Occidental Petroleum’s (NYSE:OXY) bull trap (large rejection of purchasing momentum) has been confirmed on its long-term chart in the wake of June’s drastic decline. Due to the possibility that the market’s attention has shifted away from the problems with Russia and toward a possible recessionary scenario has increased conviction levels of a potentially steeper fall in the future. The decline also occurred at the same time that WTI crude fell significantly over the previous month, falling below $100. This suggests that Occidental’s profitability is anticipated to continue strong, but the market has concentrated on the possibility of weaker oil prices in the near future.
Valuation analysis indicates that OXY might perform poorly. OXY underperformed the SPDR S&P 500 ETF over the past month while trading at relatively “cheap” FCF yields of close to 20% in early June. Even though OXY traded at an FCF yield of close to 20% during its most recent June bull trap, the market rejected further purchasing momentum. As a result, OXY experienced a 1M decrease of 15.91%, significantly less than the SPY’s 1M return of -6.65%.
With price action cues alerting to a potential distribution since April, the market has already begun to focus on a possible recessionary situation. As a result, the market has probably been distributing “quietly” during the past two to three months to prepare for a more drastic sell-off in June. Analysts argued over whether such risk-off transactions in the petroleum market could persist, which caused WTI crude to fall below $100. Even while a price for a decline to $45 per barrel of oil by the end of 2023 has not yet been factored into futures pricing, Citi analysts predicted it might happen.
Despite this, WTI futures for July 2024 have fallen below $74, showing that the market still anticipates a decrease in the future. Warren Buffett has certainly been very fond of Occidental since Berkshire has gradually raised its position in OXY and may eventually reach 20%. Therefore, despite the risk-off sentiments exhibited in June, it appears Buffett has been buying the decline in OXY. Buffett continues to be hopeful about the prospects of Occidental.
However, estimates—which are typically bullish—indicate that Occidental’s revenue growth may fall by 11.6 percent in FY23 and by a further 7.6 percent in FY24. Even though it is anticipated to decline to 30.7% by FY24, adjusted EBIT profitability will remain strong. Investors may find themselves in a pickle as they try to make sense of Occidental’s sharply declining revenue growth estimates. In contrast, the Oracle of Omaha has maintained his bullish outlook on Occidental’s long-term prospects, as seen by Buffett’s growing conviction (given Berkshire’s growing position in OXY).
Occidental Petroleum’s Loss of Momentum
Early in June, at an FCF yield of approximately 20%, OXY’s purchasing momentum was rejected. The yield was deemed by the market to be too low to compensate for the stock’s holding risk. This opinion is in line with the company’s forecast for declining revenue, which could affect profitability. Using a 29% blended TTM FCF margin (factoring in a reasonable margin of safety), TTM revenue for Occidental is anticipated to reach $47.56 billion in FY26, representing an implied hurdle rate of 5% (market-underperform).
Occidental is unlikely to meet its revenue objective in light of the revised consensus projections. As a result, it implies that OXY might not even reach the hurdle rate suggested by this model. According to OXY’s weekly chart, the short-term technical indicators are highly oversold. There may then be a brief rally before a potential lower-high bull trap develops to halt the buying momentum.
Despite this, OXY still has a bullish bias, which the market may use to attract more buyers on dips before preparing for its imminent fall. Investors are not urged to buy this dip considering its worrisome price action signs. Investors seeking to diversify their holdings can, however, first wait for a potential short-term rally. Given its very oversold technicals, OXY might be nearing a bottom. As a result, investors should wait for a potential short-term rebound before reducing exposure.
Investors are not urged to purchase the dip as Buffett did, though. Our valuation estimate shows OXY could perform worse than expected over the following four years if prices stay the same. In order to add OXY, investors should be patient and wait for a much deeper retracement.
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