3 Reasons Occidental Petroleum Stock Could Fall

Oil and gas exploration and production major Occidental Petroleum is having a great run lately. Production is ramping up, thanks to its premier asset footprint in some of the best oil fields in the United States, including the Permian Basin. This led to double-digit earnings growth in the last quarter.

Occidental Petroleum's share price has performed well, as you'd expect. However, no stock is completely without risk. In the energy world, things can (and often do) go wrong. In that light, here are three reasons why Occidental Petroleum stock could fall.

Declining oil prices

As an exploration and production company, Occidental Petroleum is highly dependent on supportive oil prices for growth. When these prices are favorable, revenue and earnings per share get a boost. The other side of this coin is that the company is vulnerable to a downturn in petroleum prices.

Recently, this has played out, enough that it is a concern going forward. The price of West Texas Intermediate crude in the United States in just a few weekshas fallen from over $100 per barrel to its current level near $93 per barrel.

That price of oil is below Occidental's average realized price. Last quarter, Occidental realized an average price of $97.48 per barrel in the United States. This development will affect Occidental's results this quarter, and the impact could be more significant if the trend continues.

Any production disruption in the Permian Basin

Occidental Petroleum has planted its flag in the Permian Basin in a big way. Of course, there's good reason for this, since the Permian Basin is one of the most productive oil fields in the United States. In fact, the U.S. Energy Information Administration said the Permian is one of only three domestic onshore oil fields that produces at least 1 million barrels of oil per day.

However, it's worth noting that Occidental Petroleum generated more than half of its oil production last quarter from the Permian. If there's any sort of disruption there, Occidental would be really exposed.

Other exploration and production companies, such as Anadarko Petroleum , have more diversified portfolios. For instance, Anadarko holds onshore operations across the U.S. in fields such as the Eagle Ford and Marcellus shales. Anadarko is also active in the deepwater Gulf of Mexico and holds considerable interests in international developments in Algeria and Ghana. Moreover, Anadarko has built a large liquefied natural gas project in Mozambique, which holds a lot of potential.

This helps insulate Anadarko from unexpected events in any one area. Occidental Petroleum is doing just fine, to be sure, because the Permian is a hugely productive field. But being so dependent on one basin could backfire if things go wrong.

Increasing capital spending

Most oil companies are busy cutting capital spending in light of lackluster returns on new projects over the past year. Instead, they're allocating more capital to increasing cash returns to shareholders. Occidental isn't following suit. Rather, the company continues to allocate more capital into acquiring new acreage and developing existing projects.

This year, Occidental plans to spend $10.2 billion on capital projects. This is up 16% from the $8.8 billion spent last year. This approach could pay off if the new projects work out in the company's favor, but if that is not the case, investors will likely question the higher capital expenditures.

The Foolish takeaway

No company is a risk-free investment, and that's especially true in the energy space, where things can change quickly. Occidental Petroleum is highly dependent on oil prices, and is also overly reliant on one oil-producing area of the country. In addition, it is breaking from the mold of other exploration and production companies by significantly increasing capital spending this year.

These decisions could strike gold for the company if everything materializes as planned, but if not Occidental stock could hit a rough patch in the days ahead.

Do you know this energy tax "loophole"?

You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, " The IRS Is Daring You to Make This Investment Now! ," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

The article 3 Reasons Occidental Petroleum Stock Could Fall originally appeared on

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More