Occidental Crushed Q2. The Market Still Treats It Like a High-Debt E&P.

Occidental Petroleum (NYSE: OXY) generated $3 billion in free cash flow in the second quarter, posted its highest quarterly cash return since 2022, pushed debt below $12 billion for the first time since 2019, and raised its dividend — and the stock still trades at 8.5 times trailing earnings. Meanwhile, ExxonMobil trades at 19 times earnings and ConocoPhillips at 15 times. The market is still pricing Occidental like a highly leveraged producer that needs oil to stay above $80. The company is becoming something else.

Let me start with the quarter. Occidental reported adjusted earnings of $2.40 per share in Q2 2026, beating the consensus estimate of $1.88 by nearly 28%. Revenue hit $8.07 billion, up 52% year-over-year and well above the $7.22 billion analysts expected. The operating cash flow was $5.1 billion, and free cash flow before working capital reached $3 billion — the highest quarterly level since the third quarter of 2022. Production averaged 1.43 million barrels of oil equivalent per day, exceeding the high end of guidance. This was not a "fine quarter with a nice surprise." It was the best cash-flow quarter the company has delivered in nearly four years.

The surprise, and the part that matters for the long-term thesis, came from the midstream and marketing segment. Adjusted earnings hit approximately $960 million, a new quarterly record, compared to an $87 million loss in Q1. That swing reflects a structural shift, not a one-off commodity tailwind. Western Midstream Partners — Occidental's midstream affiliate in which it holds a controlling equity stake — has been converting legacy cost-of-service natural gas contracts in the Delaware Basin to simpler fixed fees. The company already completed a major $610 million contract amendment earlier this year. Midstream income is becoming more predictable and less sensitive to natural gas price swings, which matters because it diversifies what has historically been a crude-dependent cash flow stream.

Now let's talk about the balance sheet, because this is where the old narrative still clings. Principal debt stood at $11.8 billion at the end of Q2, down $1.9 billion in the quarter alone. The company is targeting $10 billion and is approaching that milestone faster than most analysts expected. When you combine that with $4.2 billion in unrestricted cash, net principal debt is $7.6 billion. Annualized interest expense has fallen by approximately $630 million compared to 2025. To put that in perspective: Occidental is spending less per year on interest than ConocoPhillips, despite being a smaller producer. The OxyChem sale to Berkshire Hathaway in January for $9.7 billion was a one-time event, but the debt reduction it enabled is structural. The interest burden — the thing that made Occidental's cash flow fragile at lower oil prices — is dissolving.

The 2030 plan is what management spent the most time on during the call, and it deserves scrutiny. The company is targeting more than $4 billion in annual sustainable free cash flow improvement by 2030 versus 2025 levels. Management expects to capture nearly half of that by the end of 2027. The drivers are lower domestic operating costs — lease operating expense guidance is fixed at $8.10 per BOE for 2026, and actual Q2 results came in at $7.80, a 6% beat — lower sustaining capital, and that falling interest burden. Critically, approximately 85% of the $4 billion target does not require production growth to be realized. That means the improvement plan is rooted in cost discipline and balance sheet normalization, not a bet on rising commodity prices. Management claims this portion is achievable even at lower oil prices. I'll grant that the math works if operating costs stay near current levels and debt continues to fall.

From a valuation perspective, the disconnect is still enormous. Occidental trades at 8.5 times trailing earnings and 7.2 times EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation, and amortization — a cash-proxy multiple that removes capital structure effects). Chevron trades at 17.9 times earnings and 7.3 times EV/EBITDA. ExxonMobil trades at 19.2 times earnings and 9.5 times EV/EBITDA. Even ConocoPhillips — a pure E&P without Occidental's midstream diversification — trades at 15.2 times earnings and 5.8 times EV/EBITDA. Occidental is the cheapest major energy producer on a trailing earnings basis by a wide margin, and the only one below single-digit earnings multiple.

That earnings multiple tells part of the story, but the forward multiple tells a different one: Occidental's forward P/E sits at 26.5 times, above both Chevron and ExxonMobil. That reflects analyst expectations for a rougher 2027, and there is a legitimate reason for it. Capital spending is expected to increase from the current $5.5–$5.9 billion guidance range to $5.9 billion in 2027. That higher capex will compress near-term free cash flow, even as the underlying business is improving. The market is front-running that compression into the forward earnings estimate. Whether that makes Occidental a bad investment depends on what happens after 2027 — and the 2030 plan suggests cash flow expansion resumes as the higher-capex phase normalizes.

The dividend adds a layer of durability. Occidental raised its quarterly dividend by 8% to $0.28 per share, marking the third consecutive year of increases and the 28th consecutive year of dividend payments. The payout ratio sits at roughly 24% of trailing earnings, which leaves enormous room to grow the dividend as free cash flow expands. That 24% payout ratio is unusually conservative for an energy producer and gives management significant flexibility.

All things considered, here is the picture. Occidental is executing on the transition from debt-burdened E&P to a cash-generating energy company with midstream diversification, a rapidly improving balance sheet, and a credible multiyear cash flow improvement plan. The Q2 quarter validated that trajectory. The valuation gap to peers — 50%+ on a trailing earnings basis — remains the single most compelling feature of the stock.

While it's true that the stock has already run approximately 36% year-to-date, that rally hasn't closed the valuation gap. A 36% move from a deeply discounted base still leaves you at a deeply discounted base. The 2027 capex increase is a real near-term headwind for free cash flow, and I don't pretend it isn't. But even if that year disappoints, the balance sheet is no longer the fragile thing it was two years ago, the midstream business is providing fee-based ballast, and the trailing multiple tells you the market is still not giving credit for the transformation.

Even if oil pulls back to $70, Occidental's cost structure, declining interest burden, and midstream revenue cushion provide margin of safety that didn't exist during the 2020 debt crisis. The company that almost ran out of money when oil went negative is now generating record free cash flow and approaching its $10 billion debt target.

I rate Occidental a Buy. The peer discount remains the primary driver, the cash flow trajectory supports it, and the balance sheet no longer disqualifies it from the "buy" column. The 2027 capex bump warrants caution on entry timing, but the valuation gap is still wide enough to absorb a rough year.