Why Merrill Lynch Switched Occidental and Pioneer on Its Prized US 1 List

Merrill Lynch opined on Occidental that investors are basically getting California for free as the company is entering the critical phase of its restructuring plan. We would note that the drop of Pioneer also coincides with the firm announcing the closing of its sale of Barnett Shale assets.

The Occidental coverage transfer report to the US 1 list said:

While dealing with limited disclosure, revised working assumptions on ResidualCo lead us to believe accelerated drilling activity in the Permian positions OXY as unique amongst large cap Exploration and productions with a competitive growth rate and prospective yield above 4% ex CRC all funded from cash flow … we contend Residual Occidental can rerate to normalize what would otherwise be a sector leading dividend.

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The firm has a $130 price objective for Occidental. By revisiting the Permian assets, this adds about $15 to Merrill Lynch’s core net asset value in the report. The firm believes Occidental (ex-CRC) can deliver competitive growth that lifts production well above management’s target of 120,000 BOEPD in 2016.

Merrill Lynch also believes that the scale of cash proceeds that accrues to ResidualCo from asset sales can not only drive buybacks to the tune of about 13% of outstanding shares, but it believes it can support another year of strong dividend growth.

The US 1 list is intended to represent a collection of Merrill Lynch’s best investment ideas, drawn from its universe of Buy ratings under the fundamental equity research analysts.

Occidental shares were up 0.4% at $96.86 after the opening bell on Wednesday. Merrill Lynch’s $130 price target compares to a $110.50 consensus price target from all analysts. What investors will want to know is that the $130 price target from Merrill Lynch is the highest price target on the street, and it seems as though the firm even sees upside in its own target. Occidental’s market cap is right at $75 billion.

Pioneer Natural Resources stock was down 1.4% at $194.60. Interestingly enough, its consensus price target from all analysts is just under $249. Pioneer’s market cap is almost $28 billion.

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