Occidental Petroleum

Occidental Petroleum (commonly known as 'Oxy') is a prominent American company engaged in Hydrocarbon exploration and production, as well as Petrochemical manufacturing. Headquartered in Houston, Texas, its operations are primarily concentrated in the United States (especially the prolific Permian Basin), the Middle East, and Latin America. As one of the largest oil producers in the U.S., Oxy's fortunes are intrinsically linked to the global Oil and Gas Industry. For a Value Investing practitioner, Occidental represents a fascinating case study in corporate ambition, high-stakes financing, and strategic pivots. Its story is less about simply drilling for oil and more about aggressive acquisitions, managing a colossal Debt load, and the influential backing of one of the world's most famous investors. Understanding Oxy is to understand the cyclical, capital-intensive, and ever-evolving nature of the energy sector.

From a value investor's perspective, analyzing a company like Occidental requires looking beyond the daily fluctuations in oil prices and focusing on its underlying assets, operational efficiency, capital discipline, and long-term strategy.

Oxy's business is built on a simple, yet volatile, premise: pull hydrocarbons out of the ground and sell them for more than the cost of extraction and processing. This is primarily done through three segments:

• Oil and Gas (Upstream): This is the core business. It involves exploring for and extracting crude oil, natural gas liquids (NGLs), and natural gas. The profitability of this segment is directly tied to Commodity Prices, such as WTI Crude Oil and Henry Hub Natural Gas. When prices are high, cash flows gush; when they fall, profits can evaporate.
• Chemical (OxyChem): This segment acts as a partial hedge. OxyChem uses oil and gas as feedstocks to produce basic chemicals like chlorine and caustic soda. While still cyclical, its performance is not always perfectly correlated with energy prices, providing a degree of earnings diversification.
• Midstream and Marketing: This division focuses on the transportation, storage, and marketing of Oxy's products. It ensures the oil and gas produced can get to market efficiently, capturing value all along the supply chain.

Perhaps the most compelling chapter in Oxy's recent history involves Warren Buffett and Berkshire Hathaway. In 2019, Occidental entered a bidding war to acquire its rival, Anadarko Petroleum. To secure the financing, CEO Vicki Hollub flew to Omaha and struck a deal with Buffett. Berkshire Hathaway invested $10 billion in Occidental in exchange for:

• Preferred Stock: A special class of stock that paid a hefty 8% Dividend, providing Berkshire with a steady, high-yield income stream. This is a classic Buffett move, demanding strong compensation for providing crucial capital.
• Warrants: A sweetener giving Berkshire the right to purchase millions of shares of Oxy's common stock at a fixed price in the future. If Oxy's stock performed well, these Warrants would become immensely profitable.

This deal was a lifeline for Oxy but came at a high cost, reflecting the risk Buffett was taking. However, following the 2020 oil price crash and subsequent recovery, Buffett's conviction grew. Berkshire began buying large amounts of Oxy's common stock in the open market, eventually becoming its largest shareholder. For investors, this signals Buffett's confidence in Oxy's assets, management's commitment to Deleveraging, and the potential for massive Free Cash Flow (FCF) generation in a favorable oil price environment.

Despite the Buffett endorsement, investing in Occidental is not for the faint of heart. Prudent investors must weigh the significant risks.

The Anadarko acquisition loaded Occidental's balance sheet with an enormous amount of debt. This high Leverage made the company incredibly vulnerable during the 2020 oil price collapse, pushing it to the brink. While management has made tremendous progress in paying down this debt using strong cash flows, it remains a central risk. An investor must continually monitor the company's debt levels and its ability to service them, especially if energy prices were to fall dramatically again.

Oxy's stock price often dances to the tune of a barrel of oil. Its Earnings are highly sensitive to global energy prices, which are influenced by geopolitics, economic growth, and OPEC+ decisions. This volatility makes it difficult to forecast future results and can lead to wild swings in the stock price. An investment in Oxy is, in large part, a directional bet on the future price of oil and gas.

The long-term shift toward renewable energy poses an existential threat to traditional oil and gas companies. Recognizing this, Occidental is making a significant and unique bet on Carbon Capture, Utilization, and Storage (CCUS) through its subsidiary, 1PointFive. The company aims to become a leader in capturing CO2 from the atmosphere and industrial sources and either storing it underground or using it to create lower-carbon products. This is a bold, forward-thinking strategy that could create a new, valuable business line. However, the technology is still nascent and the business model unproven, making it a speculative but potentially revolutionary part of the overall investment thesis.