Why Analysts See Big Upside for Occidental Petroleum Despite Lows

Key Points

• Investors worried about Occidental Petroleum's recent sell-off should consider whether this is now an opportunity rather than a risk.
• Analysts expect this stock to grow above its peers for the next 12 months, and price targets showing double-digit upside confirm this view.
• As the yield curve returns to positive, a historically positive sign for the energy sector, Occidental Petroleum's discount becomes unmissable.

Even after one of Wall Street’s best investors, Warren Buffett bought up to 29% of Occidental Petroleum Co. NYSE: OXY, the stock has been downward and now trades at a new 52-week low. Has the Oracle of Omaha lost his touch? Bears could criticize his timing, but the reality is that the short term doesn’t matter for investors like Buffett, but rather the coming few quarters.

Investors can look to a few economic indicators to determine whether they, too, can get a payoff from the energy sector before 2024. One main concern driving lower oil prices is the weakening business activity in the world’s largest economies, the United States and China. While these concerns are justifiable enough, the short side is no longer an attractive bet, as the risk of upside is now greater than the risk of a further sell-off.

Before discussing the macroeconomic factors that could send the sector higher, investors should first determine where Occidental Petroleum stock stands compared to its peers in the industry. This comparison will show a massive growth difference compared to stocks like Marathon Oil Co. NYSE: MRO and even ConocoPhillips NYSE: COP and open up a potential recovery path to the upside.

Occidental Petroleum Stock Has a Double-Digit Growth Runway

As the stock now trades at 76% of its 52-week high, an official bear market defined by Wall Street’s 20% or more sell-off from highs, investors have two choices. The first and natural choice for most is to give in to the anxiety and fear and sell to prevent further losses.

The second and better one is to stick to fundamentals and potentially add to positions at a better cost basis. Regarding Occidental Petroleum, the latter choice could be justified by the factors that made Wall Street analysts forecast up to 31.2% earnings per share (EPS) growth in the next 12 months.

Leaning on these outlooks, those at Scotiabank decided to place (and keep) a price target of $80 a share for Occidental Petroleum stock, implying that the company has up to 47.3% upside from the new lows it has made recently. Here’s how the company fares against its peers.

Compared to ConocoPhillips and its 17.3% EPS growth forecast, Occidental Petroleum stays on top of the new cycle in energy. More than that, ConocoPhillips stock’s short interest rocketed by as much as 25.7% in the past month alone. While bears shorted more of Occidental, that stock’s short interest only rose by 8%.

Even though oil has been moving lower, bears had no intention of flocking to Occidental Petroleum. With only 11.2% to show for EPS growth in the next 12 months, Marathon Oil stands at the bottom of this list, leading to a consensus price target of $32.3 today, or roughly 18% upside from today’s price (nearly half of Occidental Petroleum’s).

This doesn’t mean the stock is in the clear, but evidence is starting to stack up, pointing to the bottom being closer today than ever before.

This Key Economic Indicator Signals a Potential Rally in Oil Stocks, Including Occidental Petroleum

The yield curve (ten-year treasury yields minus two-year treasury yields) has returned to positive territory after a couple of years of being inverted (negative). When yield curves invert, the downside to economic conditions could potentially deteriorate.

Now that the curve is steepening back to positive, this has been good for the Energy Select Sector SPDR Fund NYSEARCA: XLE, which represents up to 100% accuracy. This time is not necessarily going to be the same, but it could rhyme, and here is why.

When the curve steepens, business conditions improve. Oil is typically the center of all this activity and new demand for pretty much all products and basic materials. An event that is only a couple of weeks away is driving the catalyst behind the energy sector recovery.

The Federal Reserve (the Fed) is set to cut interest rates by September 18th, 2024. Once rate cuts are lower, flexible financing and ample liquidity could also help oil prices a bit, but another driver is also looking to strengthen oil prices.

OPEC+ has just halted oil production to tighten supply, and the law of economics suggests that once demand comes back online, prices will soar. Saudi Arabia’s balance sheet also shows that the nation needs oil to trade at least at $95 a barrel to avoid deficits.

So, while Occidental Petroleum could continue lower, the chances that it does are deteriorating, and the reward potential is starting to shift to the upside for investors to consider.