Shares of Occidental Petroleum Corp. extended their pullback Tuesday, after UBS analyst Lloyd Byrne turned bearish on the oil and natural gas producer, citing valuation concerns following a record monthly gain in November.
The stock /zigman2/quotes/207018272/composite OXY -0.23% fell 4.0% in afternoon trading, enough to pace the SPDR Energy Select Sector exchange-traded fund’s /zigman2/quotes/206420077/composite XLE -0.52% decliners. It has shed 9.8% amid a four-day losing streak.
Byrne cut his rating to sell, after being at neutral since March 2018. He raised his stock price target to $12 from$10, but his new target is still 20.7% below current levels.
“The downgrade is based on valuation,” Byrne wrote in a note to clients. “Improving market confidence in the crude oil price trajectory, coupled with [Occidental Petroleum’s] progress on its debut maturities in 2021 and 2022 resulted in the recent move higher in the share price.”
After closing at a 20-year low of $8.88 on Oct. 28, the century-old company’s stock had shot up 72.6% in November, its biggest-ever one-month percentage gain. The stock had closed at a four-month high of $16.78 on Nov. 24 before the current losing streak began.
He said current share prices are discounting $53-to-$55 a barrel for West Texas Intermediate (WTI), which is “significantly above the forward curve.” As a result, he sees better risk-versus-reward investment scenarios in the sector.
Byrne said he sees “more compelling” investment opportunities in shares of ConocoPhillips /zigman2/quotes/207605056/composite COP -1.16% , EOG Resources Inc. /zigman2/quotes/204634330/composite EOG -0.31% and Canadian Natural Resources Ltd. /zigman2/quotes/203976248/composite CNQ -1.22% /zigman2/quotes/203742161/delayed CA:CNQ -0.48%
Despite the record November rally, Occidental’s stock is still down 63.3% year to date, while the energy ETF has lost 38.3% and the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.30% has gained 13.3%.
One issue investors have had with Occidental this year, besides the 27.0% tumbled in crude oil futures year to date, is the company ‘s high debt level following the $55 billion purchase of Anadarko Petroleum Corp., which was completed last year.
The company said in its latest 10-Q filing with the Securities and Exchange Commission that it had long-term debt of $35.90 billion as of Sept. 30, compared with cash and cash equivalents of $1.90 billion and quarterly revenue of $3.28 billion.
In comparison, ConocoPhillips had $14.91 billion in long-term debt on Sept. 30, and cash and cash equivalents of $2.49 billion $4.39 billion in revenue.
UBS’s Bryne said although Occidental generates “solid” free cash flow (FCF), he expects all available FCF will be earmarked for debt reduction. As a result, he doesn’t believe shareholders are likely to see increased returns in the near term.
“In our view, [Occidental] will remain focused on reducing its absolute debt and leverage metrics,” Bryne wrote.