Occidental Petroleum Can Continue Generating Steady Returns (NYSE:OXY)

Occidental Petroleum (NYSE:OXY) is among the largest oil companies in the world, with a market capitalization of almost $60 billion. The company is also one of our favorite investors’ (Berkshire Hathaway’s) the largest holdings after the company swooped in during the company’s COVID-19 related struggles after spending a massive amount of debt on its Anadarko Petroleum acquisition. As the company moves forward, we’ll see throughout this article, how it’s an interesting investment worth adding to on dips.

Occidental Petroleum CrownRock

Occidental Petroleum has recently made one of its largest acquisitions since the Anadarko Petroleum acquisition, a $12 billion acquisition of CrownRock.

The acquisition is expected to add 170 thousand barrels/day in fresh production, closing in the next several months. The asset is expected to add 1700 undeveloped locations and strong locations well integrated into Occidental Petroleum’s existing acreage. The company expects to generate high-margin production and growing FCF from the acquisition, and expects it to be accretive on a per-share basis. However, it does have substantial debt to pay down.

The acquisition happened at the time of substantial consolidation in the industry, and with the company’s strong shale assets, It’s definitely on the expensive side, but we like that it was done with debt instead of issuing additional shares. Overall, we expect the acquisition to help generate long-term shareholder returns.

Occidental Petroleum 1Q 2024 Performance

Occidental Petroleum had a reasonably strong 1Q 2024, despite continued investment in its business.

The company is continuing to produce almost 1.2 million barrels / day, not counting the CrownRock acquisition, which would push that past 1.3 million barrels / day. The company CFFO was $2.4 billion, but capital expenditures remained high, annualizing the company’s FCF at around $700 million (annualized at $3 billion). Capital expenditures are expected to remain similarly high, but we do expect the company’s FCF to improve going into the back-half.

The company has continued to see strong performance across its business segments with an impressive portfolio of assets. The company expects the CrownRock acquisition to help itself even more, and FCF guidance is more than $5 / share at $75 WTI post-acquisition. That helps to show the strength of the company’s asset portfolio.

Occidental Petroleum Low Carbon

Oil companies now comfortably admit to climate change being a problem and the need to decrease global CO2 emissions. For many forms of emissions there are existing alternatives, i.e. removing leaks in natural gas pipelines, or building high-speed rail instead of short-distance air travel. However, for stubborn emissions, there’s carbon capture, a complicated business that Occidental Petroleum is hoping to use its expertise to build up.

The business is fairly expensive, the company is planning to spend $600 million in net capital expenditures in 2024, almost 10% of its total capital expenditures. The company expects its first DAC plant to be commercial operational in mid-2025, and it’s planning to build a hub in Texas, where it already has an impressive business. The company is hoping to build up additional sequestration hubs, and it expects to keep capital costs at <$600 million until 2026.

The company expects future DAC plans to meet its return thresholds for FID. There’s a lot of uncertainty here, especially in relation to long-term reliable demand for high-volume projects, and the impact of regulation. However, the company is seeing itself up well to have a strong business here.

Occidental Petroleum FCF Enhancement

Occidental Petroleum also sees itself as having the ability to grow FCF by more than $1 billion by 2H 2026.

The company expects that growth to come from a variety of sources, including additional FCF of more than $1 billion incrementally by 2H 2026. That income also comes from continued midstream investments and OxyChem plant enhancements, along with the company’s targeted debt reductions. That incremental FCF is huge for an almost $60 billion company, and combined with lower debt will support a strong focus on returns.

Occidental Petroleum Shareholder Returns

The company has a number of priorities as it focuses on continuing to generate strong shareholder returns.

The company’s core focus is a sustainable and growing dividend, however, the company’s dividend is exceedingly low, just 1.4%. There’s nothing particularly exciting about a steadily growing dividend, given how much the company’s prior dividend cut was. The company’s goal immediately after the CrownRock acquisition is to repay $4.5 billion in debt, decreasing the overall debt taken out from the acquisition.

The company continues to use divestitures and debt pay down to get principal debt to below $15 billion. After that, the company plans to work on paying down its expected preferred equity from Berkshire Hathaway, which has a 10% premium but at an 8% yield is still well worth it to pay down versus the debt load. That combined with opportunistic debt repurchases will continue to improve the company’s overall shareholder return profile.

That helps highlight the company as a valuable investment.

Thesis Risk

The largest risk to our thesis is crude oil prices. The company’s carbon capture business is still incredibly young, and not enough to make the company. As a result, the company needs to earn sufficient cash flow from its core business, and that means oil prices need to stay high. The company needs WTI prices at $80+ / barrel WTI to drive double-digit shareholder returns. There’s a lot that can stop that from happening, as the company has substantial risks worth noting.

Conclusion

Occidental Petroleum was once a company whose management was hated, as the company’s bidding war for Anadarko Petroleum resulted in it having a massive amount of debt at an inopportune time. However, since then, the company has admitted its faults along with the impact of the Black Swan Covid-19 event and worked to improve its overall portfolio and drive shareholder returns.

The company is facing relatively weak oil prices, with WTI just a hair above $80 WTI. The company is quite profitable at the current time, but it’s not exactly providing unreasonably high shareholder returns that make it an investment no matter what. Still with dips in the company’s share price, along with its strong and improving portfolio of assets, adding during dips makes the company a valuable investment opportunity.

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