Occidental Petroleum Stock Is Off Its Highs Despite Strong Q3 Results

Occidental Petroleum (OXY) produced strong Q3 earnings results on Nov. 8 with strong full-year guidance though oil and gas prices are down. Nevertheless, OXY stock is now off its highs, with a low valuation. This makes it interesting to value buyers, especially to those willing to sell out-of-the-money puts to create option income by buying the stock at a discount.

As it stands, at $68.35 on Nov. 21, OXY is now down 6.4% in the last week since it announced its Q3 results, but it is still up over 5.5% in the last 6 months. So, in effect, the stock has been treading water and could become more interesting to value investors if it gets any cheaper.

Large Shareholder Return of Capital Payments

One reason value buyers like the stock is Occidental seems committed to shareholder return of capital. For example, with its latest dividend announcement OXY has paid out 13 cents per quarter for the last 4 quarters. It is likely they could raise the dividend before the Q4 earnings are announced. This could act as a catalyst for the stock which now has a 0.75% dividend yield.

In addition, given Occidental's large free cash flow (FCF), it has been buying back large amounts of shares. Last quarter it produced quarterly free cash flow before working capital of $3.6 billion. 

As a result, Occidental repurchased over 28.4 million shares for $1.8 billion during the third quarter. And YTD OXY has bought back 41.8 million shares for $2.6 billion through November 7, 2022. That represents about 4.6% of its 908.9 million shares outstanding. This puts it on a run rate buyback yield of 6.1% annually in terms of share buybacks.

OXY Stock Is Attractive

Oxy stock has an attractive valuation now that the stock has fallen off of its highs. For example, analysts now project earnings per share (EPS) of $7.90 for next year. That puts the stock on a forward multiple of below 10x earnings (i.e., 8.55x). However, this is down substantially from EPS projections for this year at $9.95 per share.

That assumes that the slump in oil and gas prices will continue. This is very possible, especially if the Fed keeps raising rates and the global economy enters into a recession. 

On the other hand, OXY stock has a valuation that already assumes this worst-case scenario. And if the company keeps buying back shares and the dividend moves higher, the stock could be near its bottom. 

As a result, investors might want to begin accumulating shares, especially if the stock weakens from here.

Sell OTM Put Options

One way to profitably do this as well as collect some income is to sell out-of-the-money (OTM) cash-secured put options. For example, the Dec. 23 put option chain with Barchart shows that the $63.00 strike offers a premium at $1.55 per contract.

This means that if an investor puts up $6,300 with his brokerage firm, and sells the $63.00 strike put for Dec. 23, he will immediately receive $155 per put contract sold. That works out to a 2.46% return on investment. If the stock does not fall by 9.47% to $63.00 by Dec. 23, the investor will not have to purchase the 100 shares of OXY at $63.00. 

That works out to annualized ROI of over 29.5% if the investor can repeat this every month for a year. And even if the stock falls to $63.00 by Dec. 23, the investor gets to buy the stock as a 9.5% discount from today's price. The investor can then sell covered calls on the stock that is now purchased. That will help provide more income opportunities.

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