I'm Buying Occidental on This Dip -- Not Because of Oil, but Because of This

High oil prices are a classic tailwind for energy stocks. Thanks to the war in Iran, that's exactly the scenario investors are facing this year, as energy ranks as the best-performing group among the 11 sectors represented in the S&P 500.

Undoubtedly, surging crude prices are playing a pivotal role in the 47% year-to-date gain sported by Occidental Petroleum (NYSE: OXY) shares. Amid a rally like that, you can't count on a dip, but as of Sept. 4, the stock trades 11% below its 52-week high. By definition, that's a correction, but prospective investors should note the shares are up 7.1% over the past month. That may be a sign the correction won't deepen.

As for reasons to buy this dip, oil prices help, but don't lose sight of Occidental's scorched-earth campaign to reduce debt and its efforts to reduce costs.

Occidental Petroleum has pulled back from its 52-week high, and that's an opportunity. Image source: Getty Images.

Occidental is taking the ax to its liabilities

Investors just now getting to know Occidental may not realize that it's one of Berkshire Hathaway's major holdings. The stake was initiated when Warren Buffett was still captain of the conglomerate's ship, and the stock has been in rally mode since CEO Greg Abel took the reins at Berkshire.

The Berkshire/Occidental connection is noteworthy because Buffett is known to embrace companies with strong balance sheets and attractive cash-flow characteristics. Through the sale of its OxyChem unit to Berkshire (completed in January), Occidental pared its debt by $8.6 billion in the first half of 2026. At the end of the second quarter, the energy company's debt stood at $11.8 billion.

That sounds like a lot for a corporation with a market capitalization of $59 billion. Still, Occidental is within striking distance of its goal of getting the debt burden down to $10 billion. Realizing that goal is crucial because, with $10 billion in liabilities, the company saves $740 million in yearly interest expenses.

Obviously, companies have to pay interest on the capital they borrow, so it's not fair to say that Occidental is "squandering" money on servicing its debt. However, $740 million per year isn't small potatoes, and investors would be much better served if Occidental used that capital to invest in its business and potentially support shareholder rewards. An 8% quarterly dividend increase announced earlier this year confirms that as Occidental reduces debt, it does, in fact, reward investors.

Don't forget the cash flow

As Occidental makes good on its pledge to reduce liabilities, it evolves from a debt-cutting story to one where cash flow becomes another reason to consider the oil stock. Working on the assumption that West Texas Intermediate hovers around $95 a barrel for the remainder of 2026, S&P estimates Occidental will generate north of $10 billion in free operating cash flow this year, or more than triple the $3.2 billion it tallied in 2025.

The company is also prioritizing cost reductions, having trimmed costs by $2 billion since 2023, with another $500 million in store this year.

Importantly, cost cuts aren't a detriment to output. Despite taking some old rigs offline, Occidental can grow production 2% per year through 2028 thanks to a keen focus on operational efficiencies. Yes, that sounds like consultant jargon, but those efficiencies are part of the non-oil-price thesis underpinning this stock.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.