Everyone who didn't buy into the hype surrounding cryptocurrencies is probably feeling pretty smug right now given the collapse of the FTX Token exchange and the implosion of pretty much every other crypto name out there. There is good reason to be skeptical about many of them.
Yet, let's be honest. Stocks can vaporize your portfolio too if you don't pick and choose investments carefully. Heck, the once-venerable investment house Lehman Brothers collapsed and nearly brought down the entire financial market. And while investing in Bitcoin might be risky, look at what online used car dealer Carvana has done to portfolios this year.
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That's why many investors stick to index investing, putting their money in indices tracking the S&P 500 or Dow Jones Industrial Average, for example. Yet investors can beat the Dow, as investing legend Peter Lynch once wrote, and you needn't take on excessive risk by buying hard-to-understand crypto investments or a fly by-night stock.
A business like oil and gas giant Occidental Petroleum (OXY +2.05%) could handily outperform the index over the next five years, and quite likely for many years to come.
Drilling deep for opportunity
Over the past decade, oil hasn't actually been a good investment. Compared to the Dow Jones Industrial Average, which returned 154% during that time, oil companies like Occidental, ExxonMobil, and Chevron produced returns ranging from losses of 8% (Occidental) to gains of 68% (Chevron), and that includes their index-drubbing returns over the past year.
However, there's good reason to believe oil companies, generally, and Occidental Petroleum in particular, will be much better investments going forward, and not just because Warren Buffett has been acquiring shares in Berkshire Hathaway and has the right to buy as much as half of Occidental's outstanding shares.
Barring a scenario like the COVID pandemic occurring again, which saw global economies grind to a halt, there is still a very bright future for fossil fuels.
NYSE: OXY
Key Data Points
A tailwind of demand
Renewable energy only accounted for about 12% of U.S. energy needs last year, and while that portion will expand over time, it's not feasible to think it will be the primary or even a dominant source for decades. Solar farms are massive, wasteful users of land, while wind farms are equally aesthetic blights that pose a risk to birds -- and both are subject to the whims of the weather.
The technology behind them is also reliant upon natural resources that are expensive, destructive to the environment, and subject to geopolitical pressure. Fossil fuel may also have similar hurdles to surmount, but with an infrastructure already in place to extract, produce, refine, and deliver, it's arguably a more abundant and cheaper resource.
Occidental Petroleum is a 100-plus-year-old upstream market player whose assets are focused on exploration and production in the U.S., Middle East, Africa, and Latin America. It does have a midstream component as well to help move energy from the wellhead to the market. Its overarching goal is to be an industry leader in low-carbon production through carbon capture technologies and sequestration.
Acquisitions burdened the oil giant with substantial debt that necessitated a bail out of sorts from Berkshire Hathaway. Afterwards, Occidental slashed its dividend payment and suspended its share repurchase program to allocate more cash toward debt reduction. With its business on a firm footing again, Occidental's future seems solid.
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An eye on the future
Rather than the peak oil we've heard so much about in years past, the world remains flush with petroleum assets waiting to be exploited. But gone are the days of drill-at-all-costs projects. They have been replaced by more targeted programs that seek to invest in only the most profitable projects.
Exxon, for example, has narrowed its long-range guidance for capital expenditures to $21 billion to $24 billion annually through 2027. By keeping a tight rein over its capital costs, the oil company believes it can continually reduce its break-even costs. Chevron is spending around $15 billion this year on capital and exploratory expenditures.
Occidental's capital spending is much more modest -- it's spent about $3 billion through the first three quarters of 2022 -- but the common theme among all of them is they will still be profitable with oil priced well below current levels. Exxon believes it can achieve break-even costs as low as $35 a barrel by 2027, Chevron is currently around $45 a barrel and can do quite well at $50, and Occidental stands around $40 a barrel.
A stock to buy low and sell high
Fossil fuels remain ingrained in the world economy, and will not be easily divorced from it for decades to come. Even with West Texas Intermediate down from its recent highs and going for around $85 a barrel, there is still plenty of global demand to sustain pricing and profits near term.
Occidental Petroleum is not the same company it was even a few years ago, and is targeting a future that supports environmental stewardship. It trades at just 8 times next year's earnings estimates, a fraction of its projected earnings growth rate, and a bargain-basement 6 times the free cash flow it produces.
It's now committed to returning cash to shareholders, and raised its dividend a whopping 1,200% from a penny per share to $0.13 per share -- which currently yields a modest 0.8%, but will likely grow going forward. In short, Occidental Petroleum is an oil stock cheap enough to buy now to reap outsized rewards for years to come.
