Warren Buffett has a knack for seeing things that other investors miss. In 2019, his company, Berkshire Hathaway (BRK.A 0.50%) (BRK.B 0.29%), made a bold bet that Occidental Petroleum's (OXY -1.59%) aggressive acquisition of Anadarko Petroleum would pay off by helping it fund that deal. Buffett believes so much in Occidental that Berkshire has gone on to buy 20% of the oil company's outstanding shares and has received regulatory approval to boost that stake up to 50%. 

The pandemic-driven oil market downturn of 2020 cast doubt on whether the acquisition would ever deliver on its promise. However, the subsequent recovery in oil prices has validated Buffett's thesis that the combined oil company could become a cash flow machine. That was evident in the third quarter when Occidental produced another $3.6 billion of free cash flow.

Another cash flow gusher

Occidental Petroleum produced $4.7 billion of cash during the third quarter. After funding $1.1 billion of capital projects, the oil company generated $3.6 billion of free cash flow. That's not too far off the record $4.2 billion of free cash flow it produced in the second quarter on $5.1 billion of operating cash flow. 

What makes that tally so impressive is it came in a period of lower oil prices. Occidental realized an average of $94.89 per barrel of oil sold during the quarter, 12% lower than the second quarter. Natural gas liquids prices were also lower by 16%. 

Occidental was able to offset some of the impacts of lower oil prices on its cash flow thanks to higher natural gas prices (they were up 13% from the prior quarter) and production. Total output grew from 1.147 million barrels of oil equivalent per day (BOE/D) in the second quarter to 1.18 million BOE/d in the third quarter and exceeded the midpoint of its guidance by 25,000 BOE/D. The company also delivered stronger-than-expected earnings in its chemicals and midstream and marketing segments, though both were lower than the second quarter's performance.

Putting its cash to good use

Occidental's strong cash flow gave it lots of financial flexibility in the period. It used those funds to invest in capital projects (capital expenditures rose from $972 million in the second quarter to $1.1 billion in the third) to maintain and expand its oil and gas production. 

Occidental also repaid another $1.3 billion in debt. That brought its year-to-date debt repayments to an impressive $9.6 billion. It has reduced debt by 34% this year and pushed its remaining total below $19 billion. The company's continued debt reduction puts it in a much stronger position to weather future oil market downturns.

The oil company's improving balance sheet has also allowed it to return more cash to investors. It spent $1.8 billion to repurchase 28.4 million shares in the quarter. That brought its year-to-date total to $2.6 billion of repurchases, putting it on track to buy back $3 billion of stock this year. Investors like Buffett will own an even larger interest in the company as it retires shares. Occidental also reset its dividend earlier this year -- after dropping it to a penny per share early in the pandemic, it's now up to $0.13.

With the company's balance sheet back on solid ground, Occidental expects to return more cash to shareholders in 2023 and beyond. The oil and gas producer aims to continue growing its dividend at a level it can sustain at $40 oil. It also plans to continue allocating excess cash to repurchasing shares. Occidental could also start redeeming some of the $10 billion preferred equity investment Berkshire made in the company to help fund the Anadarko deal. These moves could further enhance value for shareholders, including Buffett.

Credit where credit is due

Buffett believed that the merger of Occidental Petroleum and Anadarko Petroleum would be a winning combination, which led him to make a big bet on the company. He's now reaping the rewards of that investment as Occidental Petroleum is generating a gusher of free cash these days. That's giving it the funds to repay debt and return money to shareholders. The company is proving it can continue producing lots of cash even if oil prices cool off. With its financial situation improving, it's becoming a much lower-risk option for those seeking a way to invest in the oil market.