Occidental Petroleum Earnings: Efficient Production Drives Gains

Key Morningstar Metrics for Occidental Petroleum

• Fair Value Estimate: $64.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

Occidental Petroleum’s OXY third-quarter net production increased 5% sequentially to 1,465 mboe/d. Cash operating costs decreased 9% sequentially to $14.28 per boe, while oil and gas capex decreased 14% sequentially to $1.3 billion. It used $1.3 billion of cash to pay down debt, and $400 million to pay out dividends.

Why it matters: The results were solid relative to our expectations, as volumes bested both guidance and what we earmarked, even as investment went lower. In fact, Oxy’s becoming more efficient as it has focused investment in developing low-cost reservoirs like the Delaware Basin.

• Cost and capital efficiency are important as Oxy has more debt on its balance sheet than peers, which is why we think investors have punished the stock. E&P investors demand capital returns, so elevated debt levels mean equity investors will get fewer benefits from free cash generation.
• OxyChem’s sale for $9.7 billion will help the firm deleverage further, but we’re somewhat frustrated with management’s moves here as it’s selling OxyChem at the bottom of the chemicals cycle when prices are less attractive. Still, we’re hoping this will provide Oxy with flexibility to buy back stock.

The bottom line: We lift our fair value estimate to $64 per share from $63 on better cost and capital efficiency for no-moat Oxy. At current prices, the 4-star stock trades at over a 30% discount to underlying value, though at a Very High Uncertainty Rating, which is higher than its US shale peer set.

• Oxy remains higher on the cost curve, and its non-upstream investments have a wider dispersion for succeeding on a probabilistic basis, which is why we recommend a wider margin of safety relative to other US independents.
• Oxy’s performance at the wellsite is showing improvement—it has reduced well costs this year in the Permian and in the Rockies. Since 2023, Oxy has reduced Midland well costs by 38% and has extracted 22% more oil in this low-cost reservoir.