Energy has performed poorly against the S&P this year after a decent performance off 2016 lows. While Credit Suisse's US strategist observes that near term large cap Energy valuations look expensive relative to the S&P, the firm believes Occidental Petroleum Corporation (NYSE:OXY) is towards the low end of a reasonable Net Asset Value range of $58/sh (at $50/bbl WTI) to $86/sh at the firm's $62.5/bbl WTI longer term forecast. Inside, Credit Suisse shows that Occidental Petroleum's good inventory of low cost Permian reserves is not reflected in valuation (nor for its Permian peers). If your portfolio does not have enough (Permian) cowbell, then OXY's combination of 4.8% dividend yield plus headline 5-8% growth looks attractive. Part of its call is that Energy, having underperformed thus far in 2017, is due a catch up.
Credit Suisse discusses several important points from the deck. (1) OXY has a differentiated competitive advantage in the Permian, which is already a low cost area for the industry. (2) OXY can further lower costs via its new logistics hubs and/or new technology (e.g. multi-laterals, subsurface modeling, Occidental Petroleum Drilling dynamics, big data). (3) OXY's inventory is not reflected in current valuations and continues to grow.
As CS rolls over the model, the firm's TP rises to $79/sh from $77/sh. Credit Suisse upgraded to Outperform from Neutral. The upside to $86/sh would reflect a 15% bump in Permian well productivity and lower wells costs on OXY's technology gains (the firm's model currently assumes 15% higher total well costs in 2018 due to inflation). EPS increases slightly in 2017-19 $0.49/$1.31/$1.54 respectively. The key risk would be lower oil prices caused either by a recession or another flip-flop from OPEC reverting back to a policy of maximizing current production.
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