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Can Occidental Petroleum (OXY) Beat on Earnings in Q1?

We expect integrated oil & gas company, Occidental Petroleum Corporation OXY to beat expectations when it reports first-quarter 2016 results on May 5, before the market opens. Last quarter, the company reported a negative earnings surprise of 21.43%.

Why a Likely Positive Surprise?

Our proven model shows that Occidental Petroleum is likely to beat earnings because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates and Occidental Petroleum has the right mix.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate of loss of 39 cents and the Zacks Consensus Estimate of a loss of 41 cents, is +4.88%. This is meaningful and a leading indicator of a likely positive earnings surprise.

Zacks Rank: Occidental Petroleum currently carries a Zacks Rank #3, which when combined with the company’s positive ESP, makes us fairly confident of an earnings beat.

Conversely, we caution against Sell-rated stocks (#4 or #5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Surprise History

The above chart indicates that Occidental Petroleum was able to generate positive earnings surprises in two out of the last four quarters. The average positive surprise was 82.14%.

What is Driving Better-than-Expected Earnings?

Given the current commodity price environment, Occidental Petroleum is pursuing strategies to reduce activities in non-core operations in the Middle East and North Africa, while shifting focus toward opportunities to generate higher financial returns.

Meanwhile, the company’s focus on its core oil and gas operations has resulted in strong growth in the Permian Basin. The company expects the region to reach production capacity of 123,000 barrels of oil equivalents (BOE) per day in the first half of 2016, reflecting an 8% year-over-year increase. On the other hand, it projects full-year production growth in the range of 570,000–585,000 BOE per day, up from the 2015 level of 560,000 BOE, with core areas contributing 2–4%.

Due to the ongoing softness in commodity prices, the company projects 2016 capital expenditure in the range of $2.8–$3 billion, down nearly 50%. We consider the planned reduction in expenditure to be a prudent move in this scenario as it will boost company’s financial flexibility. Occidental Petroleum also expects to slash general & administrative costs by $100 million in 2016 to counter the weak commodity price environment.

Other Stocks to Consider

Occidental Petroleum is not the only company looking up this earnings season. We see likely earnings beat coming from these companies in the oil & energy space as well:

Linn Energy, LLC LINE has an Earnings ESP of +500.00% and a Zacks Rank #3. The company is expected to report first-quarter 2016 results on May 4.

Bill Barrett Corp. BBG has an Earnings ESP of +9.09% and a Zacks Rank #3. The company is expected to report first-quarter 2016 results on May 5, after the market closes.

Chesapeake Energy Corporation CHK has an Earnings ESP of +9.09% and a Zacks Rank #3. The company is expected to report first-quarter 2016 results on May 5, before the market opens.

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CHESAPEAKE ENGY (CHK): Free Stock Analysis Report
 
BILL BARRETT CP (BBG): Free Stock Analysis Report
 
LINN ENERGY LLC (LINE): Free Stock Analysis Report
 
OCCIDENTAL PET (OXY): Free Stock Analysis Report
 
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