1 Energy Stock for the Long Term

Good old-fashioned value investing is not simply about having a buy-and-hold strategy. There's something more to it. It's buying a stock cheap and then selling it at the right price. Just ask Warren Buffet.

For those Fools whose memories need refreshing, Buffett bought a stake in PetroChina (NYS: PTR) in 2003, worth $500 million, and sold off his entire position in 2007. His profit? A cool $3.5 billion.

In hindsight, what Buffet managed to do was this: He saw a company's business, its intrinsic worth, and the growth potential, not to mention an excellent management. He went on to acquire a stake and waited for the right time. He sold it when he felt that the company's stock price had gone up too much.

The rest, as they say, is history. They also say that this was one of his coolest investments ever.

One stock for today
Now I'm going to show you a stock whose value is yet to be fully tapped by the market. A solid business with sound growth opportunity for years to come, run by a management obsessed with shareholder returns.

This is a stock whose trailing price-to-earnings, at 12, has become the lowest in the last nine quarters, and yet has returned 23% (with operating income growing at 48%) in the same period. In other words, despite the stock price moving up, it's become cheaper when compared to earnings.

Occidental Petroleum (NYS: OXY) is a company that's been around for quite some time. Maybe even long enough to be given some attention when compared to its flashier (and more newsworthy!) peers. However, its CEO, Stephen Chazen, seems set on carrying forward the legacy of his illustrious incumbent Ray Irani. The aim is pretty simple: Increase shareholder returns.

How does it do it?
It boils down to allocating and deploying capital with a focus on returns that are well above the cost of capital. The company strives to achieve a 15%-plus return from domestic operations and 20%-plus from international operations.

In terms of domestic returns, Occidental has done a great job. Operating income in the last 12 months grew by 30%, while 2010 saw a corresponding growth by 46%. In the last six years, annual operating returns beat the 25% mark four times. (The Great Recession in 2008 ensured that the target wasn't met that year.)

Priority, not greed
And how is management achieving this? Occidental just doesn't exploit all the available resources. Instead, it prioritizes particular reserves and focuses completely on them. Case in point: The company entered the California shale reserves though its Elk Hills discovery in 1998. Since then, cumulative production from this location stands at over 400 million net barrels of oil equivalent (BOE) with a reserve replacement ratio of around 130%. That's the kind of business I'm looking for.

Last year, a major chunk of capital expenditure -- around $1.6 billion -- was allotted to the Californian reserves. This is a solid 80% more than that of 2010. Bear in mind, this is despite Occidental's exposure to the Permian Basin reserves and North Dakota's lucrative Bakken reserves. Out of a total of 73 rigs operated, a good 30 are in California.

The strategy employed is so unlike that of Chesapeake Energy (NYS: CHK) , which is all over the place. The natural gas player has chewed off more than it could possibly swallow, and it doesn't really come as a surprise that the Oklahoma-based company has divested some of its Utica shale assets to Total. The debt situation for Chesapeake has been getting out of hand lately. Occidental's debt-to-equity stands at only 16%; Chesapeake's is four-and-a-half times higher.

And how can one miss the dividends? For a safe and solid business, this doesn't come as a surprise. In the last 10 years, dividends grew at a compounded annual rate of 15%. At 1.9%, I believe that the dividend yield is worth the deal for this undervalued stock.

Solid outlook
Coming back to operations, the Permian Basin and the Williston Basin should see substantial growth in the next few years. In the first nine months of 2011, Occidental acquired domestic properties worth $3.6 billion. I'm not expecting production to go up dramatically. Rather, you can be assured of a steady expansion in operations and resulting cash flows.

Management targets its Williston Basin production to go up from 8,000 barrels of oil equivalent/day to 30,000 Boe/d in the next five years. On the international scene, the company has acquired a 40% participating interest in the Al Hosn Gas project in Abu Dhabi. The $10 billion project is a 30-year joint venture in the Shah Field. With production anticipated to begin in late 2014, the project is estimated to add a whopping 200 million cubic feet of gas per day in sales, plus condensate and NGLs.

Foolish bottom line
Occidental is not for investors who want to hold it for a few months. I believe the stock's true value won't be realized for at least the next five years. All in all, there's a long way to go for this safe, dividend-paying stock. Long-term investors should definitely take a closer look. You can start watching this stock by adding it to your watchlist.

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At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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.

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