When Warren Buffett invests in a business, the market generally views it as a huge vote of support for that business. Occidental Petroleum (OXY +1.16%) can vouch for that claim following Berkshire Hathaway's investment in its stock. The Oracle of Omaha also provided pivotal support for the energy company's acquisition of Anadarko Petroleum, which it bought out from under Chevron (CVX +0.69%).
Before you run out and buy Occidental as well just because Buffett (through Berkshire) owns it, though, you need to take a deeper look at what has happened to Occidental since the Anadarko deal.
Loaded up before the pandemic
Chevron announced it would be buying Anadarko Petroleum in April 2019. Shortly thereafter, Occidental announced it was making a counteroffer, attempting to buy Anadarko away from Chevron. Buffett was in the mix at this point, helping to fund Occidental's offer. There was a short period of uncertainty in which it was unclear who would end up buying Anadarko and at what price, but in the end, Chevron decided to step away.
OXY Total Long-Term Debt (Quarterly) data by YCharts.
Even then, Wall Street was highlighting the deal's cost as a potential problem for Occidental. The issue was really about its balance sheet, which was suddenly loaded with debt. While that's hardly an uncommon after-effect of a large acquisition, leverage can be both a powerful tool for good and a huge burden. It quickly turned into the latter when the coronavirus pandemic started to spread in 2020.
Governments around the world effectively shut down their economies in an effort to slow the spread of the illness. That, in turn, reduced demand for energy. West Texas Intermediate (WTI) crude prices, a key U.S. oil benchmark, actually fell below zero at one point. There were technical reasons for that, but suffice it to say the operating environment for energy companies got much harder shortly after Occidental bagged its quarry.
NYSE: OXY
Key Data Points
Dividend investors got hit and should still be cautious
What happened next was hardly a surprise -- Occidental cut its dividend. Chevron, by comparison, continued to increase its dividend. And ExxonMobil (XOM 0.06%), another major energy competitor, also supported its dividend throughout that downturn. But with a heavy debt load, Occidental needed cash fast. One of the quickest ways to free up money is to cut the dividend.
OXY Dividend Per Share (Quarterly) data by YCharts.
This highlights another lingering difference between Occidental, Chevron, and ExxonMobil that dividend investors should keep in mind now that Occidental has started increasing its dividend again. Before the pandemic, Occidental's leverage (as measured by its debt-to-equity ratio) was roughly similar to that of its larger peers up until 2016 or so. Then, it rose a bit higher and, finally, exploded higher after the Anadarko deal.
OXY Debt to Equity Ratio data by YCharts.
To be fair, Occidental has worked hard to reduce leverage, and the debt-to-equity ratio has fallen dramatically from its peak levels. The oil industry rebound following the crash in 2020 helped materially in that. But Occidental's debt-to-equity ratio remains well above the levels of ExxonMobil and Chevron and is still higher than before the deal. The magnitude of the difference here matters. Chevron's debt-to-equity ratio is a tiny 0.12 times, and ExxonMobil's is very impressive at 0.2 times. Occidental's ratio is multiples higher at 0.65 times.
Conservative dividend investors should err on the side of caution
Warren Buffett's owning a stock often results in other investors following his lead. But just because Buffett owns something doesn't make it right for every investor. In this case, conservative dividend investors got burned if they bought Occidental just because Buffett bought it.
While Occidental has worked hard to improve its balance sheet, most conservative investors eying the energy sector, particularly those with a dividend focus, will probably be better served with an investment in ExxonMobil or Chevron, given their more conservative use of leverage.
