No Clear Path for Occidental Petroleum to Outperform
This stock may not work for a while

Even with new management and a shift in capital strategy, Occidental Petroleum's (OXY)  expected total return may not be competitive with higher growth exploration and production (E&P) companies.

BMO Capital Markets downgraded the Action Alerts PLUS (AAP) holding to Market Perform from Outperform, saying "OXY shares are now in line with our $70 per share target price, and we don't see further upside to the valuation."

OXY shares were holding relatively flat during midday trading at just below $70.

BMO analyst Phillip Jungwirth says that even though Occidental has some "sweets spots" in the Delaware and Midland Basin, he does not view the core unconventional resource potential as significant enough to drive net asset value.

"While OXY is expected to grow production at a mid-single-digit rate over the 2017-19 period, combined with a 4.3% dividend yield, we view this all-in high-single-digit return as less compelling than the 15-20% debt-adjusted production growth we forecast for most of our Outperform-rated E&Ps," Jungwirth wrote in a research note on Wednesday. "With valuation in line, and unlikely to trade at a premium, we don't see a path to relative share price outperformance absent a bear market in oil prices, whereas we expect a gradual recovery," the BMO analyst concluded.

The downgrade is relatively in line with the view from AAP portfolio managers Jim Cramer and Jack Mohr.

"Occidental has been a thorn in my side," said Cramer. "I've been waiting, trying to build the Apache position so I can sell Occidental."

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