Occidental Petroleum (OXY 5.39%) has slumped over the past year. Shares of the oil giant are down more than 20%. That's largely due to weakening oil prices. Wes Texas Intermediate (WTI), the primary U.S. oil price benchmark, has fallen more than 15% to just under $70 per barrel.
While oil prices have an effect on Occidental's cash flows, it has several catalysts unrelated to oil that could boost shareholder value in the future. Here's a look at whether they make the oil stock a buy right now.
NYSE: OXY
Key Data Points
Rapidly repaying debt
Occidental Petroleum made a needle-moving acquisition last year, closing its $12 billion purchase of CrownRock. The deal added high-margin oil and gas production and enhanced its inventory of drilling locations with low breakeven levels. The company estimates that the highly accretive deal will boost its free cash flow by $1 billion in its first year of ownership based on WTI's averaging $70 a barrel.
The only concern was the debt it took on to close the deal. Occidental assumed all of CrownRock's $1.2 billion of existing debt and issued $9.1 billion of new debt to fund the purchase. The added debt is a concern, given the volatility of oil prices.
However, Occidental has rapidly repaid debt after closing the deal. It initially targeted to reduce its debt by at least $4.5 billion within 12 months of closing the deal through a combination of free cash flow and noncore asset sales. It has already achieved that target seven months ahead of schedule.
The company's near-term priority is to continue trimming its debt by retaining free cash flow after paying dividends and selling additional noncore assets to repay debt as it matures. This deleveraging will steadily transfer value from creditors to shareholders. It will also cut the company's interest expenses, positioning it to generate additional free cash flow in the future. It has been using those savings to increase its dividend, which it boosted by another 9% this year.
Growing its non-oil businesses
Occidental Petroleum continues to invest heavily in expanding its oil and gas operations. In addition to buying CrownRock, it spent $5.3 billion on oil and gas capital projects last year and plans to invest $5.8 billion to $6 billion more this year.
However, the company is also investing capital to grow its chemicals business, OxyChem, and build out its lower-carbon energy platform. Those investments should start paying dividends over the next two years.
The company is spending over $1.5 billion across several projects to expand OxyChem, including modernizing and expanding its Battleground plant. The company expects to see the full benefits of a plant enhancement project later this year while wrapping up construction on Battleground by the middle of 2026. Once complete, these projects should add $325 million of annualized earnings before taxes, interest, depreciation, and amortization (EBITDA) in 2026 and beyond.
Occidental Petroleum is also building the first of what could be many carbon capture and storage (CCS) projects. The company and its partner Blackrock are constructing the STRATOS direct air capture project in Texas to capture carbon dioxide directly from the air. They expect to start operations on the first phase, which will capture 250,000 tons of carbon dioxide per year, by the third quarter of 2025. Meanwhile, phase two, which will also involve 250,000 tons of annual capacity, should start capturing carbon dioxide by the middle of next year. Occidental is monetizing the project by selling carbon credits to a variety of customers to help them reduce their carbon emissions. It will also use the captured carbon dioxide to enhance the recovery of oil from legacy fields to produce lower-carbon oil that it will sell to customers.
The company believes CCS has tremendous potential. Occidental estimates it could become a $3 trillion to $5 trillion global industry in the coming decades. That drives its view that the company could eventually generate as much earnings and cash flow from providing CCS solutions as it currently does from producing oil and gas.
Lots of non-oil upside catalysts
Oil prices will continue to drive Occidental Petroleum's stock price in the short term. However, the energy company has several long-term value catalysts unrelated to oil prices. It's using its oil-fueled cash flows to repay debt, expand OxyChem, and build out a lower-carbon energy business, which should all boost its cash flows in the future. That non-oil upside potential makes Occidental look like a compelling buy, especially now that its stock price is much lower.
