Occidental Petroleum (NYSE:OXY) entered 2019 with loads of upside potential. The energy giant was coming off a transitional year during which it completed its cash-flow breakeven plan. As a result, it only needed oil to average $40 a barrel to support its operations and its high-yielding dividend. With crude starting the year well above that level, Occidental appeared poised to generate lots of excess cash. Indeed, it looked to me like the top oil stock to buy heading into 2019.

However, instead of sitting back and watching the cash flow in as oil prices rose during the year, Occidental went on the offensive and paid a pretty penny to wrestle rival Anadarko Petroleum away from Chevron (NYSE:CVX). It was a move that infuriated shareholders as it added a substantial amount of debt to Occidental's balance sheet. That weight caused the stock to tumble 33% on the year.

In the wake of that slump, the question now is whether Occidental has suffered enough, or if further declines could still be ahead.

An oil pump at sunset after a rain storm.

Image source: Getty Images.

Why the worst could be over

Occidental Petroleum laid out a whopping $55 billion for Anadarko, outbidding Chevron by $5 billion. However, in a relatively unusual move for a megamerger, Occidental didn't issue a lot of stock to finance the deal. To do that would have required a shareholder vote that it likely would have lost. Instead, it funded the majority of the transaction with cash -- $31.8 billion overall -- which meant taking on a substantial amount of debt. 

Occidental aims to pay down that debt burden by selling between $10 billion and $15 billion in assets, and it has made significant progress on that front. "We are highly confident that the actions we already have in progress will allow us to exceed the upper end of our original $10 [billion] to $15 billion divestiture goal by the middle of 2020," said CEO Vicki Hollob in a mid-November update. If everything goes according to plan, Occidental will significantly reduce its balance sheet issues, which should help lift the main weight holding down its stock. 

In addition to that, oil prices have risen considerably over the past year. Crude ended 2019 up more than 35%, with U.S. benchmark WTI closing above $61 per barrel. If crude oil remains in its current neighborhood, the company should generate significantly more cash flow in the coming year, which it can use to support its dividend as well as further pay off debt. 

Finally, the main reason Occidental bought Anadarko is that it believed that there were significant synergies to be found in combining the two companies' operations. Management expects to be able to cut out $3.5 billion of annual expenses by 2021. Progress toward that goal would help prove to skeptical investors that it made the right move. 

An oil worker standing next to a pumpjack.

Image source: Getty Images.

Why rough seas could still be ahead

While Occidental Petroleum still asserts that it can hit the high-end of its asset-sales target, the process has proved more complicated than initially expected. One major piece of the puzzle is the planned sale of Anadarko's African assets to French energy giant Total (NYSE:TTE). While the companies completed one part of the transaction, Occidental ran into a roadblock with the deal for Anadarko's Algerian assets; that country's national oil company is trying to block the transaction. 

In addition to that, Occidental wanted to monetize some of its stake in Anadarko's former midstream arm, Western Midstream (NYSE:WES). However, a slump in Western's valuation forced Occidental to put the process on hold. While Western Midstream's valuation has bounced back a bit, it's still down 29% over the past year. This leaves Occidental with a dilemma -- either sell Western shares at a fire sale price, or fail to hit its assets-sales target. If it's the second option, investors' concerns over Occidental's financial profile would likely intensify, which could lead to a further slide in its share price. 

Also, Occidental's fortunes naturally are tied to the price of oil. While crude was red hot last year, it could give back some of its gains in 2020 as new supply enters the market.

Either headwind would be bad for this energy company. But if both occur, it might need to slash its 7.7%-yielding dividend to shore up its finances. Add it all up, and more suffering could be ahead for Occidental's shareholders. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.