Occidental Petroleum: A Strategic Buy at the Bottom of the Cycle

Warren Buffett's investments often serve as a barometer for long-term value. His recent reaffirmation of Occidental Petroleum (OXY) as a “stock Berkshire might own forever” underscores a compelling case for investors seeking resilience in the energy sector. With a 28.2% stake in OXY valued at $11 billion, Berkshire Hathaway has not only deepened its position in 2025 but also signaled confidence in the company's ability to navigate macroeconomic volatility. This endorsement, combined with OXY's robust free cash flow, disciplined debt reduction, and attractive dividend yield, positions it as a strategic buy at the bottom of the cycle.

Warren Buffett's Endorsement: A Vote of Confidence

Berkshire Hathaway's investment in OXY has grown steadily since 2019, with significant additions in early 2025. Buffett's public emphasis on OXY's “long-term value and resilience” aligns with the company's progress in deleveraging its balance sheet. Since the CrownRock acquisition, OXY has repaid $6.8 billion in debt, surpassing its $4.5 billion target. This financial discipline has stabilized the company's operations, enabling it to generate $3 billion in operating cash flow and $1.2 billion in free cash flow in Q1 2025 alone. Morningstar's $59 fair value estimate—28% above the current price—further validates the stock's undervaluation.

Free Cash Flow: The Engine of Growth

OXY's free cash flow (FCF) generation is a cornerstone of its investment thesis. In Q1 2025, the company produced 1.4 million barrels of oil equivalent (BOE) per day, exceeding guidance and driving $3 billion in operating cash flow. Capital expenditures were trimmed by $200 million, and domestic operating costs fell by $150 million, boosting FCF to $1.2 billion. Analysts project FCF of $3.7 billion for 2025, with $5.1 billion expected in 2026, fueled by Permian Basin efficiency gains and low-carbon ventures.

The company's deleveraging efforts have unlocked financial flexibility. Year-to-date in 2025, OXY has repaid $2.3 billion in debt, reducing interest expenses by $370 million. With a net debt-to-EBITDA ratio of 1.77x and a debt-to-equity ratio of 0.75x, OXY's balance sheet is now among the healthiest in its sector. This stability allows for strategic reinvestment in high-margin projects and shareholder returns.

Dividend Yield: A Sustainable Payout

OXY's dividend yield of 2.15% (as of August 18, 2025) may lag the industry median of 4.45%, but its low payout ratio of 33.06% suggests room for growth. The company has raised its dividend for five consecutive years, with a 9% increase in 2025. A forward payout ratio of 33.06% indicates that OXY can sustain or even accelerate dividend growth without overextending its earnings. The next quarterly payout of $0.24 per share, scheduled for October 15, 2025, reflects this commitment.

Sustainability as a Catalyst

OXY's strategic pivot toward sustainability is another differentiator. Its subsidiary, 1PointFive, is pioneering industrial-scale Direct Air Capture (DAC) technology, with the STRATOS facility in Texas set to capture 1 million tons of CO₂ annually. A 25-year carbon offtake agreement with CF Industries adds recurring revenue, while partnerships with ADNOC and JPMorgan Chase validate the commercial viability of these initiatives. These projects, combined with enhanced oil recovery (EOR) techniques, position OXY to benefit from both traditional energy demand and the green transition.

Investment Thesis: Buy at the Bottom

OXY's combination of Buffett's endorsement, strong FCF, and sustainable dividends creates a compelling case for entry at current levels. The stock trades at a 28% discount to its intrinsic value, supported by Morningstar's analysis. With $2.6 billion in unrestricted cash and $3.7 billion in projected 2025 FCF, OXY has the liquidity to fund growth, reduce debt further, and reward shareholders.

For investors, the key risks include oil price volatility and regulatory headwinds for carbon capture. However, OXY's operational efficiency, diversified asset base, and strategic focus on low-carbon ventures mitigate these concerns. The company's ability to exceed production guidance while cutting costs demonstrates its resilience.

Conclusion: A Long-Term Play with Short-Term Catalysts

Occidental Petroleum is a rare blend of traditional energy strength and forward-looking innovation. Buffett's unwavering support, coupled with OXY's financial discipline and sustainability initiatives, makes it a strategic buy for investors seeking exposure to the energy transition. With a dividend yield that offers income and a payout ratio that ensures sustainability, OXY is well-positioned to deliver value across cycles. As the market reprices energy stocks, OXY's undervaluation and growth potential make it a standout opportunity in 2025.