To The Moon

$Occidental(OXY)$  at the current price, the company is worth 52.44 billion.

Financials and ratios

Cash & Investments: $5.3 billion

Debt: $20 billion

Enterprise Value: 78 billion

Revenue TTM: $28 billion

Net income TTM: $3.9 billion

Free cash flow: $4.1 billion

P/E Ratio: 14x

EV/FCF: 19x

Stock Performance comparison

Occidental petroleum has not had the best couple of years including dividends. The stock has returned -9% while the S&P 500 is up 34% and $Energy Select Sector SPDR Fund(XLE)$  is up 22% over the same period.

Past actions

However, the performance of Occidental isn't that surprising. Back in 2019, the company won a bidding war with $Chevron(CVX)$ for and $Anadarko(APC)$   petroleum but in winning that deal, OXY ended up losing. The company ran up massive debt, issued preferred stock to $Berkshire Hathaway(BRK.B)$ halfway at onerous terms and then took a leveraged balance sheet head first into the pandemic. Oil prices were crushed and turned negative in April 2020. Occidental stock went below $10 a share. A decline of 90% from the peak later as oil prices recovered the stock gained over 500%.

Positives

However, despite going nowhere for the last 2 years, Occidental does seem to be making progress. Firstly, production levels beat expectations in the second quarter while free cash flow and asset sales have helped to pay down debt. Secondly, the company acquired Crownrock earlier this month for 12 billion which adds high-quality acreage to the business. Lastly, Occidental is even making progress with its Stratos direct air capture which aims to pull carbon dioxide out of the air. There's a belief among some investors that Occidental is now a coiled spring ready to break out with higher oil prices. Clearly, Buffett agrees as Berkshire now owns about 28% of the company.

Why Occidental?

However, the question is why Buffett chose Occidental over more diversified names like Exon Mobile or Chevron. The likely answer is that Occidental offers the purest play on a rebound in crude oil. A leveraged balance sheet and strong oil assets means that Occidental's earnings can move sharply higher with help from oil prices. When oil prices go down OXY goes down further but when they rebound OXY rallies more. The obvious risk here is a deep recession because that would likely cause oil prices to collapse and it's a real risk with interest rates where they are. However, many analysts see oil prices as closer to a floor than a peak. There simply aren't that many oil wells that are profitable. When oil is below $60 a barrel, that puts a limit on supply. Buffett owns Occidental because he thinks oil prices are unlikely to go much lower from here. If that's the case, the company can continue to drive significant free cash flow, pay down its debt and boost its earnings. Over time, that should be a winning combination for shareholders and it's never wise to bet against the Oracle of Omaha.

These are my personal opinions not financial advice and I hold no position in Occidental Petroleum.