Occidental Petroleum: Keep Calm and Keep Buying (NYSE:OXY)

Occidental Petroleum Corporation (NYSE:OXY) investors endured a terrible quarter as the stock fell to lows last seen in early 2022. As a result, OXY has fallen below the critical $55 mid-2022 consolidation zone. I assess that its momentum of purchase weakened considerably, aligning with the weakness in crude oil futures (CL1: COM). The energy sector (XLE) also retreated to early 2024 lows, although OXY’s relatively underperformance may have spooked the bulls.

In my previous January 2024 OXY article, my thesis was proven timely before the stock made a solid recovery to its April 2024 highs. However, it has fallen sharply since then, hampered by underlying market volatility and continued weakness of the oil price.

Berkshire Hathaway ( BRK.A ) ( BRK.B ) CEO Warren Buffett appears to have stopped further purchases of OXY, even though the stock has recently dropped. Therefore, the stability provided by the Buffett Put disappeared at a crucial time as investors reassessed their bullish proposition. Occidental Petroleum’s poor performance suggests the market is likely concerned about potential oil price cyclicality impacting its production and operational performance.

Despite the potentially accretive acquisition of CrownRock, investors are likely concerned about whether the significant increase in capital spending is smart. Given the mixed and increasingly bearish outlook affecting oil demand dynamics, OXY investors need to determine whether the anticipated increase in production can offset the potential weakness in demand.

As a result, Occidental is expected to generate relatively robust free cash flow margins over the FY2026 forecast period, even as it ramps up capital spending. The company boasts a low return inventory backed by its market leadership position in the Permian Basin. Therefore, execution risks arising from increased capital expenditure should not have a significant impact on FCF margins. In addition, the integration of CrownRock’s portfolio is anticipated to improve its operational efficiency. Consequently, it should enhance Occidental’s prospects of maintaining low return inventory, sustaining its competitive advantage. OXY’s ‘A’ profitability grade underlines my belief, justifying the market’s confidence in its profitability through the cycle.

Moreover, Occidental is not resting on its laurels as it continues its “strategic divestment” and delivers on its commitment to reduce debt. As a result, management articulated the potential to reduce debt by about $3 billion by the third quarter, coming significantly closer to its $4.5 billion debt reduction efforts. In addition, it has also completed approximately $1 billion in divestitures since early 2024, critical to its efforts to optimize its portfolio. As a result, I assess that the company has made substantial progress in delivering tangible results that should improve shareholder value. It also added credence to the company’s goal of achieving a “senior debt target of $15 billion or less” by the end of 2026 or early 2027.

OXY’s ‘D+’ rating suggests it has improved from an ‘F’ rating six months ago. Therefore, the relatively low performance has improved its appeal, although it is still valued at a premium price. The stock’s buying momentum has worsened considerably (from ‘C’ to ‘D+’) over the past six months, suggesting investors are likely concerned about the weaker underlying market.

Despite the market’s near-term caution, investors must ask whether the market may be unduly concerned about execution risks going forward. In particular, the acquisition of CrownRock is expected to add approximately 170,000 boe per day to Occidental’s portfolio. However, investors are urged to consider potential delays in achieving the anticipated production growth, exacerbating execution risks at a crucial time. In addition, management’s ambitious asset divestiture and debt reduction program could also be affected if oil price volatility continues. Therefore, I assess that the market is justified in reflecting heightened concerns about Occidental’s execution capabilities if fundamental market conditions do not improve over the next six months.

OXY’s price action suggests that its bullish trend has weakened significantly. As a result, OXY lost the critical support area above the $55 level, suggesting that dip buyers have lost interest in defending that level. In addition, the lack of Buffett Put likely lowered the market’s confidence in OXY’s bullish thesis as the market reassessed its risk/reward. Caution is warranted given OXY’s relative premium to its energy sector peers.

Despite this, OXY’s retest of its early 2022 lows above the $50 level appears to have attracted bullish buyers. However, we still need a few more weeks to establish the robustness of the consolidation zone.

While I assess that OXY’s buying momentum has waned, I am still confident in its fundamentally strong business model and the potential benefits from its recent acquisition. In addition, its low break-even inventory and anticipated production growth should mitigate underlying oil price volatility, helping to stabilize operating performance. While production growth delays could hamper recent integration efforts, further clarity could also lift investor sentiment, providing a timely boost to OXY’s buying momentum.

Rating: Maintain Buy.

Important Note: Investors are reminded to do their due diligence and not to rely on the information provided as financial advice. Consider this article supplementing the necessary research. Please always apply independent thinking. Note that the rating is not intended to time a specific input/output at the time of writing, unless otherwise stated.

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