This year, Occidental Petroleum (NYSE:OXY) has been hogging the spotlight for all the wrong reasons. The energy stock has blasted through the floor of a 10-year low and continued to tumble. Can the oil-and-gas company's rich portfolio of shale assets save the day, or is this stock headed lower?

Tenacity at its finest

Occidental Petroleum is one of the largest U.S. oil and gas exploration and production businesses. It specializes in newer techniques such as horizontal drilling and hydraulic fracturing in tight shale formations. In addition to being the No. 1 producer in the Permian Basin -- the nation's most prolific shale play -- it's also the top producer in Colorado's Denver-Julesburg Basin, and the Uinta Basin in Northeast Utah. 

That may all sound good in principle, but bigger doesn't always mean better, especially when that size comes with a hefty price tag.

Pumpjacks at sunset.

Image Source: Getty Images.

In late April, Occidental CEO Vicki Hollub offered a $76 per share buying bid for rival upstream giant, Anadarko Petroleum. The offer came after Chevron (NYSE:CVX) had made its own $65 per share proposition, which valued the target at a 35% premium to where its shares had closed the day before the bud was announced. Chevron refrained from getting involved in a bidding war, and pocketed a $1 billion breakup fee when Anadarko accepted Occidental's offer. The acquisition closed in August, with Occidental paying Anadarko shareholders $59 in cash plus 0.2934 shares of Occidental common stock per share of Anadarko common stock. 

In order to swing the purchase of a company nearly its own size, Occidental Petroleum received $10 billion from Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) in exchange for preferred stock that yields 8%. The preferred shares come on top of Occidental's now $50 billion debt load, some of which it inherited from Anadarko. In addition to the preferred shares, Berkshire Hathaway will hold warrants for 80 million shares with a strike price of $62.50 per share and an 11-year duration.

OXY Chart

OXY data by YCharts

The market's early reaction to the deal was fairly negative, and thus far, it has not changed its mind. As the chart above illustrates, Chevron shares are up around 9% for the year while Occidental shares have fallen fairly steadily, and are now down more than 37% for 2019.

Upside potential

While the terms of the Anadarko deal were steep, investors can look forward to some positives if things go according to plan. For example, Occidental's $3.16 per share annual dividend is yielding 8.5% at the current share price. If Occidental can sustain its payout, shareholders will receive a dividend that yields roughly five times what an S&P 500 ETF pays out. In 2019, Occidental increased its dividend for the 17th consecutive year, an impressive feat considering the generally mediocre dividends of its peers.

In order to keep that dividend flowing and growing, Occidental is in the midst of efforts to divest some of its non-U.S. shale assets and use the proceeds to deleverage its balance sheet. As of Q3, Occidental had put $4.9 billion toward debt repayments, including repaying its $4.4 billion 2020 term loan and clearing all of its debt that would have matured next year. That was funded in part by the sale of $3.9 billion in Mozambique assets, among over divestitures. 

The game plan is to essentially sell assets that don't pertain to U.S. shale, pay down debt, grow production, and decrease operational costs. Management argues that the Anadarko deal, although expensive, will eventually deliver cost synergies that lower its well production costs. From a technical perspective, this means averaging more production out of each well and lowering the cost of subsurface inputs, such as the proppants used in fracking. In Q3, Occidental touted that it had over 20% of the top 100 wells for 12-month cumulative oil production in the Delaware Basin (part of the Permian Basin) while having drilled less than 7% of its total wells. The company also noted that its competitors use 26% more proppant than it does during the hydraulic fracturing process. And Occidental is also estimated that its capital budget will decrease from $9.0 billion in 2019 to somewhere in the $5.3 billion to $5.5 billion range in 2020 

What about sustainability?

Occidental's investment thesis is predicated on the idea that there will be long-term growth in oil and gas demand. All signs point toward a growing United States energy economy on the production side, but output could quickly exceed domestic consumption. On the natural gas side, the Energy Information Agency noted in its 2019 reference  case that, "after 2020, [natural gas] production grows at a higher rate than consumption in most cases, leading to a corresponding growth in U.S. exports of natural gas to global markets." On the oil side, the International Energy Agency said this in its flagship oil market report for December 2019:

"On a historic note, in September, the United States momentarily became a net oil exporter to the tune of 89 kb/d [thousand barrels per day]. This is a major milestone on its path to becoming a sustained net exporter, which is likely to be late in 2020 or early in 2021. However, this does not mean that energy independence has been achieved: the United States remains a major crude oil importer."

While Occidental Petroleum's stock price could offer a good entry point for investors interested in adding a large upstream energy company to their portfolios, it could be better to take a wait-and-see approach. Let the company prove to investors that it really can leverage Anadarko's assets as effectively as it says it can. And given that its status as a dividend stock is a strong part of the argument for owning it, investors should also look out for any pauses in its 17-year streak of payout increases -- or worse, payout cuts. Those would be clear signs of trouble for Occidental.