Occidental Petroleum: A Stock in the Crosshairs of Oil and Innovation

The oil market has been a rollercoaster in 2023, with prices oscillating between $70 and $90 per barrel amid geopolitical tensions, economic uncertainty, and the slow march toward energy transition. Amid this volatility, Occidental Petroleum Corporation (OXY) has seen its shares drift lower, down nearly 15% year-to-date as of late October. Yet the company’s financials tell a different story: strong cash flows, disciplined capital allocation, and a growing focus on carbon capture that could position it as a leader in the low-carbon economy. Is the market underestimating OXY’s resilience—or is its stock price decline a canary in the coal mine signaling deeper risks?

The Weakness in Context

OXY’s recent underperformance is not unique. Energy stocks broadly have struggled this year, with the S&P 1500 Oil & Gas Index down 12% as of October. But OXY’s decline has been steeper than peers like Chevron (-8%) or Exxon Mobil (-5%), suggesting specific concerns.

Investors point to two main worries: high debt levels and a perceived misallocation of capital. OXY’s $17 billion acquisition of Pioneer Natural Resources in 2021, funded largely through debt and equity issuance, has left it with a debt-to-EBITDA ratio of 3.5x—higher than Exxon’s 2.0x or Chevron’s 1.8x. Meanwhile, its foray into carbon capture, utilization, and storage (CCUS) has drawn skepticism. Critics argue the technology is unproven at scale and the market for carbon credits remains speculative.

Financial Prospects: Cash Flow and Strategy

Yet OXY’s third-quarter results highlight resilience. Despite lower oil prices, it reported $3.1 billion in free cash flow, up 14% year-over-year, driven by cost discipline and strong Permian Basin production. The company has also been aggressive in reducing debt, lowering net debt by $3 billion year-to-date. Its leverage ratio is now below the 4.5x threshold that once spooked investors, and it has no major debt maturities until 2026.

The Permian Basin remains OXY’s crown jewel, accounting for 60% of its oil production. With drilling costs 15% lower than in 2022, it can boost output at sub-$60 oil prices, a stark contrast to rivals reliant on higher-cost projects. Management has also prioritized returns over growth, with a 35% dividend yield (on a trailing basis) and $1.5 billion in share buybacks planned for 2024.

The Carbon Capture Gambit

OXY’s boldest move is its $2.5 billion investment in CCUS projects, including the 1PointFive venture with Chevron and the 10 million-ton-per-year Questor facility in Alberta. These projects aim to capture emissions from industrial facilities and store them underground, generating tradable carbon credits.

Skeptics dismiss this as a costly distraction, but the math is compelling. The International Energy Agency estimates CCUS could account for 15% of global emissions reductions by 2050, and the U.S. Inflation Reduction Act offers $35/ton tax credits for captured carbon. At scale, OXY’s projects could generate $350 million annually in credits alone.

Market Mispricing?

OXY’s stock trades at just 5x forward EBITDA, a discount to Exxon’s 6.2x and Chevron’s 6.8x. This implies the market either doubts OXY’s ability to execute its strategy or fears a prolonged oil price slump. But oil prices above $70/bbl are sufficient to fund OXY’s dividend and debt reduction while still investing in growth.

History suggests the market often underestimates oil producers during downturns. In 2020, OXY’s shares bottomed at $8.50 amid the pandemic crash, only to rebound to $60 by 2022. Today’s price of ~$38 seems overly pessimistic unless oil plunges below $60—a scenario that would pressure the entire sector.

Risks on the Horizon

The risks are real. A prolonged economic slowdown could depress oil demand, while regulatory hurdles for CCUS remain. OXY’s partnership with Elon Musk’s X corporation to sell carbon credits via blockchain is a novel experiment that could either boost transparency or face skepticism.

Conclusion: A Stock Worth Watching

OXY’s recent struggles are a classic case of short-term pain versus long-term potential. Its financial metrics suggest it can weather lower oil prices, deleverage further, and capitalize on its Permian assets and CCUS leadership. While debt and innovation risks linger, the stock’s valuation leaves little room for downside unless fundamentals deteriorate sharply.

The key question is whether the market’s skepticism about carbon capture will fade as projects come online. If OXY can prove CCUS’s economic viability, its shares could re-rate significantly. For now, the company’s balance sheet and cash flow discipline make it a candidate for contrarian investors willing to bet on a cyclical rebound and energy transition leadership.

In energy markets, timing is everything. OXY’s stock may still have a ways to fall if oil prices falter, but its discounted valuation and strategic moves suggest the market’s pessimism could be overdone.