Occidental Petroleum (OXY -0.49%) is a major player in the energy sector and is one of the United States' top oil and gas producers. After a banner year in 2022, Occidental strengthened its balance sheet and reduced its debt.
However, the past couple of years have been tough for the company. Since its recent peak at $76 per share in late 2022, the stock has fallen by 35% over the past few years. With the stock down in recent years, investors may wonder if now is the time to jump in.
Let's delve deeper into the business and see if the stock is right for you.
NYSE: OXY
Key Data Points
Berkshire Hathaway can't stop buying Occidental
Occidental is perhaps best known as one of Warren Buffett's largest holdings in his Berkshire Hathaway portfolio. Last year, the conglomerate sold down numerous stock positions, including Apple, Bank of America, and Citigroup. However, it continued to hold and even add to its position in Occidental. Last year, Berkshire Hathaway added 20 million shares to its Occidental position and now has 264 million shares, or about 28% of Occidental's outstanding stock.
Berkshire Hathaway was a key player in helping Occidental finance its acquisition of Anadarko Petroleum in 2019, outbidding Chevron in the process. As part of the deal, Berkshire provided $10 billion in return for preferred stock yielding 8%. Berkshire also has warrants that give it the right to purchase another 83.9 million shares for around $59.62.
Breaking down Occidental's business
Occidental Petroleum operates in various segments of the oil and gas industry. The company has a significant presence in the United States, particularly in the Permian Basin, and operations in the Middle East and Africa. In addition to its exploration and production activities, Occidental transports oil and gas through pipelines, manufactures chemicals, and is expanding into carbon removal solutions.
Occidental's primary source of revenue is exploration and production. This focus makes the stock particularly sensitive to fluctuations in oil and gas prices, which can be affected by broader economic conditions.
For example, Russia's invasion of Ukraine in 2022 resulted in a significant surge in oil prices. This increase was driven by sanctions imposed by the U.S., Europe, and other nations on Russian oil. The combination of tight supplies and market uncertainty contributed to rising prices. Occidental Petroleum used this windfall to pay down debt and improve its balance sheet.
Last year, it achieved record production levels, with strong performance in the Delaware, DJ, Midland, and Powder River basins. The company also acquired CrownRock, enhancing its presence in the Midland Basin, and repaid $4.5 billion in near-term debt seven months ahead of schedule.
Image source: Getty Images.
What does the future have in store for Occidental?
Occidental is one of the more efficient oil producers, with an average breakeven production point of around $60 per barrel. The acquisition of CrownRock added 1,700 new undeveloped locations, of which 1,250 development-ready locations have sub-$60 breakeven costs and 750 locations at sub-$40 breakeven. This provides the company with some room if oil prices fall further. Over the last year, WTI Crude Oil has hovered between $70 and $80 per barrel.
Then, there is the long-term potential of direct air capture (DAC) technology. Through its subsidiary, 1PointFive, the company is developing large-scale DAC facilities. This technology aims to remove CO2 directly from the atmosphere and store it underground. The facility, called STRATOS, is set to be one of the largest DAC facilities in the world, and construction is 94% complete as of late February.
Is it a buy?
Occidental's stock has struggled over the past few years as oil prices have fallen. However, the company has shored up its balance sheet and is well-positioned even if oil prices were to fall from here.
At a forward price-to-earnings ratio of around 12.3, Occidental is a solid pick today at a reasonable valuation for investors looking for exposure to the oil and gas industry. The stock may not provide outsized returns, but it provides a nice hedge should oil prices rise.
On top of that, it is pursuing a multi-decade opportunity in carbon capture and storage, which CEO Vicki Hollub thinks could be a $3 trillion to $5 trillion industry down the road.
