Sales of onshore equipment are about 18% to 20% of revenue, whereas 32% come from the deepwater market. With sales growth rates in the 20% to 25% range, the company deserves a high P/E ratio in the low 20s. Its market value is around $16 billion. They also carry strong gross margins of 30%, but have a hard time carrying that down to net margins, which stand at 9%.
Occidental Petroleum Corporation (NYSE:OXY)
Occidental is one of the giants in the oil and gas production arena at a $71 billion market cap. They also specialize in enhanced oil recovery, pulling out hard-to-extract crude oil from wells, using water or gases. They primarily operate in the United States, Latin America and Middle East.
In 2012, Occidental began a cost-reduction campaign, resulting in a smaller rig count. However, oil production in the recent fourth quarter grew 4%, indicating that their growth efforts are starting to pay off.
More importantly, due to their enhanced oil recovery program and purchase of new wells, they increased their reserve replacement rate at a healthy 175%. This metric gauges the amount of oil reserves added to the company’s base, minus the amount of oil and gas their wells pump out. An energy producer needs at least 100% to stay in business, so OXY’s is a strong measure of long-term growth.
As a leader in enhanced oil recovery techniques in older wells, the company has done a good job buying wells with modest production declines and bringing the rates back up, extending their lives. Finally, Occidental has also entered the Bakken shale, acquiring 300,000 acres of the rock formation, which contains large amounts of oil, though they have not aggressively exploited the area as of yet. They are hoping for lower recovery costs in the future there. The Bakken deposits underlie parts of North Dakota, Montana and Saskatchewan.
Being a major player in the oil industry, they bring in over $6 billion a quarter in revenue. Occidental’s large size makes rapid sales growth difficult; it now registers in the low single digits. But gross margins are high, at 68%, and net margins at 28%.
When looking at Big Oil, dividends are important and OXY carries a 2.5% rate, higher than the industry average, according to Bloomberg. The company’s P/E ratio at 15 is somewhat elevated compared to some of its peers in the industry. That may be due to the high margins and the belief in their continued improvement as the company focuses on cost cutting and growth initiatives. Occidental also stepped up a stock repurchase plan, in 2012 buying back 5 million shares at an average cost of $76.15.
All these companies have a common denominator and that is the price of oil. Where do energy companies stand, as oil prices go up or down? The direction of global economic growth will always be the best guide to answer this tough question.
Steve Peasley is president of KPP Financial Inc. in Dana Point, Calif. The firms’ clients hold positions in Oceaneering International (OII).
The article 3 Stocks Riding the Hard-to-Reach-Oil Boom originally appeared on Fool.com and is written by Steve Peasley.
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