Shares of Occidental Petroleum (NYSE:OXY) have plummeted a stunning 77% this year. The oil stock is currently trading right around its lowest point even though it has made some progress on its debt reduction plan and the oil market has improved a bit.  

That combination of bottom-of-the-barrel valuation and notable improvement might have contrarian investors wondering if now's the time to buy this beaten-up oil giant. Here's a look at the bull and bear cases for buying Occidental these days.

An oil pump with a beautiful sunset in the background.

Image source: Getty Images.

The Occidental Petroleum buy thesis

Occidental Petroleum has made significant progress on its plan to improve its financial profile. The oil company recently reached agreements to sell its onshore assets in Colombia and its land position in the western U.S., which has it on track to exceed its $2 billion asset sale plan. That will give it the cash to repay some debt. Meanwhile, the company also refinanced some of its bonds, while most holders of some other notes opted not to force the company to repurchase them this year. Because of that, the oil company's upcoming debt maturity wall isn't quite as high. 

Meanwhile, with oil prices improving from earlier this year and its costs coming down thanks to various reduction initiatives, it's generating free cash to help chip away at its debt. According to some analysts' estimates, the company could generate as much as $4 billion in free cash flow next year. That's almost half of the company's current market cap -- though at that rate it would take it nearly 10 years to pay off its debt. 

Still, with the company's balance sheet improving and its business starting to produce lots of free cash flow, the weight on Occidental's stock price could begin to lift in the coming quarters.

The case against buying Occidental Petroleum

While there's no doubt that Occidental Petroleum is in a better position today than it was a few months ago, that doesn't necessarily mean its share price will outperform the market from here. Oil prices, which have been extremely volatile in recent years, could prove troublesome. Another plunge in oil prices would cut into Occidental's cash flow, impacting its ability to continue trimming its debt.

Meanwhile, the company's debt reduction plan also relies on asset sales, which have proven to be much harder to complete than expected. It has run into issues with government approvals and valuations, hampering its ability to sell as many assets as previously planned. Few buyers are willing to pay cash for oil assets given all the volatility in oil prices and the increasing reluctance of banks and investors to lend to the sector.

Finally, the dwindling long-term prospects of the oil sector are even more worrying for Occidental. Due to climate change concerns and falling costs for renewable energy, oil is losing its grip on the energy market. While some still believe that oil demand will continue expanding in the future, a growing number of market watchers fear that the industry will never regain its pre-pandemic peak. Instead, the sector appears to be on a downward slope that could steepen in the coming years if governments enact more pro-renewable policies. That structural shift away from oil could keep the pressure on Occidental's stock price.

Too much could still go wrong

While Occidental Petroleum's balance sheet and cash flow are heading in the right direction, its stock price has continued to sink. That's because it still has a lot of debt, which is an issue given the potential for lower oil prices and continued trouble selling assets. Add in the oil sector's dimming future, and Occidental Petroleum's stock doesn't seem like a compelling buy.

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.