Occidental Petroleum: Another bounce from the buy zone

Key Points

• Occidental Petroleum posted another solid quarter of FCF, debt reduction, and repurchases. 
• Berkshire Hathaway continues to up its stake in the company. 
• Dividends, share repurchases, and dividend growth will help lift the stock in 2024. 

It’s yet to be seen whether Warren Buffett and Berkshire Hathaway NYSE: BRK.A are involved in the latest bounce in Occidental Petroleum NYSE: OXY shares, but it doesn’t matter. The Q3 results align with the thesis robust cash flow allows for share repurchases, dividend growth, and debt reduction, which is a driving force for Mr. Buffett’s interest. The takeaway is that Occidental Petroleum continues improving its operating conditions, capital structure, and production, which has it set up to gush higher given time. 

And Mr. Buffett is still buying shares. The latest transactions occurred in late October, about 2 weeks before the Q3 release was issued, and added about 1.7 million shares to the position. Berkshire now holds 228.05 million shares or about 26% of the 50% he’s been authorized to buy. The most significant detail is the average prices for the 2 transactions, $62.80 and $63.05, the highest price Berkshire has paid for OXY. At this price point, Mr. Buffett is lifting the floor for the market and setting it up for a rally. 

Occidental deleverages, but cash flow is robust

Occidental Petroleum’s Q3 release aligns with other major oil players in that revenue fell more than 20% on the deleveraging of oil prices. Revenue of $7.4 billion is down 22% but beat the Marketbeat.com consensus estimate by $0.44 billion or about 600 basis points on above-guidance production and strength in the OxyChem segment. 

However, the critical detail in the report is the sequential improvement in operating results. The company posted its strongest results of the year with a cash flow of $3.3 billion, operating cash flow of $3.1 billion, and free cash flow of $1.7 billion. The free cash flow is the most critical as it allowed dividend payments, repurchasing $600 million in shares, and redeeming $342 million in preferred shares. 

Berkshire Hathaway holds the preferred shares, which are part and parcel of the OXY-Buffett Thesis. Berkshire began buying OXY common stock early in 2022 when it became apparent cash flow was improving. OXY began redeeming its preferred shares earlier this year, shortly after a ramp in stock purchases by Berkshire, and both activities persist into the present. Assuming this trend continues, we can expect OXY to continue redeeming debt and Berkshire to use the capital to buy common stock. 

There is a catalyst in Occidental’s dividend outlook 

Occidental’s improved cash flow and capital structure combine with the dividend to provide another potential catalyst for share prices. The company cut its distribution during the pandemic to preserve capital and has yet to bring it back to the prior level, although it could. The payout ratio is a low 10% of the earnings consensus, which provides ample room for an increase once preferred shares are fully redeemed. 

As it is, the company has increased the payment once since the cut by nearly 40%, and another hike is expected soon. The Q4 distribution has been declared aligned with the annualized outlook, so the next could include an increase. Regardless, investors should expect additional share repurchases and preferred stock redemption in the Q4 report. 

Analysts HOLD Occidental Petroleum

Analysts' sentiment in Occidental is tepid to warm, with the stock pegged at Hold with a target of $70. The consensus is about 15% above the current action and edging higher after hitting a bottom earlier in the year. The low target is conspicuously close to the current action at $70, reinforcing the idea there is a floor for the market and a bottom is in place. Assuming institutional (Berkshire) activity, debt reduction, and share repurchases continue, the consensus target should continue to edge higher as 2024 progresses. 

The price action in OXY is also tepid to warm. The market is trending sideways within a range and may continue to do so despite the bullish outlook for shareholders. Critical support is near $59 and may trigger a buying round if reached. Critical resistance is near $66 and capped gains for about a year.