By Sam Boughedda
On Tuesday, Goldman Sachs analysts raised Occidental Petroleum (NYSE:OXY) to Buy from Neutral with an $81 per share price target.
The analysts said in a note that the upgrade is due to the company's robust FCF, solid upstream portfolio, and low carbon option value.
The firm was previously positive on the stock but moved to the sidelines in July last year after "sharp outperformance."
"In the last 6 months OXY once again lagged peers, reflecting concerns about 2023 capital spending levels, a choppy oil macro, uncertainty around how to value the Low Carbon segment and relative valuation (investors rotated into other global oils such as XOM, HES)," explained the analysts. "From here, we believe there are four parts of the OXY story that are underappreciated."
"First, the magnitude of free cash flow that can be returned to shareholders and to redeem preferred equity," they said. "Second, we believe the Upstream portfolio is underappreciated, with high-quality assets in the Middle East and Permian (where productivity is positively surprising in the Delaware for OXY)."
For the third part, they state that Goldman Sachs sees the chemicals business as a consistent source of cash flow, with "above-normal earnings likely in 2023 from the caustic soda business."
Finally, for the fourth part, they explain that many investors are skeptical about the low carbon segment, especially toward the Direct Air Capture project, due to the lack of visibility around project economics. However, they believe the "Inflation Reduction Act should provide some ballast - more confidence in higher carbon credits from voluntary/compliance markets in the near term, and path to stated cost reduction targets in the long-term can unlock the value for the business."