Is Occidental Petroleum stock a buy?

Over the past few quarters, Warren Buffett and his team at Berkshire Hathaway reduced many of their holdings, including selling shares of Apple and Bank of America. However, one stock the conglomerate can’t stop buying is Occidental Petroleum (OXY -0.59%).

In the second quarter, Berkshire Hathaway acquired 7.3 million shares in the oil and gas producer, bringing its total stake to 255.3 million, worth about $13 billion today. Berkshire Hathaway doesn’t seem to get enough of Occidental, but the stock is right for your portfolio?

Let’s dig deeper into the business and its long-term opportunity to see if an answer presents itself.

Occidental significantly improved its balance sheet

Occidental took on massive debt in 2019 when it entered a bidding war with Chevron for Anadarko Petroleum. It ended up being one of the biggest oil mergers ever, as Occidental acquired the company and assumed Anadarko’s debt in a deal valued at $57 billion.

As part of the deal, Berkshire Hathaway provided $10 billion in financing in exchange for Occidental preferred stock that pays Berkshire an 8 percent dividend yield. It also received stock warrants to purchase additional shares of Occidental. As of June, Berkshire holds warrants for 83.86 million shares of Occidental Petroleum common stock at an exercise price of $59.624 per share.

The deal helped Occidental grow its foothold in the coveted Permian Basin, but the timing was precarious. In 2020, the global pandemic led to widespread shutdowns, travel came to an abrupt halt and oil prices collapsed. The company sold assets and paid Berkshire in stock instead of cash, which helped it weather the challenges of falling oil prices.

Then Russia invaded Ukraine in 2022 and the price of oil rose to $120 a barrel. That year, Occidental generated $23.6 billion in free cash flow. It wisely used its profits to shore up its balance sheet, pay down $10 billion in debt (which reduced interest and finance charges by $400 million annually), and reward investors with dividends and buybacks of actions.

Last year, Occidental bought back 15 percent of Berkshire’s preferred stock, saving another $120 million in annual preferred dividends. This year, the company reduced its debt by another $3 billion in the third quarter and expects to pay down another $800 million by the end of the fourth quarter. Over the past few years, the oil and gas giant has reduced its debt by 60% since its peak.

OXY Total Long Term Dab data (quarterly) by YCharts.

Oil and gas stocks have faced some headwinds lately

Energy stocks have had a rough time recently. Inflation is nearing normal rates and concerns about slowing economies around the globe persist. Despite resilient demand in the US and OPEC+ extending their production cuts until 2025, oil prices have been on a downward trend.

Over the past year, crude oil prices have fallen from around $90 per barrel to $70 per barrel, which has affected the entire oil and gas production sector. Over the same period, Western stocks fell 22% and hit their lowest price since Russia invaded Ukraine.

Occidental’s long-term opportunity

Headwinds in the energy sector haven’t stopped Buffett and his team at Berkshire from scooping up Occidental shares. A potential long-term catalyst for the company’s earnings and stock price is its investments in direct air capture (DAC) technology.

DAC allows it to capture carbon dioxide from the air, which it can store underground or use to create clean fuels for transportation. It is highly sought after by companies looking to achieve their carbon neutral goals. Microsoft recently agreed to purchase 500,000 metric tons of carbon dioxide removal credits over six years, one of the largest purchases ever for a DAC facility.

Image source: Getty Images.

This technology, commonly known as carbon capture utilization and sequestration (CCUS), could grow into a massive market in the coming decades as entities look to reduce their carbon footprint. Occidental CEO Vicki Hollub projects that CCUS could grow into a $3 trillion to $5 trillion global market, potentially earning Occidental as much revenue as it currently earns from oil and gas production.

Occidental received yet more good news on that front when 1PointFive, one of its subsidiaries, received $500 million from the US Department of Energy to support the development of its direct air capture hub in South Texas. 1PointFive will receive $50 million to continue its work at the hub, and the award could increase to $650 million if it develops an expanded regional carbon network in the area.

Is Occidental Petroleum Stock a Buy?

Occidental is a cyclical stock. Factors affecting oil prices, such as a recession or falling demand, could affect the company’s earnings and share price in the short term. However, ongoing production cuts from OPEC+ and the replenishment of the US strategic oil reserve could keep a lid on oil prices.

That said, Occidental’s balance sheet is strong and getting stronger as the company continues to focus on reducing its debt. Its long-term opportunity with CCUS is another potential catalyst for the company’s long-term growth, and I think the stock is a solid one for investors to buy and hold for the long term.