"We recommend the purchase of Occidental shares based on the prospect of significantly higher oil, gas and chemical earnings during the next two years, and the stock's attractive 5.3% dividend yield," says Michael C. Young, managing director and senior integrated oils analyst for Deutsche Banc Alex. Brown in Boston. "In addition, we recommend focusing on Oxy because the company is generating significant free cash flow in relation to its current market capitalization," he says. "During the next two years, we project Oxy could generate $1.7 billion in free cash flow." Young rates Occidental a Strong Buy, with a 12-month price target of $28 per share. Based in Los Angeles, Occidental is primarily engaged in exploring for, developing and producing oil and gas reserves worldwide. Its core holdings are in Colombia, Ecuador, Qatar, Yemen and the U.S., including the Elk Hills oil field in California, the giant Hugoton gas field in Kansas, the Gulf of Mexico and the Permian Basin. Oxy also has substantial chemical assets domestically. Wall Street has been cautious towards Oxy's shares because of the company's weak earnings performance in the past two years, disappointment with respect to production growth at the recently acquired Elk Hills oil field, the company's relatively overleveraged balance sheet, and a misunderstood issue over executive compensation. What's more, Oxy's weak share price during the last six months has reinforced these negative perceptions. "Our view is different," says Young. "It is precisely the decline in Occidental's share price in the face of substantial improvement in the company's earnings power that makes the stock attractive. We project that Occidental is likely to record the strongest operating results in the company's history this year. Moreover, Oxy's management deserves high marks for dramatically repositioning and upgrading the company's asset base in the last decade." Oxy disposed of such questionable operations as MidCon Pipeline, Iowa Beef Packers, the Piper Field in the North Sea, and its Bangladesh gas assets-all for top-dollar. "As for the Elk Hills and Altura acquisitions, they represent better underlying, long-lived assets than those Occidental has sold." The purchase in March of the Altura Energy LP, which was owned by BP Amoco and Shell Oil, gives Oxy control of 850 million barrels of proved oil reserves in the Permian Basin. Assuming $25 West Texas Intermediate spot prices for 2000 and $21 in 2001, Altura could add 40 cents per share to earnings this year and 30 cents next year. Says Young, "We expect Oxy's share price to move higher as investors recognize how much stronger the underlying earnings power of the company is following the massive asset redeployment that management has successfully engineered." The analyst also expects substantially higher chemical earnings for Occidental this year. Specifically, he predicts that chemical segment results could increase more than 300%, from $132 million pretax in 1999 to $535 million pretax in 2000. Concludes Young, "Wall Street does not fully appreciate the magnitude of the earnings increase in Occidental's chemical segment, at the same time that its oil earnings are surging." Note: Analysis was on 3-24 when OXY closed at $19 and reaffirmed 5-4 when $21.69. Currently, some 367.6 million shares are outstanding. The 52-week price range was $24.56-$15.75.