(Idea) Occidental Petroleum - Warren Buffett's Favorite Energy Name
Occidental Petroleum’s (OXY) stock has recently sold off into the mid-$50s, significantly below the low-$60s range where Warren Buffett bought them for Berkshire Hathaway. The selloff has caused OXY shares to become the most attractive alternative among large-cap U.S. E&Ps. Every energy investor should take a look at what’s on offer at today’s price. Over the next few years, we expect them to rise well above the low-to-mid $60s trading range they’ve maintained since 2022.
OXY Overview
OXY is a U.S.-domiciled oil and gas E&P with operations in the U.S. and Middle East. It produces approximately 1.3 million boe/d, split 75%/25% between liquids and natural gas.
The company’s global operating footprint is shown below.
Source: OXY Q2 2024 Earnings Conference Call Presentation, Aug. 8, 2024.
Geographically, OXY’s production is split 82%/18% between the U.S. and the Middle East. Its operations are spread throughout the DJ Basin in Colorado, the Powder River Basin in Wyoming, and the Permian Basin in West Texas and New Mexico. Its production mix by operating region is shown below.
OXY’s largest U.S. operation is in the Permian basin, where it produces roughly 725,000 boe/d, representing 59% of companywide production.
OXY’s non-E&P operations consist of its low-carbon ventures and its OxyChem petrochemical manufacturing segment.
The company’s low-carbon venture explores ways to help customers reduce their carbon footprint. The operation is housed in OXY’s midstream segment, and management doesn’t break out its financials. One of OXY’s first low-carbon projects was a direct air capture joint venture with BlackRock (BLK). Despite its recent progress, we suspect the low carbon ventures have yet to turn a profit.
OxyChem is OXY’s petrochemical manufacturing operation. It accounted for 23.7 of OXY’s revenues in the first half of 2024.
In recent years, OXY has undergone an asset “high-grading” program in which it shed lower-returning E&P assets and expanded its roster of high-return opportunities. Most of its high-grading efforts have aimed at increasing production in the Permian Basin.
OXY’s most significant step in that direction was its acquisition of Anadarko Petroleum in 2019. The acquisition featured a bidding war with Chevron (CVX), as well as vocal opposition and a lawsuit against OXY from Carl Icahn.
The deal’s $38 billion price tag strained OXY’s balance sheet. It required OXY to issue $13 billion of new debt and $15 billion of new common shares and pursue a financing deal whereby it sold $10 billion of convertible preferred stock to Berkshire Hathaway (BRK.B). The Berkshire preferreds pay an 8% dividend and include 80 million warrants to purchase OXY common stock at an initial exercise price of $62.50 per share. The Berkshire warrants remain exercisable as long as the preferreds remain outstanding. OXY raised additional captial to fund the Anadarko deal through the formation of a $1.5 billion drilling partnership with Ecopetrol (EC) to develop part of its Permian acreage.
OXY’s latest move to expand in the Permian was its $12 billion acquisition of privately-held CrownRock, which closed on August 1, 2024. The deal involved the issuance of $9.1 billion of debt, $1.2 billion of common stock, and the assumption of $1.2 billion of CrownRock debt.
CrownRock’s assets were located in the Midland basin, substantially contiguous with OXY’s acreage. The map below shows OXY’s Permian acreage in blue and CrownRock’s acreage in red.
Source: Oil & Gas Journal, Dec. 11, 2023.
The CrownRock acquisition increased OXY’s inventory of high-quality drilling prospects, increased the company’s scale in the Midland sub-basin of the Permian, and improved operational efficiencies attributable to infrastructure sharing, resource utilization, and lower costs.
The addition of CrownRock assets caused OXY to increase its full-year 2024 production guidance from 1.25 million boe/d to 1.32 million boe/d. The acquisition was immediately accretive to OXY’s cash flow and allowed it to boost its quarterly dividend by $0.04 per share to $0.22 per share.
As it acquired Permian assets, OXY has simultaneously divested Permian acreage it considers non-core to its operation. Proceeds from the divestitures helped reduce leverage and fund additional core acreage acquisitions.
OXY’s 2020 Warrants
On August 3, 2020, OXY issued 116 million common stock warrants at a rate of 0.125 warrants for each share of OXY owned. The warrants have an exercise price of $22.00 and expire on August 3, 2027. They trade under the ticker “OXY.WS.” The company said it distributed the warrants “to provide value to our existing shareholders.”
Investors can purchase the warrants on the open market. They represent a leveraged wager on OXY shares as long as the shares trade above the warrants’ $22.00 exercise price. Over the next few years, the exercise of the warrants will generate substantial cash flow for OXY.