Follow Buffett into Occidental?

Valuation of Occidental Petroleum

Berkshire Hathaway first got involved with Occidental Petroleum (OXY) when the company needed financing to buy Anadarko. Over time, Berkshire got involved in the stock, and it is currently the company’s 6th-largest position. The stock now trades below where the Oracle of Omaha last bought the shares, so I thought I’d take a look. (FYI, Warren Buffett was asked a couple of times about OXY at the AGM in Omaha - you can see what he had to say here: 2019, 2020, 2023, 2024)

The company has three main segments: Oil & Gas production, Chemicals, and Midstream and Marketing.

The company is one of the largest producers of oil and gas in the U.S. with a large stake in low-cost producing Permian, as well as DJ Basin, offshore in the Gulf of America (hence the cartoon), and internationally (Algeria, Oman, Qatar, UAE). Revenues and operating profits for the segment peaked in 2022 at $27b and $13b, respectively, but these numbers declined to $22b and $5b in 2024 as oil weakened.

The chemical segment (called OxyChem) mainly produces caustic soda, chlorine, and PVC. Management has said that low-cost production is the segment’s goal. Revenues and operating profits for the segment peaked in 2022 at $7b and $2.5b, respectively, but these numbers declined to $5b and $1.1b in 2024. This segment has been consistently profitable, as shown in the chart.

Midstream and marketing (gathering, processing, transport, storage, etc) is the least significant division with even more volatility in its historical revenues and profits.

Below is the margin per division over the last 4 years

The company also has a ‘Low Carbon Venture’ which, according to the CEO will generate $507m in profit in 10-15 years and beyond 15 years could potentially exceed the profits generated by the oil and gas business. The company is building the world’s largest Direct Air Capture (DAC) facility (called STRATOS) in Texas.

The company plans to use cash generated and proceeds from asset sales to deleverage its balance sheets and reduce debt to $15 billion. Assuming all else equal, that value will accrue to the equity holders. In other words if debt today was $10b less than market cap would have been $10b more. The pie doesn’t change. $10b on $42b is roughly 24%. As of year-end, the company also has $1.2 billion remaining from it $3.0 billion share repurchase program (February 2023). No repurchases were done in Q1.

Market Info

Ticker: OXY
Stock Price (Local): $42.16
52-W High (July-18-2024): $64.76
52-W Low (April-09-2025): $34.79
5 Year Beta 0.81
Avg Volume (3-month, millions) 13.7
Avg Volume (USD, millions) 575.9
Shares outstanding (basic, millions): 984m

Enterprise Value

Market Cap (USD, millions): $41,491
Plus: Total Debt 25,987 of which Leases 1,781
Plus: Preferred Stock 8,287
Plus: Minority Interest 393
Less: Cash and ST Investments -2,612
EV (USD, millions): $73,546

Key Valuation Metrics

P/E forward: 16x
EV/EBITDA forward: 5.4x
Dividend Yield: 2.3%

Key Persons

President, CEO & Director: Hollub, Vicki
Senior VP & CFO: Mathew, Sunil
Senior VP & Executive VP of Essential Chemistry of OxyChem: Peterson, Robert Board of Directors, Chairman: Moore, Jack

Top Holders

Berkshire Hathaway: 27%
Vanguard: 8%
Dodge & Cox: 7%
BlackRock: 4%
State Street: 4%
Geode Cap Mgmt: 1%

Stock Performance

Over both the 5-year and 10-year periods, the stock has performed in line with its earnings growth. So up in the last 5 years, but down over the last 10!

The stock is at the same price it was in 2006…

Competition

Since 2019, the peer group has underperformed the S&P, while Occidental has done even worse.

The company, in its own 10-K, defines its peer group to consist of BP, Chevron, ConocoPhillips, EOG Resources, ExxonMobil, Shell, and TotalEnergies. Over the last year, all the stocks in this group have done poorly, while Occidental was the worst performer

Both P/E and EV/EBIT are at the high end compared to their competition.

All of them appear to lack growth, which is part of the reason for the sector’s underperformance.

The company ROE has historically been volatile, while for 2024, it was below the group average (12%). Its 20% EBIT margin was above the average (17%).

Historical Margins Vs Peers

Along with EOG has the highest gross margin historically:

This though, hasn’t translated into superior operating margins. On the contrary, it’s been more volatile than its peers.

Discounted Cash Flow

The company generated c. $4b in free cash flow in 2024. Assuming a 3% growth forever, and a 9% WACC, we get an intrinsic value of $41, which is roughly where the stock is trading. Consensus FCF for 2025 is $5b. Under the same assumptions, the intrinsic value is $57. Taking that into account as well as the deleveraging, the stock does look cheap.

While the stock looks cheap, I’d like to quote a few words Buffett said during his comments on Occidental: “…when you buy into an oil company, how it works out is going to depend on the price of oil to a great extent… And who knows where they go in the future… you’re betting on oil prices over time and over a long time. And oil prices there’s risk… ”

You can see below a long-term chart of oil. I have been around long enough where people talked about oil as if there was no bottom (negative prices) and where there was no top. I don’t know if I could sleep at night if oil dropped another $20 and I was long OXY, and that’s a question each investor needs to ask themselves.

So, have you jumped on board with the Oracle, or are you in a wait-and-see mode? Let me know in the comments!

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