With the oil price at a minimum level, it is time to think a bit about the future. In fact, most traders are locked up at home, and everybody is buying Netflix (NFLX) because there is a new reality. I do think that the Coronavirus will change our ways of operation / functioning in 2020. It could perhaps even change the economic environment in 2021. With that, I don’t believe in radical changes. Yes, the amount of employees working from home (“WFH”) may increase. However, we will still use and purchase one thing, that’s for sure: oil. Once the people get back to work, the transportation will definitely increase, and the demand for oil will go back to normal. As a result, the oil price, in my opinion, will recover. If we accept this case scenario, there is one company that will be benefited: Occidental Petroleum (OXY)
Occidental Petroleum Got To Know Other Large Oil Crises
Founded in 1920 and headquartered in Houston, Texas, Occidental Petroleum Corporation engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, and Latin America.
It is an old dog, which, in the past, has gone through many oil crises. Let me recall some of the most critical events. There is, first of all, the 1973 oil embargo. Notice that Occidental Petroleum successfully operated with the oil price at $3-$12 per barrel. I wonder why the company would not perform with the current oil price:
“The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo was targeted at nations perceived as supporting Israel during the Yom Kippur War. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom and the United States with the embargo also later extended to Portugal, Rhodesia and South Africa. By the end of the embargo in March 1974, the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or “shock”, with many short- and long-term effects on global politics and the global economy.” Source
Besides, OXY also went through the Iranian Revolution, which pumped the oil price to $39.50. Notice that OXY had to undertake massive capacity changes due to widespread panic:
“The 1979 (or second) oil crisis or oil shock occurred in the world due to decreased oil output in the wake of the Iranian Revolution. Despite the fact that global oil supply decreased by only ~4%, widespread panic resulted, driving the price far higher. The price of crude oil more than doubled to $39.50 per barrel over the next 12 months, and long lines once again appeared at gas stations, as they had in the 1973 oil crisis.” Source
Some analysts will say that this time is very different since there is an oil demand shock. They are correct. However, I don’t see any problem. Let’s shut down the industry for a few months. Let’s stop operations and wait. In my view, once the damages of Coronavirus diminish, the oil price will again go up. With this in mind, let’s see if there is upside potential in OXY’s share price.
Share Price Dynamics
In less than 10 days, OXY’s share price went down from $40 to around $10-$14. The destruction of value is very impressive. The company lost almost 75% of its total market capitalization because of the virus. In the light of these numbers, the market appears to expect that OXY will sell significantly less crude oil at a low price. Are we not just exaggerating? In the worst case scenario, people may be locked up for four months or even less. OXY will sell crude oil for the rest of the year, which is more than eight months. Can we justify that the company has lost 75% of its market capitalization? I don’t think so.
What’s the upside potential in the stock price? In the last four weeks, traders seem to be buying shares at $10-$13. It looks like an accumulation period at that price mark. If the demand for the stock continues, the share price may finally increase to $20 or even $25.
If there are more demand shocks in the oil industry, the oil price may head even lower. As a result, OXY’s share price could decline even more. With that, I don’t see that case scenario very likely. Oil futures hit negative territory a few days ago. We have never seen that in the history of this industry. Thus, I have firm belief that both the oil price and OXY’s share price will creep up slowly.
Hopefully, things will get better slowly. I cannot imagine that a One Year Coronavirus Combat will destroy the oil industry. OXY was founded in 1920. Since they have operated for a long period of time, after a four-month lockdown, I would not expect the share price to go to zero. Besides, somebody appears to be buying at $10-$13 as the share price is not declining from that price mark. Let’s see what happens in the next few months.
Disclosure: I am buying Occidental Petroleum (OXY)