There are a lot of odd things about Occidental Petroleum (NYSE:OXY) in the context of the broader energy sector. While investors have generally cheered the decisions of companies like ConocoPhillips (NYSE:COP) to separate from their refining and/or chemical businesses, Oxy seems in no particular hurry to match. Likewise, Oxy has a pretty good record of cash flow production and returns on internal investment, and while management has received rather generous compensation, they actually seem to run the business like a business.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Not that any of that has helped all that much lately. Oxy has fallen along with many other energy companies, and there are the usual worries here about the company getting stuck between rising production costs and declining realizations. All of that said, today's valuation suggests investors ought to take another look at this company as a longer-term quality energy play.

Underappreciated Assets Should Deliver the Goods
Investors don't really think of California as an especially promising energy-producing region, but Oxy has made it work. Not only is Oxy the largest acreage holder in California, but these fields have proven to be both productive and profitable for the company. What's more, the company would seem to have a rich inventory of potential drilling sites, and the completion of the Elk Hills plant should help the company meet its CO2 needs for its enhanced recovery projects.

Elsewhere, Oxy is also the largest producer in the Permian, ahead of well-known names like Apache (NYSE:APA), Chesapeake (NYSE:CHK) and Exxon Mobil (NYSE:XOM). Here, too, Oxy's experience in enhanced recovery pays dividends, as more than half of its producing wells use CO2 floods to stimulate production.

While more than half of Oxy's production comes from the United States, operations in Libya and Iraq offer solid growth potential as well. These are not the easiest operating regions in the world, Oxy is still trying to bring Libyan production back to pre-war levels for instance, but they play into Oxy's strengths and also lend geographical diversification.

Familiar Challenges and Worries
Oxy has a good long-term history of earning economic returns on its asset base, but that seldom matters in the face of macro worries. As most investors know, energy production costs have been rising significantly, while global economic worries seem to be undercutting pricing.

For the time being, Oxy is managing these threats in a logical way. The company has cut back its activity in the Bakken as supply and service costs continue to spiral, and has likewise cut back on its North American dry gas production.

SEE: Understanding Oil Industry Terminology

The Bottom Line
Assuming that five to six times forward EBITDA is a fair price for an energy company, Occidental looks undervalued today. Investors certainly have to consider the risk that energy prices drop further and take the EBITDA estimates down with them, but that's an ever-present core risk to energy investing.

On a longer term outlook, Occidental not only has an attractive inventory of acreage and drilling opportunities, but a demonstrated history of disciplined and focused management of its assets. Like Apache, Occidental looks like a quality name to consider whenever macro fears push the sector down to attractive long-term prices.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  2. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  3. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  8. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  9. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  10. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center