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Analyst: 'Unloved' Oil & Gas E&P is 'Premier Permian Growth Story'
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A Raymond James report made the case for revising its rating on this energy company.

In an Oct. 22 research note, analyst Pavel Molchanov reported that Raymond James upgraded its rating on Occidental Petroleum Corp. (OXY:NYSE) to Strong Buy from Outperform to reflect the oil and gas company's "unwarranted" stock underperformance against the backdrop of higher oil price forecasts.

Year to date, "unloved" Occidental is down 2%, whereas the oil and gas exploration and development sector overall is up 8%. "This underperformance has widened the dividend yield to 4.3% while erasing the stock's traditional valuation premium," Molchanov highlighted.

The analyst pointed out the market most recently reacted negatively to Occidental's opting to leave the Qatar ISND concession when it expires in October 2019, but that was an overreaction. "If the company had decided to re-up, this would have involved a long lead time field redevelopment with increased upfront capital spending that would have wiped out much of ISND's current free cash flow," he explained. "Thus, by exiting instead of re-upping, the company is following a capital disciplined approach."

Also at play in the Occidental story are oil prices, and Raymond James expects them to be higher next year, Molchanov relayed. For 2019, the financial services firm increased its projected West Texas Intermediate (WTI) and Brent oil prices to $77.50 and $90, respectively. Raymond James estimates a peak price in 2020 of $92.50 WTI and $100 Brent and a long-term average price of $75 WTI and $80 Brent.

These higher prices would affect Occidental's 2019 peak cash flow yield by 8%, as opposed to 6%, noted Molchanov. The company would have about $2 billion available for share buyback, which Raymond James sees as upside.

Also worth noting, Molchanov wrote, is strong production growth in the Permian Basin. "We forecast Permian liquids growth of 17% in 2019, driving all-in companywide growth of 8%." Further, the current midstream bottlenecks in the Permian do not impact Occidental, because "ironclad access guarantees are in place for its Permian barrels well into the next decade."

Raymond James has a $90 per share target price on Occidental, whose stock is currently trading at about $68.23 per share.

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Disclosures from Raymond James, Occidental Petroleum Corp., October 22, 2018

ANALYST INFORMATION

Analyst Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates makes a market in shares of OXY.




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