Occidental Petroleum (OXY -0.15%) is an oil stock that has made it onto many investors' radar thanks to Warren Buffett and Berkshire Hathaway's buying activity. Berkshire first acquired interest in the oil and gas giant in 2019, when it offered $10 billion to Occidental to facilitate its acquisition of Anadarko Petroleum. Since 2022, Berkshire has purchased 228 million shares on the open market for around $11 billion.
The oil company is a solid source of cash flow, and its balance sheet has improved substantially over the past several years. Here's what you should consider before buying Occidental.
Occidental Petroleum investors' wild ride over the last several years
Occidental Petroleum engages in oil and gas exploration and production, with operations in the U.S., Middle East, Africa, and Latin America. These activities account for the bulk of its revenue, with midstream activities, like processing, transportation, and chemical production making up the remainder.
In 2019, Occidental engaged in a bidding war with Chevron to acquire Anadarko Petroleum to boost its position in the oil-rich Permian Basin. Berkshire Hathaway helped facilitate the acquisition by providing $10 billion in funding in return for preferred stock -- which pays Berkshire an 8% dividend yield. Berkshire also received stock warrants to purchase 83.86 million shares of Occidental at $59.62 a share.
The acquisition was vital for Occidental to increase its foothold in the Permian Basin, but the timing was somewhat precarious. In 2020, the global pandemic resulted in widespread shutdowns, travel came to a grinding halt, and oil prices collapsed. The company sold assets and paid Berkshire in stock instead of cash, which helped it weather the challenges of falling oil prices.
The oil and gas company has improved its finances significantly as oil prices rebounded
Things have improved significantly for Occidental since then. Oil prices rebounded over the last couple of years as economies across the globe reopened and oil demand increased to pre-pandemic levels. Other contributing factors to higher oil prices included the Ukraine-Russia conflict, which disrupted oil supplies from Russia and reduced investments in oil production, which impacted the producers' ability to supply enough oil to meet the growing demand.
In 2022, Occidental's revenue grew 41% from the prior year and 128% compared with 2020 levels. The high oil prices also helped it generate record free cash flow ($13.6 billion) and net income ($12.5 billion), which it used to pay down over $10 billion in debt and reduce interest and finance charges by $400 million annually. The company has even redeemed 15% of Berkshire's preferred stock, saving it another $120 million in annual preferred dividends.
OXY Free Cash Flow data by YCharts.
These headwinds could weigh on Occidental
Occidental has improved its financial standing in recent years. However, it's still vulnerable to falling oil prices. Since most of its revenue comes from drilling activities, it's sensitive to changes in crude oil prices. This year, oil prices are closer to the level they were at before the Ukraine-Russia conflict, which has put some pressure on its earnings. Through the first three quarters of its 2023 fiscal year, Occidental's total revenue has fallen 26%, while its net income has fallen to $3.5 billion.
If oil prices continue to fall next year, Occidental's earnings would take a hit. However, supply cuts from OPEC+ and resilient consumers have kept a floor on oil prices, and JPMorgan Chase expects more of the same next year. Natasha Kaneva, head of global commodities research at JPMorgan, expects oil prices to average $83 per barrel next year, with demand rising by 1.6 million barrels next year and increased supply coming from producers outside of OPEC+.
Image source: Getty Images.
Occidental's multitrillion-dollar market opportunity
Looking further down the road, Occidental Petroleum is investing heavily in direct air capture (DAC) technology. This enables it to capture carbon dioxide from the air, which it can store underground or use to create clean transportation fuels.
This technology, known as carbon capture utilization and sequestration (CCUS), could grow into a massive market over the coming decades as companies and governments look to reduce their carbon footprint. CEO Vicki Hollub said CCUS could grow into a $3 trillion to $5 trillion global market, potentially earning Occidental as much revenue as it currently makes from oil and gas production.
Is it a buy?
Occidental Petroleum is a solid oil and gas producer that has made considerable strides in improving its balance sheet and rewarding shareholders through dividends and stock buybacks. Its oil and gas production business should benefit from elevated oil prices, while its longer-term opportunity in CCUS makes it an appealing stock to buy and hold for the long haul.
