Occidental Petroleum ‘s recent underperformance has brought the stock to a more attractive level, according to Goldman Sachs. Analyst Neil Mehta upgraded the energy stock to buy from neutral. His price target of $81 per share implies upside of 25.1% from Monday’s closing price of $64.76. He turned neutral in July after the stock sharply outperformed in the first half of 2022. But after lagging peers in the past six months due to concerns about the macro environment and higher capital spending, he once again sees the stock as worth buying. Occidental shares are down 1.5% in the past six months, while rivals Exxon Mobil and Hess are both up more than 20%. “Our upgrade is not a call on the quarter or 2023 capital spending guidance, where we are modestly above consensus,” he said in a note to clients Tuesday. “Instead, it reflects a view that the current valuation is difficult to reconcile with the quality of the underlying assets and cash flow power through a cycle.” The stock gained 1.4% in premarket trading. It’s added 2.8% so far this year after skyrocketing 117.3% in 2022. Mehta said he expects Occidental to return around $9 billion in free cash flow to shareholders in 2023 through share repurchases and equity redemption. Share repurchasing could start as early as the first quarter, he said. The chemicals business is one source of consistent cash flow, he said, and a reason to be bullish on the stock. Mehta also said the company’s upstream business segment is underappreciated given what he called “high quality” assets in the Middle East and the Permian Basin. Mehta said some investors are skeptic of the company’s low-carbon segment, especially the Direct Air Capture project given a lack of visibility into its economics. But he said the Inflation Reduction Act should help somewhat in the near-term, while the potential to reduce costs long-term can unlock value. — CNBC’s Michael Bloom contributed to this report.
