Occidental Petroleum (OXY 3.78%) recently reported impressive second-quarter results. The oil company posted robust oil and gas production in the period and expectations-beating earnings in its midstream and marketing segment. It also reported strong earnings and cash flow.
The oil stock's robust results must be music to Warren Buffett's ears. As Occidental's top shareholder, Buffett's company, Berkshire Hathaway, is participating in Occidental's success, which seems likely to continue.
Drilling down into Occidental Petroleum's second-quarter results
Occidental Petroleum produced an average of nearly 1.3 million barrels of oil equivalent per day (BOE/d) in the second quarter. That exceeded the mid-point of its guidance by 6,000 BOE/d.
Better-than-expected output in the Permian Basin and Gulf of Mexico helped fuel the guidance-beating tally. That strong production and higher realized oil prices (5% higher on average compared to the first quarter) helped Occidental post robust earnings in its oil and gas segment ($1.6 billion compared to $1.2 billion in the first quarter).
The energy company also reported better-than-expected earnings in its midstream and marketing segment, which exceeded guidance by over $180 million. The company benefited from its investment in master limited partnership (MLP) Western Midstream Partners, which contributed $163 million of income.
Meanwhile, income in the company's OxyChem subsidiary rose to $296 million, as its chemicals business benefited from higher prices and volumes.
"The strength of our operational performance resulted in impressive financial results for the second quarter of 2024," commented CEO Vicki Hollub in the earnings press release. The diversified energy company produced $3 billion in cash flow and about $1.3 billion in free cash flow during the period. Occidental Petroleum is using its strong free cash flow to pay its growing dividend and strengthen its balance sheet.
Even better days appear to lie ahead
Occidental Petroleum's strong momentum should continue. The company closed its needle-moving acquisition of CrownRock earlier this month. The $12 billion deal will significantly enhance its top-tier position in the Permian Basin, adding 170,000 BOE/d of high-margin production. The company expects CrownRock to add $1 billion to its free cash flow during its first year of ownership, assuming oil averages around $70 a barrel (it was recently over $75).
In the near term, the company will focus on using that free cash flow and asset sales to repay some of the debt it used to close the acquisition. (Occidental issued $9.1 billion of new debt while assuming $1.2 billion of CrownRock's existing debt.) The company aims to sell $4.5 billion-$6 billion of assets in the coming years to help reach its target of repaying at least $4.5 billion of debt in the next 12 months.
Occidental has the line-of-sight to repay $2.3 billion of debt by the end of August. It recently agreed to sell $970 million of non-core assets to jump-start its debt-reduction plan.
The company had a deal to sell a stake in CrownRock to an existing joint venture partner, but it fell through. Because of that, it will have to sell other assets to reach its divestiture target.
CrownRock isn't the only catalyst for the oil company. Occidental is investing heavily in expanding OxyChem, which should supply meaningful earnings growth in the coming years. Meanwhile, it expects continued improvements in its midstream segment, including cash distributions from its investments in Western Midstream.
On top of that, debt repayment should reduce its interest costs. Finally, Occidental Petroleum is building out a low-carbon solutions business, including carbon capture and sequestration projects. The company estimates these factors will add more than $1 billion of incremental annual free cash flow by the second half of 2026. These sources will provide steadier cash flow, helping reduce the overall volatility of its earnings profile.
Given all these catalysts, it's easy to see why Warren Buffett is buying Occidental's shares hand over fist. He went on another buying spree in June, purchasing 7.3 million shares over nine trading days. Berkshire owns over 255 million shares, 28.8% of Occidental's outstanding shares. At nearly $15 billion, it's Berkshire's sixth-largest holding at 4.9% of its investment portfolio. Occidental's growing cash flow should help increase value for shareholders, like Buffett's Berkshire.
A top-notch oil stock
Occidental Petroleum is firing on all cylinders these days. It posted strong second-quarter results, fueled by its diversified portfolio of energy businesses. Meanwhile, even better days appear to be ahead, given the near-term boost it will get from CrownRock and the growth of its non-oil cash flows. These factors make Occidental look like a compelling energy stock to buy for the long haul, which is exactly what Warren Buffett has been doing.
