Occidental Petroleum Persists in Showcasing the Appreciable Worth that Warren Buffett's Enterprise Perceives in the Oil Shares
Occidental Petroleum's Whirlwind Year and Berkshire Hathaway's Interest
Warren Buffett's company, Berkshire Hathaway (BRK.A -0.44%, BRK.B -0.39%), has been captivated by Occidental Petroleum (OXY 0.09%). This fascination is evident in Berkshire's recent binge of purchasing Occidental's stock, bumping its stake to a staggering 28.8% of the oil company's outstanding shares. This makes Occidental one of Buffett's top six holdings, accounting for 4.3% of Berkshire's investment portfolio.
To grasp what Berkshire finds alluring about Occidental, delve into the oil company's latest quarterly report. Let's unpack the significant highlights of that report and peek into Occidental's future plans.
Burrowing into Occidental's Q4 Results
Occidental Petroleum averaged near 1.5 million barrels of oil equivalent (BOE) per day (BOE/d) in Q4, surpassing the mid-point of its guidance by 13,000 BOE/d. The company posted record U.S. production, driven by robust growth in the Permian Basin and Rockies region. This growth helped offset the impact of lower oil prices during the quarter. Occidental's oil and gas segment notched a pretax income of $1.2 billion – identical to Q3 – despite a 7% decrease in the average price for the oil it sold during the period.
Additionally, Occidental reported $270 million in pre-tax income from its chemicals business, OxyChem, exceeding its expectations. The midstream and marketing segment also outpaced Occidental's guidance.
The energy company's remarkable operational performance fueled a robust cash flow of $3.1 billion. Free cash flow was a healthy $1.4 billion, taking into account $1.8 billion in capital spending.
Occidental allocated this excess cash flow to fulfill its dividend obligations and retire debt following its $12 billion acquisition of CrownRock. Occidental reached its $4.5 billion near-term debt repayment goal seven months ahead of schedule, thanks to strong cash flow generation and non-core asset sales.
A Year of Unrelenting Execution
Deleveraging its balance sheet upon acquiring CrownRock remains a priority for Occidental. The company has already started moving forward with its next phase of debt reduction plan. Occidental has agreed to offload $1.2 billion worth of assets, including non-operated assets in the Rockies and assets in the Permian that weren't part of its near-term development plan. This asset sale continuation follows Occidental's aim to divest $4.5 billion to $6 billion worth of assets following the CrownRock deal to bolster its financial standing.
Occidental will utilize the cash generated from sales to pay off the remaining $1 billion of debt that matures this year. The remainder of the excess cash flow will be dedicated to paying dividends and building a cash reserve for debt maturities in 2026 and beyond.
While portfolio expansion is another focus for Occidental, the company anticipates investing $7.4 billion to $7.6 billion this year – virtually the same amount as the previous year – in developing its oil and gas resources, mainly in the Permian and Rockies, to maintain modest oil production growth.
Occidental also has its sights set on major projects to enhance the resilience of its cash flow. The company is on track to commence operations for its Stratos carbon capture and storage hub by the year's end, aiming to bring half its 250,000 tonne capacity online by year's end, and the remaining capacity by the middle of next year. This project should help reduce carbon emissions and yield steady revenue from the sale of carbon credits to various clients and net-zero oil companies.
Occidental is also working on the OxyChem Battleground modernization and expansion project, which should be in full swing by the middle of next year. The company expects Battleground and other OxyChem plant improvement projects to bump its annual earnings by approximately $325 million in 2026 and beyond.
Multiple Levers for Valuation Enhancement
Occidental shines in several areas. Its operational and financial performance has been unparalleled, resulting in record production and robust free cash flow. This allows Occidental to deleverage its balance sheet while also returning cash to shareholders via increased dividends and investing in expanding its business. Its growth investments in chemicals and carbon capture should strengthen its cash flow in the future.
Buffett's Berkshire is seemingly unable to get enough of the stock, especially as shares have dipped around 30% from their recent peak. Buffett and co. feel confident that Occidental will be worth a lot more in the future as the company continues to execute its strategic plan.
- Berkshire Hathaway's interest in Occidental Petroleum is evident in its recent quarterly reports, where the company purchased Occidental's stock, increasing its stake to a significant 28.8% of the oil company's outstanding shares.
- Occidental's fourth quarter performance was impressive, averaging near 1.5 million barrels of oil equivalent (BOE) per day, surpassing its guidance and posting a pretax income of $1.2 billion in its oil and gas segment, despite lower oil prices.
- Berkshire Hathaway may find Occidental's strategy of allocating excess cash flow to fulfill dividend obligations and retire debt, following its $12 billion acquisition of CrownRock, appealing, as this helped Occidental reach its near-term debt repayment goal seven months ahead of schedule.
- Buffett's fascination with Occidental may also be influenced by the energy company's future plans, such as the commencement of operations for its Stratos carbon capture and storage hub by the end of the year, which is expected to bring in steady revenue from the sale of carbon credits.
