Occidental Petroleum May Only Be a Gamble on the Short Side

a close up of a sign: A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

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A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

Once the novel coronavirus became a reality in the U.S., the oil market was always going to be trouble. Indeed, the sector faced long-term concerns before the pandemic due to the rise of electric vehicles. But when the crisis devastated transportation demand, Occidental Petroleum (NYSE:OXY) looked as if it was on borrowed time. The struggle is still apparent. However, some positive developments may encourage those speculating on OXY stock.

a close up of a screen: A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

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A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

First, a Reuters report revealed that Occidental will pay a $200 million quarterly dividend to Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,BRK.B). The format is important as the oil firm will pay in cash instead of shares of OXY stock. Obviously, that’s significant because Occidental is trying to dig itself out of a debt pit due to unfortunately timed acquisitions.

As well, the company in April did the opposite of what it’s doing now. Back then, the energy firm decided it was best to dilute shares of OXY stock to preserve cash. Frankly, it’s hard to fault management here because that was during the time of an unprecedented collapse in energy prices.

Second, Occidental stated that it “has the ability to generate substantial free cash at current oil prices” to service near-term debts. Again, that’s big news coming out of the beleaguered organization. It suggests that if the broader fundamentals improve, OXY stock could be a bargain at present levels.

And this isn’t just wishful thinking. Since this summer’s peak, new daily Covid-19 cases have declined substantially. Admittedly, cases have been rising recently. But compared to Europe, especially countries like Spain and France, we have been so far spared the devastation of a second wave.


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OXY Stock Is at an Inflection Point

From a technical perspective as well, I can understand why some traders are optimistic about OXY stock. For one thing, oil prices have leveled for several sessions following unfavorable international production news earlier in September. Furthermore, recent volatility in Occidental shares failed to push them below their March doldrums.

If OXY can hold on to technical support and if the broader fundamentals cooperate, this is a bounce-back candidate. In the new normal, anything can happen. With that caveat out of the way, I’ve got to be blunt: I’m not holding my breath.

For OXY stock to regain true credibility to the point where conservative investors would buy in, the underlying company must benefit from a significant uptick in demand. It’s important not to get too carried away with specific catalysts, such as paying dividends in cash.

That’s wonderful and all. But for the oil sector, it really comes down to whether people are pumping gas in their car and jetting off to other parts of the country and the world. Unfortunately, that’s just not happening.

chart, line chart: OXY stock vs. Percentage of people staying home

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OXY stock vs. Percentage of people staying home

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Source: Chart by Josh Enomoto

Don’t take my word for it. Instead, consult the Bureau of Transportation Statistics. Since the week of May 17, the percentage of people staying home relative to last year has steadily increased. On the week of Sept. 6, the number of Americans choosing to stay home increased nearly 42% year-over-year.

The biggest such metric was registered on the week of March 29 at 46% YOY. Thus, we’re not too far away from a record level of “homebodiness.”

But the issue, of course, is that Occidental can’t make money if people just shelter in place. Since this is a national phenomenon, it seems inevitable that oil prices will fall. That will make Occidental’s financial situation unsustainable.

How Long Can Occidental Last?

For the sake of stability in the oil market, I hope that OXY stock finds upside momentum here. Because that would imply a reasonable narrative has materialized for improved oil demand. Despite what the environmentalists have to say, this would be a lifesaver for our economy.

Sadly, government statistics tell a very different tale. Besides the folks staying home, what about when they venture out? According to transportation data, the number of trips between one to 25 miles have declined nearly 41% YOY.

Obviously, commuting to work has vaporized for white-collar employees. But this stat also suggests that personal trips or errands have also plummeted. And that is supported by the explosive rise of e-commerce as a percentage of total retail sales.

Although the price point for OXY stock is incredibly tempting, unless you’re a hardened gambler, you may want to hold off. Even as a trade, the rest of the fundamentals don’t look too appetizing.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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