Occidental Petroleum (OXY +2.22%) started 2026 off with a bang. Shares of the oil and gas producer rallied 10.4% in January. That meaningfully outperformed the S&P 500's 1.4% rise last month.
A rebound in crude oil prices was a major catalyst for the oil stock last month. However, it wasn't the only factor behind Occidental's January surge.
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Ending the drought in a big way
Crude prices skyrocketed last month. Brent, the global oil benchmark, rocketed 16%, while WTI, the U.S. benchmark, surged 14%. That was the first monthly rise in oil prices in six months.
Oil rallied amid potential supply disruptions. The U.S. military captured the former Venezuelan President Nicolás Maduro and later charged him with narcoterrorism. While the country's oil infrastructure needs a major rebuild, which will take time, there's potential for supply outages in the interim. Additionally, tensions between the U.S. and Iran are growing, which could also cause supply disruptions.
NYSE: OXY
Key Data Points
Higher oil prices will have a direct benefit on Occidental Petroleum's bottom line. They would enable the company to produce more cash, which it can use to repay debt and return to shareholders.
More forward progress
Oil prices weren't the only upside catalyst for Occidental Petroleum last month. The oil giant closed the sale of its former chemicals business, OxyChem, to Berkshire Hathaway in early January. The oil company received $9.7 billion in cash for the unit. Occidental expects to use $6.5 billion of that cash to reduce debt, enabling it to achieve its target of bringing its principal debt balance below $15 billion. As a result, it will now have greater flexibility to focus on growing its oil and gas production and delivering long-term value for shareholders.
Occidental Petroleum also amended its existing Delaware Basin natural gas gathering contract with its affiliated master limited partnership, Western Midstream Partners. They're transitioning from a cost-of-service agreement to a fixed-fee structure. As part of the deal, Occidental will transfer 15.3 million Western Midstream common units it currently owns to the MLP, valued at $610 million. As a result, Occidental's ownership will fall from 42% to 40%. Overall, the deal will save Occidental Petroleum money in the near term, giving it more flexibility to develop its oil and gas assets tied to this midstream agreement. Meanwhile, the transaction enables Western Midstream to continue its evolution toward becoming a stand-alone entity.
A strong start to 2026
Occidental got a lift from higher oil prices at the start of the year. They position it to produce more cash in 2026 to further strengthen its balance sheet, which is now at its targeted debt level following the sale of OxyChem. The company will get a further cash flow boost from its lower interest expenses and its amended contract with Western Midstream. These improvements enhance its long-term investment appeal, even after last month's rally in its share price.
