Occidental Petroleum's Stock Is on Sale -- But Not for Long

NEW YORK (TheStreet) -- At the end of my last energy-company-related article, I wrote the following: "Meanwhile, if you want to catch the next HES-style energy opportunity, our own Jim Cramer and Stephanie Link like Occidental Petroleum (OXY), which pays a delectable 3.28% current yield-to-price and trades at slightly more than 10 times forward (one-year) earnings."

This is the kind of compelling investment theme that deserves our careful consideration. With a company like OXY, we have an opportunity to "catch a wave" before all the other stock "surfers" know the underlying potential of the "wave" and how rewarding a "ride" lies ahead. This is no April Fool's Day story and that's why I wanted to circle back to OXY and explain why I own it and want to buy more shares.

Speaking of April 1st, this morning just after the markets opened, TheStreet Ratings reiterated its "buy" recommendation on OXY, and the disclosure from the editor is a good place to begin.

"Editor's note: TheStreet Ratings does not represent the views of TheStreet's staff or its contributors. Ratings are established by a computer based on metrics for performance (which includes growth, stock performance, efficiency and valuation) and risk (volatility and solvency). Companies with poor cash flow or high debt levels tend to earn lower ratings in our model."

The above disclosure is important because the "buy" recommendation is done by an unemotional, non-human, computer-based screening analysis of important economic and financial metrics that use straight logic to separate "the wheat from the chaff." It gives the investor a relatively unbiased picture of the kind of companies that have both obvious positive features as well as some inconspicuous ones.

Shares of OXY hit an intraday low of $77.21 on March 26, and since that time the intraday lows and highs have been moving up. On this first day of April, the low was $77.91 and from there the share price headed above $79 after TheStreet Ratings' reiteration.

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Value investors who like to buy after a correction might be cheered to know that since the Feb. 7 intraday high price of $88.74, shares of OXY corrected 13% before moving higher the past week. Even at Monday's high of $79.21, that's still 10.7% below the high on Feb. 7. OXY is still on sale and here's why.

To begin with, it maintained a trailing 12-month operating margin throughout 2012 of over 30% and by the end of 2012, it had operating cash flow of $11.3 billion on annual revenue of $24.17 billion. That means it can continue to service its $7.62 billion total debt (most recent quarter). With the Federal Reserve keeping interest rates near zero, the opportunity to reduce the cost of that debt is auspicious too.

As an investor who likes getting paid a substantial dividend while waiting for a stock's price to push higher, it is important to note that OXY's dividend payout ratio as of the end of 2012 was a manageable 38% of earnings. That's impressive in light of last quarter's 79.4% year-over-year drop in its quarterly EPS.

Over the past five years, the stock's price saw a gut-wrenching low during the late-2008 "financial fiasco," dropping to almost $40-a-share only to see prices nearly triple to around $118 in the first half of 2011.

Then OXY shares corrected to below $70 in the last half of 2011 only to leap back above $100 by the beginning of 2012. Study carefully the five-year chart below for clues as to what might happen next. OXY Chart OXY data by YCharts

When the company reports earnings and sales growth on April 22 (in three weeks), the analyst community's consensus average estimate for EPS calls for around a 13% decline from a year earlier. When it comes to sales growth and revenue, the same group's average estimate is for a meager 1.7% increase.

My point is that expectations are low, the stock's price has been under a lot of pressure, and the officers of the company will be on the hot seat when they step into the earnings confessional. When you look at Oxy's Web site describing its businesses and operations, you may perceive that OXY is the kind of company that a wealthy activist hedge fund would like to take control of.

In short, the "parts" of OXY are likely worth a lot more than the current $63.8 billion market cap would indicate. Its operations, including vast energy production, comprehensive crude oil, natural gas and power marketing and sales in North American and international markets, are impressive.

Then you add in its valuable Occidental Chemical Corp. (OxyChem), which manufactures the building blocks for many everyday products, and you'll see the potential for its earnings, revenue and future share price.

The company is looking for a new CEO and president. As previously announced, Dr. Ray R. Irani, who continues to serve as executive chairman, will retire at the end of 2014. As of Dec. 20, Dr. Irani owned 7,657,622 shares of OXY, which at today's price is worth more than $605 million.

As of the end of 2012, the Vanguard Group and State Street owned nearly 8.7% of the outstanding shares of OXY, valued at over $5 billion. All these major holders and shareowners want to see the price of the stock move higher. Perhaps that's why current analysts' consensus one-year price target is still nearly $100.

You might remember what happened to ConocoPhillips ( COP) less than two years ago when it was in similar circumstances. The majority shareholders and the board realized it was time to spin off its refining operations and, as the saying goes, "the rest is history." That spin-off, called Phillips66 ( PSX), has been a great performing stock and hit its 52-week high March 28.

Might this be the "template" that the officers, board of directors and majority shareholders of Occidental Petroleum will eventually be mulling over? Once the new president and CEO is announced, the current corporate state of limbo will be ended. The news and earnings report on April 22 will be another major event that could be used to move the share price higher.

This is a company that can afford a share-buyback program and a dividend increase going forward. It has had a meaningful correction and is overdue for some good news. Do your own careful due diligence and accumulate the shares of OXY with knowledge and patience.

Disclosure: As of the time of publication, the author was long shares of OXY and COP.

Jim Cramer and Stephanie Link actively manage a real money portfolio for his charitable trust -- enjoy advance notice of every trade, full access to the portfolio, and deep coverage of the latest economic events and market movements.

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