Oil-and-Gas Drama is OK, if it’s Lucrative -- Think Oxy, Not Chesapeake
Chesapeake Energy (CHK) has been a fun company for an outsider to observe this year, less fun for a long-term investor to hold. That’s largely thanks to the antics of Chief Executive Aubrey McClendon. While leading the second-largest natural gas producer, behind Exxon Mobil (XOM), he also ran a private hedge fund from his office, used his stakes in company wells to borrow money from a Chesapeake financier, and built a shopping center. That led Carl Icahn and his band of shareholder activists to intervene, overthrow the board, replace McClendon as chairman, and start dumping pipelines in a bid to raise money to fill $20-some billion cash hole. That story is ongoing:
But the mess at Chesapeake is the counterpoint to an interesting story at Occidental Petroleum (OXY). Oxy, for short, is the fourth-largest oil and gas company by market cap, $65 billion. That makes it five and a half times the size of Chesapeake, and one-sixth the size of Exxon Mobil. In terms of domestic natural gas production, Oxy is far behind the top producers. But it has a stock firmly in the middle of the pack:
Oxy has had its own corporate governance troubles. Chef executive Ray Irani was forced out last year after long-simmering discontent over executive compensation and his own extremely-generous pay, reportedly triple the industry average. His pay hit $460 million in 2006, not bad for one year of work. He had reportedly squirreled away his earnings in an illegal tax scheme for which the company forgave him. In late 2010 he agreed he would step down, although he remains chairman.
Also like Chesapeake, Occidental is getting beat down by low energy prices. Crude oil prices, or at least the WTI price that reflects domestic prices, are nearing $80 a barrel. Natural gas prices near decade lows, are low to the point of being nonexistent.
So what makes Occidental attractive is its strong balance sheet and profits. The company earned $1.6 billion in the first quarter, and its net income growth is outpacing that of Exxon Mobil and Royal Dutch Shell (RDSA).
Check out its very healthy profit margin:
And while Chesapeake’s in a cash hole, Occidental is sitting on cash. The company just sold $1.75 billion of 5.5 and 10.5 year bonds for low coupons, but Moody’s boosted Occidental’s credit rating in April from A2 to A1, citing strong cash reserves.
YCharts Pro says that Occidental, while not the cheapest play in the energy sector, is trading 26% under historical multiples. It also has steady dividend growth:
Drama in the boardroom, not to mention the Middle East, could always flare up. And as JP Morgan’s (JPM) Jamie Dimon can attest, anyone playing around with derivatives could be running some big risk. Occidental has an energy trading business, Phibro, that it bought from Citigroup.
But when Chesapeake’s in the news, or falling energy prices drag down stocks, it could be productive to drill down here.
Read more articles about: Company Analysis
Timeless thoughts for serious business minds
- pharma stocks
- tech stocks
- stocks that look cheap
- money managers
- stocks that look pricey
- retail stocks
- growth stocks
- earnings season
- dividend growth
- energy stocks
- bank stocks
- short sellers
- warren buffett
- entertainment stocks
- value investing
- executive compensation
- stock screener
- Federal Reserve
- overall market
- stock that look pricey
- value stocks
- cyclical stocks