Occidental Petroleum's Hidden Cost: The Preferred Equity Keeping the Stock Suppressed

Occidental Petroleum trades at a P/E of roughly 9, half what investors pay for ExxonMobil or Chevron. At first glance, that looks like the textbook value gap — same commodity, same business, cheaper price. But the multiple difference is not an accident. It exists because Occidental has an expense that its supermajor peers do not: Berkshire Hathaway's 8% preferred stock, which costs roughly $800 million a year in mandatory dividends. That cost goes directly to Berkshire shareholders, not Occidental's, and it suppresses every earnings-per-share figure for the common stock. The real question for a common shareholder is not whether the P/E looks cheap compared to peers. It's whether Occidental's balance sheet transformation is far enough along that the preferred equity drag will soon be removed — and whether the current price adequately credits the progress already made.

The CrownRock Debt Burden and How It Got There

Occidental's leverage problem was self-made. In December 2023, management announced a roughly $12 billion acquisition of CrownRock Petroleum to expand its Permian Basin footprint. The deal was funded with about $9.7 billion in new debt. CrownRock closed in August 2024, and Occidental's total debt surged to well above $25 billion. The company's stated goal was to bring principal debt below $15 billion, then down toward $10 billion. The path to get there required a sale, not just cash flow.

That sale came in the form of OxyChem, Occidental's chemical business. In October 2025, Berkshire Hathaway agreed to buy OxyChem for $9.7 billion in cash. The deal closed on January 2, 2026. Occidental used the proceeds to retire $5.8 billion of principal debt. As of Q1 2026, total principal debt had been reduced to $13.3 billion, and by the end of Q2 2026, another $1.9 billion went toward debt, bringing the total to $11.8 billion. In roughly eighteen months, Occidental paid down more than $15 billion of the debt it took on for CrownRock.

The math is straightforward: the OxyChem sale accounted for the biggest single reduction, and operating cash flow covered the rest. This is a company that loaded the balance sheet for growth, then unloaded a non-core asset to clean it up. The $10 billion debt milestone is now within reach.

The Preferred Equity Drag

Here is where the cheap multiple hides its explanation. When Berkshire backed Occidental's Anadarko acquisition in 2019, it committed $10 billion in 8% preferred stock. That means $800 million per year in preferred dividends, regardless of how the oil business performs. Occidental has redeemed a small portion — about $650 million in face value during 2023 — but the overwhelming majority remains outstanding. Management has said it plans to begin redeeming Berkshire's preferred equity starting in 2029.

This preferred dividend is a mandatory cash outflow that common shareholders cannot access. It is not debt — it does not appear on the balance sheet as a liability — but it functions like a fixed charge that must be paid before any dollar reaches the common stock through dividends or buybacks. At $800 million a year, it is equivalent to roughly $0.80 per share of Occidental's outstanding common stock. Strip that from earnings, and the common-share P/E looks materially less attractive.

What the Cash Flow Says

The trailing-twelve-month picture shows Occidental generating $4.8 billion in free cash flow on $11.0 billion of operating cash flow, after $6.2 billion in capital expenditures. Revenue growth year over year is 20%, though that is partly a function of higher realized oil prices in 2026 — WTI averaged $93 per barrel in the second quarter, well above the $70 per barrel realized in the first quarter.

The more useful number is the one that isolates the cash flow available to common shareholders after the preferred equity cost. Subtract the $800 million preferred dividend from the $4.8 billion free cash flow, and you get roughly $4.0 billion per year in cash available to common shareholders. The preferred stock itself has a face value of roughly $9.35 billion — the original $10 billion minus the $650 million redeemed in 2023 — so a lump-sum redemption would require more than two years of that cash flow. Management plans to start the process in 2029, which means the drag persists for at least three more years.

Management's guidance provides a clearer picture. The CEO stated that free cash flow is on track to grow by more than $1.2 billion in the current year, with a pathway to add more than $4 billion in annual free cash flow by 2030, excluding the benefit of higher oil prices. Sustaining capital is targeted to decline from the current level toward $4.5 billion by 2030, driven by mid-cycle investments that lower base decline rates. If that trajectory holds, the cash flow available after the preferred dividend would expand sharply, making the 2029 preferred redemption more feasible and less painful.

The dividend to common shareholders has risen to $1.03 per share over the trailing twelve months, with a payout ratio of 24%. Occidental has paid dividends for 28 consecutive years and raised them for three consecutive years. The payout is easily covered by free cash flow, even after accounting for the preferred equity cost. The dividend is safe, but it is also modest — 1.7% yield does not move the needle for an income-focused portfolio.

The Valuation Gap and What Closes It

The core tension is this: Occidental trades at a 9x trailing P/E and 7.8x EV/EBITDA, roughly half the multiple of Exxon and Chevron. The discount has persisted for years, and the single biggest reason is the preferred equity overhang. Common shareholders do not own the full economic output of the business — Berkshire takes its $800 million first. As long as that drag exists, the market will price Occidental at a discount to supermajor peers, even if the underlying assets and cash flow are comparable.

The discount should narrow when one of two things happens. First, if Occidental reaches the $10 billion debt target and accelerates into preferred equity redemption, the capital structure simplifies and the common stock captures the full free cash flow. Second, if free cash flow grows substantially — management says more than $4 billion above today's level by 2030 — the preferred dividend becomes a smaller fraction of the cash pool, and the market will price the stock closer to its peers even before the redemption.

Neither outcome is guaranteed. The 2030 free cash flow target assumes flat production and declining sustaining capital, which is achievable but execution-dependent. Oil prices matter: at $70 per barrel, analysts estimate Occidental would still generate roughly $5 billion in free cash flow, which supports the plan but leaves less margin for error. And the preferred redemption timeline — 2029 — means common shareholders must wait at least three more years for the full capital structure benefit to materialize.

Where the Stock Fits

Occidental is not a dividend play at 1.7% yield. It is not a growth story either — production is expected to remain flat through 2027, and the company has explicitly capped spending in favor of debt reduction. What it is, at the current price, is a capital-structure turnaround. The company loaded debt for an acquisition, sold a business to pay it down faster than operations alone would allow, and now faces the final step: removing the preferred equity that has capped the stock's multiple for years.

The P/E of 9 looks cheap, but it is cheap for a reason. The reason is real and quantifiable — $800 million a year to Berkshire, not to you. If the balance sheet work completes on plan and the preferred gets redeemed starting in 2029, the common stock should re-rate toward supermajor multiples. That re-rating, not oil price momentum or production growth, is the financial mechanism behind Occidental's upside. The risk is equally clear: if debt reduction stalls, if free cash flow underperforms the plan, or if the preferred redemption is delayed, the discount persists. The stock's fate rests on the balance sheet, not the barrel price.