Occidental Petroleum: A Contrarian Buy Amid Permian Plateau Concerns

The Permian Basin's oil production growth has begun to flatten, prompting skepticism about the long-term viability of U.S. shale plays. Yet, amid this headwind, Occidental Petroleum (OXY) is emerging as a paradoxically compelling investment. By aggressively reducing debt, sharpening operational efficiency, and executing strategic acquisitions, the company is fortifying its balance sheet and positioning itself to capitalize on a post-plateau energy landscape. Here's why OXY deserves a closer look.

Leverage Reduction: The Foundation of Financial Resilience

Occidental's most striking achievement in 2025 has been its debt deleveraging. Over the past 10 months, the company has slashed $6.8 billion in total debt, reducing its debt-to-equity ratio to 70.6%—a dramatic improvement from 128.5% in 2020. This has freed up $370 million in annual interest savings, enabling greater financial flexibility. Key to this progress is Occidental's focus on near-term liquidity: it has retired all 2025 debt maturities, with only $284 million in obligations due over the next 14 months.

The leverage reduction isn't just about cutting debt—it's about reshaping Occidental's capital structure. The company's debt-to-assets ratio has improved sequentially, and its interest coverage ratio (EBIT/interest) has stabilized. With $2.6 billion in unrestricted cash and a $1 billion cash flow improvement target by 2026, Occidental is now in a position to allocate capital to high-return projects rather than debt service.

Operational Efficiency: Fueling Growth in a Slower Permian

Even as Permian production growth slows, Occidental is extracting more value from its existing assets. In Q1 2025, the company reported a 10% drop in drilling costs and 17% faster well completion times in the Permian Basin, driven by process optimization and automation. These efficiencies, paired with asset sales of $1.3 billion, have boosted free cash flow to $1.2 billion—a critical buffer in volatile markets.

The Permian's plateau isn't a death knell for Occidental. Its CrownRock acquisition (completed in 2025 for $12.4 billion) has expanded its low-cost Permian acreage, with breakeven prices as low as $35–$40 per barrel—far below current prices. This positions the company to thrive even if oil prices remain rangebound.

Strategic Acquisitions: Diversifying Beyond the Permian

While Permian growth slows, Occidental is expanding its footprint globally. In Oman, it holds rights to 800 million barrels of reserves, and its partnership with Ecopetrol on a 91-well Midland Basin project underscores its focus on high-potential, low-cost plays. These moves are complemented by its 20% stake from Berkshire Hathaway, which provides not just capital but credibility in carbon capture and nuclear energy partnerships.

The CrownRock deal is central to this strategy. By consolidating midstream infrastructure and reducing transportation costs—projected to save $400 million annually—Occidental has turned a potential liability (rising midstream expenses) into a competitive advantage.

Valuation: A Contrarian Bargain

Despite its progress, OXY trades at a forward P/E of 12x, below its five-year average of 15x and far cheaper than peers like Chevron (18x). Its EV/EBITDA of 4.2x also signals undervaluation, especially given its improved cash flow and asset quality.

Risks and Mitigations

• Oil Price Volatility: Occidental's low breakeven costs (under $40/barrel) insulate it from downside risks.
• High Leverage: While its leverage ratio (1.56x) remains elevated, ongoing debt reduction and asset sales are steadily addressing this.

Conclusion: A Buy for the Long Game

Occidental isn't immune to Permian plateau concerns, but its disciplined deleveraging, operational cost discipline, and strategic global expansion make it a standout play in an energy sector grappling with growth limits. With a robust balance sheet, rising free cash flow, and a valuation that discounts its upside, OXY is a contrarian buy for investors willing to look past near-term headwinds. Historical performance reinforces this view: a backtest of buying OXY on quarterly earnings announcement dates and holding for 30 days since 2020 generated a 9.95% annual return, though with a maximum drawdown of 50.42%, underscoring the need for disciplined risk management.

Investment Recommendation: Accumulate OXY on dips below $45/share, with a target price of $60–$65 by 2026, driven by debt reduction and operational efficiencies. Monitor Permian cost trends and global production data closely.