Is Occidental Petroleum (OXY) a Contrarian Buy Amid Shifting Energy Sentiment?

The energy sector is at a crossroads. As global demand for oil and gas faces headwinds from decarbonization efforts, investors are recalibrating their portfolios to align with the dual imperatives of profitability and sustainability. Occidental Petroleum (OXY), a major player in the U.S. oil and gas industry, has emerged as a focal point for contrarian investors. Despite a year-to-date total shareholder return of -16.9%, the company's stock trades at a 40.5% discount to its intrinsic value as estimated by a discounted cash flow (DCF) model according to a DCF analysis, suggesting a valuation dislocation. Meanwhile, OXY's aggressive pivot toward carbon capture and storage (CCS) and direct air capture (DAC) technologies positions it as a potential leader in the energy transition. This analysis evaluates whether OXY's strategic transformation and undervaluation make it a compelling contrarian buy.

Valuation Dislocation: A Tale of Two Narratives

OXY's valuation metrics tell a mixed story. While its price-to-earnings (P/E) ratio of 27.9x exceeds both industry and peer averages, a DCF model projects an intrinsic value of $69.65 per share, implying a significant discount to its current price. This discrepancy reflects divergent investor sentiment: some view the high P/E as a sign of overvaluation, while others see it as a premium for OXY's operational improvements. For instance, the company reported record U.S. production and a 27% year-over-year increase in free cash flow, alongside a 20% reduction in operating expenses. Analysts have further pegged OXY's fair value at $55.05 per share, reinforcing the notion that the stock is undervalued relative to its fundamentals.

However, the valuation dislocation is not without risks. The energy transition has shifted investor focus away from traditional hydrocarbons to cleaner alternatives, contributing to OXY's underperformance. Yet, this underperformance may present an opportunity. As one analyst notes, "The market is pricing in a worst-case scenario for OXY's transition initiatives, while the company is executing on a path that could unlock substantial value in the long term."

Strategic Transformation: Leading the Charge in Carbon Removal

OXY's energy transition strategy is anchored in its leadership in carbon capture and utilization. The company has committed $800 million to $1 billion to construct the world's largest DAC facility in the Permian Basin, capable of removing 1 million metric tons of CO2 annually. This project, set to begin operations in 2024, dwarfs existing global DAC capacity by 100 times. Complementing this, OXY acquired carbon removal startup Holocene and partnered with ADNOC's XRG to develop a South Texas DAC facility with potential for 30 million metric tons of CO2 removal annually. These initiatives align with a broader net-zero strategy that includes reusing CO2 for enhanced oil recovery and selling carbon credits to industries like aviation and maritime.

What sets OXY apart from peers like Chevron (CVX) and ExxonMobil (XOM) is its early-mover advantage in DAC. While ExxonMobil is investing $30 billion in low-carbon initiatives by 2030, with a focus on hydrogen and lithium, and Chevron is piloting solar-to-hydrogen projects, OXY's DAC-centric approach targets a multi-trillion-dollar carbon removal market. According to a report by Carbon Tracker, OXY's strategic differentiation lies in its ability to monetize carbon capture through commercial agreements with tech giants like Microsoft and Amazon, a capability that few peers currently possess.

Macroeconomic Context: A Transition in Progress

The energy transition's uneven progress underscores the risks and opportunities for OXY. As of 2025, less than 15% of the low-emissions technologies needed to meet Paris Agreement targets have been deployed, with carbon capture and hydrogen lagging behind renewables and EVs. However, global electricity demand surged by 4.3% in 2024, driven by digitalization and electrification, creating a growing market for OXY's low-carbon oil and carbon credits.

China's dominance in solar, wind, and EVs according to McKinsey analysis and the U.S. Department of Energy's funding for DAC according to a report further highlight the geopolitical and regulatory tailwinds for OXY's strategy. Yet, the transition's pace remains insufficient to meet the 1.5°C target, with emissions projected to fall by only 43% by 2050. This suggests that OXY's dual focus on hydrocarbons and carbon removal could offer resilience in a transitional market.

Conclusion: A Contrarian Case with Caveats

OXY's valuation dislocation and strategic transformation present a compelling case for a contrarian buy. The company's operational improvements, combined with its leadership in DAC and carbon removal, position it to benefit from both near-term energy demand and long-term decarbonization trends. However, investors must weigh the risks of a high P/E ratio and the uncertain success of energy transition technologies. For those willing to bet on OXY's ability to bridge the gap between hydrocarbons and carbon neutrality, the current discount to intrinsic value offers a margin of safety. As the energy sector redefines itself, OXY's bets on carbon capture may prove to be its most valuable asset.