Description

After underperforming its large-cap Permian peers by ~30% (CVX, COP, EOG, PXD, CXO) over the past 6 months, OXY offers relative value and its positioned to outperform as it updates its Permian Resources inventory. OXY's underperformance over the past 6 months has primarily been a function of an under-levered balance sheet and concerns around Permian Resource depth. OXY's underperformance accelerated following 3Q earnings (11/1/16) when the company announced a $2b Permian acquisition. This acquisition lead many investors to question the size and quality of OXY's Permian Resource acreage given its headline 2mm net acre position and its willingness to spend $2b in the context of an already large land position. At this price, OXY now more than discounts the negatives that bears have pointed to for the past year. Over the next few months, OXY has the opportunity to change investor perception when it provides a detailed update of its Permian Resource acreage. Further the company has the opportunity to provide a long-term Permian Resource growth rate (similar to the outlooks provided by EOG, PXD, CXO), which may drive a positive re-rating. In the past, OXY's CEO has stated a desire for Permian Resources production to only represent 20% of the company's total, but this may be shifting as the company improves economics in Permian Resources. To the extent OXY shifts the majority of its capital to Permian Resources, OXY could again command a similar premium multiple as its large-cap Permian peers.

Valuation:

OXY trades at ~7.5x 2018 EV/EBITDA a roughly ~1.5x-2.0x discount to EOG, PXD, CXO. Relative to CVX, OXY trades at a 1.5x premium, however this premium has averaged ~3x since OXY spun off CRC in late 2014.

Business overview:

OXY is an international independent E&P with a primary focus on the Permian Basin and Middle East. The company also has a valuable chemicals and midstream business (~$10-11b EV) which helps justify a premium multiple. Today the Permian generates 44% of total production split between shale at 20% and EOR (Enhanced Oil Recovery) at 23%. The Middle East represents 47% of production. Oil production is 61% of the company's mix. From a capital allocation & growth perspective, the Permian today receives >60% of the capex and this percentage is likely to grow in 2017+ which will drive the Permian's share of total production higher.

Risks:

• M&A: OXY has stated its desire to buy Permian acreage and/or EOR projects. Additional acquisitions are likely to be dilutive. However, after the recent $2b purchase, the risk of additional acquisitions is much lower.
• Permian Resource inventory depth: While likely to be positively biased, the resource update could prove to be disappointing if it shows that OXY has less inventory depth and expected.
• International: To the extent management invests more capital internationally, OXY could de-rate further given the low-multiple nature of those assets.

Catalyst

• Permian inventory update: OXY plans to provide a detailed update of the economics and depth of its Permian Resources inventory by 4Q16 earnings. This will likely highlight a significant increase in economics and inventory relative to its last update ~2 years ago.
• Long-term Permian Resource growth guidance: While the company has not stated a desire to do so, OXY may find it useful to provide a Permian Resources only long-term growth rate (vs the 5-8% total company guidance). This would allow investors to better compare its Permian business to those of CVX, EOG, PXD, CXO.
• Shift in capital allocation to Permian Resource: If OXY shows increased willingness to grow Permian Resources at a faster rate, OXY could regain its premium multiple.
• Improvement in well productivity: 3Q well results showed a material improvement vs. 2015. This could signal a structural improvement in completions which will have meaningful impact on returns and growth into the future.
•  Midstream monetization / earnings improvement: OXY owns 30mm PAA units (~$900mm) which are likely to be monetized and reinvested in Permian Resources.