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Is It Time to Buy Occidental Petroleum Stock?

As the energy boom in the United States ramps up, a select group stands to benefit the most. While most investors might instinctively flock to the integrated oil majors as investment candidates, a different type of company might be a better pick -- exploration and production, or E&P, companies such as Occidental Petroleum Corporation (NYSE: OXY  ) .

While the integrated giants struggle with a poor operating climate for downstream operations, upstream operators are doing well, thanks to booming domestic oil and gas production.

Occidental Petroleum is growing, and is throwing a boat load of cash back to its shareholders. Here's why now might be a great time to buy Occidental Petroleum.

Production growth fuels shareholder rewards

Occidental's domestic oil production has grown for four consecutive quarters. Production of oil in the United States rose 8% last quarter and reached 278,000 barrels per day, which is a company record. Diluted earnings per share increased 11% last quarter, and are up 7% over the first half of the year.

Much of this is due to the success of the Permian Basin, which is one of the premier oil fields in the country. Occidental is the largest operator and largest producer of oil in the Permian Basin, and the results speak for themselves.

This growth has allowed Occidental to greatly enhance its capital allocation program. Since the fourth quarter of 2013, Occidental has repurchased more than 26 million of its own shares. Rest assured, there's a lot more of this to come.

Occidental plans to separate its California assets into a separately traded entity. The company will receive a large dividend from this, and expects to use the proceeds to repurchase an additional 60 million shares. Not only that, but Occidental is currently authorized to buy back another 20.5 million shares. In all, the company expects to reduce its share count by 100 million shares, or roughly 13% of its outstanding shares.

This is on top of Occidental's competitive dividend, which stands at nearly 3%. According to management, Occidental has increased its dividend by 15% compounded annually since 2002.

Future growth in cash returns will be fueled by continued production growth and reduced drilling expenses. Occidental's long-term forecast calls for annual production growth of 5%-8% on average. Occidental will also focus on increasing drilling and operational efficiency, which should help keep returns on capital high. Management intends to reduce operating costs in the United States by 17% this year compared to two years ago. The company maintains a target of at least 15% returns on domestic assets, and at least 20% on international projects.

Compelling valuation

Not only is Occidental funneling a boat load of cash back to its investors, but its attractive valuation is another reason why now could be a good time to buy the stock. Shares of Occidental Petroleum trade for 13 times trailing earnings per share, and 13 times forward earnings. Not only do these multiples represent significant discounts to the market multiples, but investors aren't giving Occidental much credit for its future growth potential.

Occidental is even more attractively priced when evaluated by its cash flow generation. The stock trades for just 5 times its enterprise value to EBITDA, or earnings before interest, taxes, depreciation, and amortization, ratio. Occidental generates a lot of free cash flow, which is why it has so much confidence to aggressively return cash back to shareholders.

The Foolish takeaway

Occidental is growing right alongside the boom in oil and gas production in the United States. Going forward, the company intends to keep strict control over drilling expenses to increase efficiency. The company already generates a lot of free cash, so there's no reason to think it can't continue its habit of buying back billions worth of stock and paying an attractive dividend.

When combined with its attractive valuation, there are many reasons why now might be a good time to buy Occidental Petroleum stock.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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