Time To Buy Occidental Petroleum Stock?

Occidental Petroleum stock (NYSE: OXY) has faced a challenging period. The stock has decreased approximately 20% in the last year, while the S&P 500 has risen 18%. This underperformance raises a pertinent question: what happened?

The brief answer is that declining oil prices and a substantial debt burden have negatively impacted investor sentiment. However, that is only part of the picture. Occidental is currently implementing significant measures to improve its balance sheet and enhance operations. It is divesting the OxyChem unit to Berkshire Hathaway for $9.7 billion (which will provide $6.5 billion for debt reduction) and selling off smaller, non-core assets like its DJ Basin holdings. The aim is to decrease leverage and concentrate on core energy and carbon capture initiatives.

Nevertheless, risks persist. Strong Permian assets and robust cash flow are countered by high debt levels, sluggish growth, and inconsistent performance. OXY appears inexpensive for a reason — it remains a risky stock until leverage and growth patterns improve. We delve into this further below.

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Why Is OXY in Focus Now?

The divestment of OxyChem has brought Occidental back into the limelight. In addition to reducing its balance sheet, OXY is proactively pushing forward with its 1PointFive direct air capture initiatives, expanding drilling in the Permian Basin through a partnership with Ecopetrol, and targeting over $1 billion in extra free cash flow by 2026. Occidental’s mix of traditional oil operations and low-carbon strategies keeps it prominently in view as a crucial contributor to the changing energy landscape.

Oil Price Backdrop

The overall macroeconomic situation is not favorable. Brent crude recently dropped below $65 per barrel, indicating increasing expectations of a supply surplus extending until late 2025 and into 2026 — spurred by declining global demand and rising U.S. production. Oil prices have significantly decreased from this year’s peak of $82, though they remain above the $60 levels seen in May. Meanwhile, OPEC+ has cautiously commenced increasing production, raising targets by 137,000 barrels per day in November — reflecting October’s slight increase.

In total, OPEC+ has increased output targets by more than 2.7 million barrels per day this year, approximately 2.5% of global demand — a clear indication that the group is reclaiming market share from U.S. shale after years of restraint.

How OXY Performs in Numbers?

Occidental Petroleum (OXY) has experienced a revenue decline over the last three years at an annual rate of -6.8%, with the most recent quarterly revenue dropping 6% to $6.4 billion. Despite the downward pressure on revenue, the company continues to be reasonably profitable, generating $5.5 billion in operating income over the past 12 months (20% margin), a cash flow margin of 44.7%, and $2.4 billion in net income (8.8% margin). On the balance sheet, OXY carries $24 billion in debt against a $44 billion market capitalization, resulting in a debt-to-equity ratio of 53%. Its $2.3 billion in cash is modest compared to $84 billion in total assets, indicating a leveraged but liquid position.

Occidental’s valuation presents a mixed picture. Its P/E ratio of 26x is slightly above the S&P 500 average of 24x, rendering it somewhat pricey in terms of earnings. However, it is cheaper in terms of cash flow and sales: a P/FCF of 9.3 compared to 21.1 for the S&P 500, along with a lower price-to-sales ratio. Overall, OXY is undervalued based on cash flow and sales yet slightly expensive on earnings, requiring cautious evaluation.

Downturn Resilience

Occidental has historically bounced back from market disruptions, although the journey can be volatile. During the inflation surge in 2022, the stock fell 33% but rebounded in just two months. During the 2020 COVID-induced crash, it plummeted 81% before fully recovering by March 2022. Even during the 2008 financial crisis, OXY dropped 58% and only managed to recover by late 2010. The key takeaway: the company does recover, but the swings can be significant.

Bottom Line

Occidental operates as a high-quality energy entity with strong Permian assets and effective cash flow generation; however, the blend of declining oil prices, substantial leverage, and inconsistent revenue performance firmly places it in the high-risk category.

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