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Occidental Petroleum: Oiling Up for Growth

This big-oil company has a steady business at home and promising projects abroad -- and its shares could shine in 2006, an analyst says.

Strong energy prices, production growth and free cash flow, combined with a pending acquisition, could propel shares of Occidental Petroleum to another big gain this year, in the view of analyst Jacques Rousseau of Friedman, Billings, Ramsey.

The Arlington, Va., investment firm listed Occidental (symbol OXY) as one of its top picks for the coming year in a report published last week.

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Oxy Pete mainly operates in the United States, searching for oil in such areas as California and Texas's Permian Basin. Rousseau says that finds in these areas "provide the company with a strong foundation of low-risk, long-lived reserves." Its operations generate a lot of cash -- more free cash flow per barrel than any of its peers, Rousseau notes.

Occidental is looking abroad to drive production growth. It is once again producing oil from its Libyan fields, after a nearly 20-year absence from that country. And, Rousseau says, Oxy's other projects in the Middle East, including a large natural-gas development in Qatar, "should allow for steady production growth over the next several years."

Plus, the company intends to purchase Vintage Petroleum, which operates mainly in Argentina. The $3.8-billion deal is expected to close within the next month or so, pending approvals.

Rousseau looks forward to hearing more about the acquisition and other projects in late February, when Oxy officials plan to meet. He suspects that other analysts will take a more positive view of the company's oil and gas business after this meeting and will raise their earnings estimates accordingly.

Profit estimates for energy companies are, not surprisingly, tied closely to projections for oil and gas prices. Rousseau thinks oil prices will remain strong this year, which would be especially beneficial to Occidental because it's more leveraged to the price of oil than its more-diversified peers are. The downside is that if oil prices sink, Occidental's share could suffer more than those of better-diversified energy producers.

Occidental is among the holdings of two other energy bulls, Chris Davis and Ken Feinberg, who manage Selected American Shares and Clipper Fund.

At $90, the stock sells for 8 times the average of analysts' earnings estimates for 2006 of $10.65 per share. It yields 1.6%.

--Lisa Dixon

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