

“Everything went well,” Biju Perincheril, an analyst at Susquehanna, said in an interview. “It was a very good set-up for them.”

Perincheril said he can’t remember the last time a large-cap oil producer doubled in such a short amount of time, but it’s more common for small-cap producers. He said Oxy’s excellent quarter was fueled by a big bet on the firm by Warren Buffett, a dividend hike, promises of a $3bn share buyback plan, ESG initiatives and, of course, a raise. in oil prices above $100 per barrel.

Even the surprised bulls

The soaring share price — Oxy is the first S&P 500 company to double in a single quarter since L Brands did so in 2020 — even surprised some bullish analysts.

“The sheer magnitude, from the fourth-quarter earnings print to here, was a bit unexpected,” Matt Portillo, an analyst at Tudor Pickering Holt, said in an interview about the stock’s massive gains, which he attributes to shrinking demand. debt.

Occidental used to be “the undisputed leader in equity allocation” among oil and gas companies, Morningstar analyst David Meats said in an interview. That changed in 2020, when Oxy’s debt problems forced it to repeatedly cut its dividend, ending at a penny a share.

Since then, the company has used profits from high oil prices to pay off its debt. Oxy is now set to have “superior” discretionary free cash flow performance, meaning they “have the potential to be the leader (in cash payments) once again,” Meats said.

A decent chunk of Oxy’s first quarter profit came from crude’s 40% rise in the period. But the stock also got a high-profile boost in mid-March when Warren Buffett’s Berkshire Hathaway Inc. revealed a larger stake in the company. The stock was already leading the S&P with a 51% gain in the first two months of the year, but the Buffett news clearly gave them some extra juice.

Read more: Buffett renews interest in Occidental as oil giant changes course

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Occidental has had an incredible run since the beginning of 2021, rising 225%. That’s more than double the performance of the 100% energy sector S&P 500 and a reversal of fortune after being the sector’s worst performer from early 2019 to late 2020. The change is largely due to crude production unhedged Oxy, which made it “one of the most leveraged names in the face of rising oil prices,” KeyBanc analyst Leo Mariani said in an interview.

Additionally, Mariani noted that the company is seeking to build 70 carbon capture facilities, an effort that should attract ESG investors. He also increased his dividend by 1,200% and announced a $3 billion share buyback program.

That said, Oxy will have a hard time sustaining its surge, especially as oil prices have retraced from a recent peak of $130 a barrel. The average analyst price target on the stock is $57.52, which is less than 2% higher than its current position.

So the key to keeping this rally going may lie in Omaha. As Mariani put it, even if oil prices have peaked, Oxy’s shares could rise further “if we see Buffett continue to buy aggressively.”

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