Can Occidental Petroleum Stock Reach $100? Watch Buffett's Moves And Capital Allocation


Elevator Pitch

I maintain my Buy investment rating for Occidental Petroleum Corporation’s (NYSE:OXY) shares.

I previously assessed OXY to be a safe dividend stock in my earlier update for the stock written on April 7, 2022. In the past five months, Occidental Petroleum’s shares have outperformed on both an absolute and relative basis. OXY’s stock price has increased by +25% since the publication of my previous article as per Seeking Alpha data, while the S&P 500 has declined by -12% during this period.

I am of the opinion that there is still more upside for Occidental Petroleum’s stock, which supports my Buy rating for OXY. Occidental Petroleum’s shares could potentially hit the $100 mark in the future, either via a buyout offer from Buffett, or a valuation re-rating driven by reduced financial leverage and improved shareholder capital returns.

OXY Stock Key Metrics

In this section of the article, I highlight some of OXY stock’s key metrics disclosed as part of the company’s Q2 2022 financial results released on August 2, 2022. Certain metrics might provide clues with regards to how Occidental Petroleum’s shares could potentially perform in the future.

As revealed in its Q2 2022 earnings presentation, Occidental Petroleum’s non-GAAP adjusted earnings per share or EPS jumped by +888% YoY and expanded by +49% QoQ to $3.16 in the most recent quarter. OXY’s actual second-quarter normalized EPS turned out to be +5% higher than Wall Street’s consensus bottom line estimate of $3.02.

The company’s chemicals and midstream businesses were the key outperformers for OXY in the second quarter of 2022. Occidental Petroleum’s chemicals business, otherwise known as OxyChem, saw its segment earnings before tax (EBT) grow by +19% QoQ and +156% YoY to $800 million in Q2 2022. This exceeds OXY’s prior $775 million Q2 pre-tax income guidance for OxyChem, and it is also the chemicals segment’s highest EBT in its history. OXY’s midstream & marketing segment also did well in Q2 2022, with the business’ EBT increasing by +31% YoY and +14% QoQ to $168 million in the recent quarter.

More importantly, free cash flow for Occidental Petroleum grew by +26% QoQ and +108% YoY to a new historical high quarterly free cash flow of $4,176 million in Q2 2022. OXY has met market expectations with the company’s free cash flow generation in the recent quarter, as the sell-side analysts had previously projected an estimated Q2 2022 free cash flow of $4.16 billion for Occidental Petroleum based on data obtained from S&P Capital IQ. Occidental Petroleum’s substantial free cash flow offers significant opportunities for the company to enhance shareholder value with its capital allocation initiatives, which is the subject of the next section of this article.

Can Occidental Petroleum Stock Reach $100?

I am of the opinion that Occidental Petroleum’s stock can eventually break the $100 mark in the future. A $100 price target is equivalent to a +40% capital appreciation as compared to OXY’s last done share price of $71 as of August 31, 2022.

Warren Buffett’s future moves and Occidental Petroleum’s progress in terms of its capital allocation initiatives are the key potential re-rating catalysts that could drive the company’s shares up to as high as $100.

In an August 19, 2022 CNBC news article, fund manager Cole Smead was quoted as saying that Warren Buffett “will likely continue to buy as much as he can get below $70 or $75 (current price levels for OXY stock)” assuming that he “would (eventually) like to buy it (Occidental Petroleum) out at $95 or $100.” Smead’s comments on a potential $100 buyout offer for OXY in the future came after “the Federal Energy Regulatory Commission approved a request from Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) to accumulate as much as a 50% stake in” OXY as reported by Seeking Alpha News on August 19, 2022. Recent disclosures suggest that Berkshire Hathaway had a 20.2% interest in Occidental Petroleum as of early-August 2022.

Berkshire’s past disclosures of its initial stake and subsequent purchases in OXY have driven a sharp re-rating of its stock price, and there are good reasons to believe that the same will happen going forward. Berkshire’s initial 10% stake in Occidental Petroleum was revealed in early-March 2022, and OXY’s stock price rose by +30% from $46.79 as of March 1, 2022 to $60.96 as of March 21, 2022. After Berkshire disclosed that its interest in OXY increased further to 16.3% in late-June 2022, Occidental Petroleum’s shares have gone up by +20% in the past two months (July and August 2022). It is clear that Berkshire intends to continue purchasing shares of OXY in the future as seen with the request made to the Federal Energy Regulatory Commission referred to earlier, and this will be a key stock price re-rating catalyst for Occidental Petroleum.

Moving on to the topic of capital allocation, I noted in the preceding section that OXY generated close to $4.2 billion in free cash flow in the second quarter of 2022 alone. There are a lot of things that Occidental Petroleum can do with the huge cash inflows to create value for the company’s shareholders.

As per its Q2 2022 financial results presentation slides, OXY’s capital allocation targets for the short-term include $3 billion of buybacks and a $5 billion reduction in debt principal for this year. Occidental Petroleum has made good progress in terms of share repurchases, having already spent $1.1 billion on buybacks as of August 1, 2022. OXY did even better in terms of deleveraging, considering that it has retired as much as $4.8 billion worth of debt (as compared to its $5 billion target) in the second quarter of 2022.

Going forward, a faster pace of debt paydown and a larger amount of excess capital returned to its shareholders are the main capital allocation catalysts for Occidental Petroleum. It is reasonable to assume that OXY will be able to command a higher valuation as a shareholder-friendly company boasting lower financial leverage.

In the subsequent section, I touch on how the future of Occidental Petroleum could possibly look, which supports the view that OXY’s shares can eventually trade up to $100.

What Is The Future Of OXY Stock?

Occidental Petroleum’s future is bright.

In terms of the company’s financial outlook, the market’s consensus financial forecasts as obtained from S&P Capital IQ point to OXY’s net debt being reduced to approximately $1.4 billion by the end of fiscal 2024. This translates into a very low net debt-to-EBITDA or net leverage ratio of 0.08 times for Occidental Petroleum in FY 2024.

At the same time, Wall Street analysts see OXY returning more capital to the company’s shareholders. With respect to dividends, the consensus financial projections for OXY suggest that Occidental Petroleum’s quarterly dividends per share will increase from the current $0.13 to $0.155 in FY 2024.

As I discussed in the previous section, Occidental Petroleum should become an even more attractive name for investors in the future as a stock with a lower financial risk profile and a higher level of shareholder capital returns.

With regards to Buffett’s future moves, I think it is probable that Berkshire will make a buyout offer for Occidental Petroleum in time to come.

A key factor to consider is that Berkshire Hathaway also has a stake in Chevron Corporation (CVX), which is its fourth largest position as of end-Q2 2022, while Occidental Petroleum is Berkshire’s seventh largest position in its portfolio. Another thing worth noting is that OXY and CVX are the top two players in the Permian basin in terms of land holdings, and there will be opportunities for the realization of significant cost synergies in the case of a merger between the two.

As such, it isn’t farfetched to speculate that Warren Buffett would like to have full control of OXY at some point in time, and eventually push for a merger between Chevron and Occidental Petroleum sometime down the road.

Is OXY Stock A Buy, Sell, or Hold?

I rate OXY as a Buy. I view better-than-expected progress on the company’s capital allocation initiatives (e.g. shareholder capital return, deleveraging etc) and a potential buyout offer from Berkshire Hathaway to be the key re-rating catalysts to push Occidental Petroleum’s share price up.

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