Occidental Petroleum Corporation - Rock Steady Value

Occidental Petroleum Corporation's businesses consist of three principal segments, Oil and Gas, Chemicals, and Midstream and Marketing. The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas. The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls. The midstream, marketing and other segment (midstream and marketing) gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power. Industry peers include E. I. du Pont de Nemours, Exxon Mobil, and BPplc.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $74.41, with an initial trailing stop at $76.44. There is no resistance to upward price movement. Downward price movement will find support at $75.26 and again at $73.76, with final support at $70.56.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

The Act includes a transition rule to effect this participation exemption regime. As a result of the enacted legislation, taxpayers are required to include in taxable income for the tax year ending December 31, 2017, the pro rata share of deferred income of each specified foreign corporation with respect to which the taxpayer is a U.S. shareholder.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of Occidental Petroleum Corporation, total deferred tax assets, after valuation allowances, were $1.8 billion as of December 31, 2017. The company expects to realize the recorded deferred tax assets, net of any allowances, through future operating income and reversal of temporary differences. The reduction in the net deferred tax liabilities is primarily related to the reduction in the federal corporate income tax rate from 35 percent to 21 percent and the addition of $221 million of general business credits to the credit carryforward balance.

As of December 31, 2017, the company had foreign tax credit carryforwards of $2.8 billion, which expire in varying amounts through 2027, $35 million of state operating loss carryforwards, which have varying carryforward periods through 2037, $402 million of federal operating loss carryforwards that expire in 2037, and $407 million of general business credit carryforwards that expire between 2033 and 2037. The company also had corporate AMT carryforwards of $221 million, that have been classified as non-current receivables due to Tax Reform.

At December 31, 2017, the company reversed its indefinite re-investment assertion with regards to its investments in foreign subsidiaries and, as a result, a deferred foreign tax liability of $99 million was recorded. The company's valuation allowance provides for substantially all of the foreign tax credit carryforwards and approximately $4 million of the state net operating loss carryforwards. As of December 31, 2017, the company had liabilities for unrecognized tax benefits of approximately $22 million included in deferred credits and other liabilities, all of which, if subsequently recognized, would favorably affect the company's effective tax rate.

Insider Transactions
In the past 12 months, the company recorded 68 insider trades involving 495,531 shares of stock. Of those 68 insider trades, 38 were Buys involving 432,394 shares of stock, and 30 were Sells involving 63,137 shares of stock, creating an insider buy to sell ratio of 6.8 to 1.

Future Value
My future (5 year hold) target price for the stock is $78, which is an average annual return of less than 0.1%. A prior five year hold of the stock (2012-2017) would have returned an average of 1% per year. Please be aware that past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Please also be reminded that any investment has the potential for loss, and past performance is no guarantee of future results.

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. For Occidental Petroleum Corporation (NYSE: OXY) - FYE 12/2017 FAIRLY VALUED The stock is currently trading at levels in line with my most recent $98 fair value estimate. Please See Linked PDF Worksheet

Disclosure
I hold no shares of Occidental Petroleum Corporation
Posted on 04/27/18