Occidental Petroleum Is Surprisingly Expensive Relative To Its Reserves

In my recent article “Drilling for Oil in the Stock Market,” I compared the enterprise values of the oil “supermajors” to the value of their reserves—the oil and natural gas they own underground.

A company’s enterprise value is the value of all the money invested in the company by both shareholders and lenders. It equals the company’s market capitalization, which is what all its stock is worth, plus the face value of its debt minus the company’s cash (also known as its “net debt”).

Enterprise value is a good metric to compare to an oil company’s reserves because ultimately, both lenders and shareholders have a claim on the company’s assets, including those reserves. This is particularly important if the company is at risk of bankruptcy. In comparing the supermajors’ enterprise values to their reserve values, I wasn’t implying they might go bankrupt. Rather, I wanted to see how an acquirer might appraise them. However, there is a major oil company which is in financial difficulty—Occidental Petroleum (OXY). (Read More)