Is Occidental Petroleum a Buy Below $50 Amid Buffett's Strategic Holdings and Free Cash Flow Catalysts?

In the ever-evolving energy landscape, Occidental Petroleum (OXY) has emerged as a compelling case study for value investors. With Warren Buffett's Berkshire Hathaway holding a 26.92% stake in the company—a position built through 38 transactions since 2019—and OXY trading near $44.71 as of July 2025, the question arises: Is this a rare opportunity to buy a high-conviction energy stock at a discount? Let's dissect the interplay of Buffett's strategic patience, OXY's free cash flow trajectory, and the risks of commodity volatility and debt in the context of the energy transition.

Buffett's Conviction: A Hedge Against Energy Uncertainty

Warren Buffett's 265 million-share stake in OXY, valued at $11.8 billion, is a testament to his long-term faith in the company's resilience. Despite an 18% paper loss on the investment, Berkshire has continued to accumulate shares in 2024 and early 2025, including purchases at $46.79 and $50.50. This pattern reflects Buffett's philosophy of buying undervalued companies with durable cash flow and a margin of safety.

Buffett's rationale likely hinges on Occidental's unique positioning:
1. Permian Basin Moat: OXY's dominance in the Permian, the most efficient shale basin in North America, provides a stable cash flow engine even as global oil demand stabilizes.
2. Carbon Capture Leadership: The Stratos project, a $3.5 billion carbon capture and storage hub, positions OXY to monetize carbon credits and align with regulatory trends.
3. Geopolitical Resilience: With 80% of U.S. production from low-cost, high-margin Permian assets, OXY insulates itself from Middle East volatility.

Free Cash Flow Catalysts: Beyond Oil and Gas

OXY's 2025 first-quarter results highlight a transformative shift in its business model. The company generated $3.0 billion in operating cash flow and $1.2 billion in free cash flow before working capital, while retiring $2.3 billion in debt. These figures underscore a disciplined deleveraging strategy that has reduced its debt burden from a post-Anadarko peak of $36 billion to a more manageable $22 billion.

But the real story lies in non-oil revenue streams:
- OxyChem: This chemical segment, which produces ethylene and derivatives, delivered $215 million in pre-tax adjusted income in Q1 2025, outperforming guidance. With the Battleground modernization project expected to add $325 million in annual EBITDA by 2026, OxyChem could become a $2 billion revenue driver.
- Carbon Capture: The 25-year carbon offtake agreement with CF Industries for Pelican hub storage could generate $400 million annually by 2030.
- International Expansion: A 15-year contract extension in Oman's Block 53 and a recent gas discovery in North Oman add over 800 million barrels of oil equivalent to OXY's reserves.

These diversification efforts create a “hybrid” energy company model, blending traditional hydrocarbons with climate-aligned growth.

Valuation Metrics: A Balancing Act

OXY's current valuation appears anchored to its free cash flow and EBITDA potential rather than speculative energy transition bets. Key metrics as of July 2025:
- P/E Ratio: 18.12 (TTM) vs. 20.15 (forward), suggesting moderate growth expectations.
- P/FCF: 10.48, well below the S&P 500 average of 15.
- EV/EBITDA: 4.93, a discount to peers like Chevron (CVX) at 6.2 and Exxon (XOM) at 7.1.

Analysts project OXY to generate $4.2 billion in FCF in 2025, with $1 billion from non-oil sources by 2026. At $50, the stock trades at a 10% premium to its current price but remains within historical norms for a company with Buffett's backing.

Risks to Consider

1. Commodity Volatility: While OXY's Permian focus mitigates some risk, a sustained drop below $70/barrel could pressure free cash flow.
2. Debt Overhang: Although OXY has repaid $6.8 billion in 10 months, its leverage ratio (net debt/EBITDA) remains at 2.1x, above the 1.5x target.
3. Transition Costs: Carbon capture projects require upfront capital and regulatory clarity.

The Buffett Factor: A Long-Term Lens

Buffett's track record in energy investments—such as his 2008 acquisition of ConocoPhillips at $54/share—proves his patience with cyclical stocks. OXY's 28.4% ownership by Berkshire (as of Q1 2025) suggests Buffett sees a floor at $40–$45/share, given the company's $2.6 billion in unrestricted cash and $370 million in annual interest savings from debt reduction.

Conclusion: A Cautious Buy for Patient Investors

Occidental Petroleum's current valuation below $50 offers a compelling entry point for investors who can tolerate short-term commodity volatility. The stock's 11.79% upside from its July price to the $50.12 analyst average price target, combined with Buffett's strategic conviction and non-oil growth drivers, justifies a cautious buy. However, investors should monitor OXY's debt reduction progress and the pace of carbon credit monetization. For those aligned with Buffett's long-term horizon, Occidental represents a unique blend of energy security and climate-conscious innovation—a rare duality in today's market.