Occidental To Benefit From Likely Widening In Midland-MEH Spread, Citi Says In Upgrade

Crude oil prices have been on an uptrend this year, with supply concerns propping up the commodity to some extent. Even as the oil price outlook appears bright, one Citigroup analyst said Occidental Petroleum Corporation OXY could benefit from a trio of factors.

The Analyst

Analyst Robert Morris upgraded shares of Occidental from Neutral to Buy and increased the price target from $88 to $97.

The Thesis

The spread between the Midland and Magellan East Houston grade of crude oil is likely to widen in the second half of 2018 and in 2019, Morris said in a Monday note. This is a net positive for Occidental due to the boost it can provide to the company's midstream and marketing division, the analyst said.

Following a recent increase in Citi's oil price forecast and an update to its Permian oil and natural gas in-basis differentials, the sell-side firm raised its 2018 and 2019 earnings per share and cash flow per share estimates for Occidental.

Occidental guided midstream-marketing pre-tax income to a range of $0.9 billion to $1 billion on the premise of a full-year Midland-MEH spread of $6-$6.75 per barrel, Morris said. With expectations for a further widening of the spread, the analyst now estimates fiscal 2018 pre-tax net income of $2.2 billion from the segment, which could increase to $2.3 billion in 2019.

Citi also increased its fiscal 2018 and 2019 pre-tax net income estimate for the chemicals segment following a second increase in caustic soda prices the company reportedly announced for its spot customers May 23.

Citigroup projects 10-percent production growth in 2018 and 11-percent production growth in 2019 for Occidental.

The Price Action

Occidental shares have gained about 17.3 percent year-to-date. 

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