Occidental Petroleum Is Showing Why It Has Become a Top Warren Buffett Stock

Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has invested nearly $280 billion into other publicly traded companies. One of its top holdings is Occidental Petroleum (NYSE: OXY). Buffett's company owns 28.2% of the oil company's outstanding shares, which are currently worth $11 billion. That's its seventh-largest investment at 3.9% of the portfolio.

The oil company recently reported its first-quarter results, which showcased once again why Buffett's company has made it a top holding. Occidental has built an oil company that can grow shareholder value in a variety of market conditions.

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Drilling down into Occidental Petroleum's first-quarter results

Occidental Petroleum reported solid Q1 results earlier this week. The oil giant produced an average of nearly 1.4 million barrels of oil equivalent (BOE) per day during the period, slightly higher than the midpoint of its production guidance. That enabled the company to generate $3 billion of operating cash flow and $1.2 billion of free cash flow after funding its capital spending to maintain and grow its production. "In the first quarter, our teams' sustained focus on operational excellence unlocked additional efficiencies and supported the delivery of resilient free cash flow," commented CEO Vicki Hollub in the earnings press release.

The oil company used its strong free cash flow to pay its quarterly dividend, which it increased by 9% earlier this year. It retained the rest to help repay debt following last year's $12 billion debt-funded acquisition of CrownRock ($9.1 billion of new debt and assuming $1.2 billion of existing debt). The company has repaid $2.3 billion of debt so far this year, aided by closing $1.3 billion of non-core asset sales. It has now repaid $6.8 billion of debt since the third quarter of last year, exceeding its target of repaying at least $4.5 billion within 12 months of closing the CrownRock deal. The company has repaid all its maturing debt for this year and only has $284 million due over the next 14 months.

Occidental's rapid progress in reducing debt puts it in a much stronger position to weather the recent slump in oil prices. Its debt reduction has lowered its interest expenses, which will help mute some of the impact of lower oil prices on its free cash flow. Meanwhile, with minimal debt maturities over the next several quarters, Occidental won't need to sell assets at lower values to shore up its balance sheet if oil continues to fall.

Well prepared for whatever is ahead

"We continue to rapidly advance toward our debt reduction goals, and we believe our deep, diverse portfolio of high-quality assets positions us for success in any market environment," stated Hollub in the earnings press release. The company continues to work toward its next debt target of getting its principal balance below $15 billion. It still has a ways to go to reach that goal, given its more than $24 billion long-term debt balance at the end of Q1. The company plans to continue chipping away at debt as it generates excess free cash flow after paying dividends over the next few years.

Occidental's free cash flow will get a significant boost starting in 2026 from non-oil and gas sources. It will benefit from generating an additional $1 billion in free cash flow next year through a combination of incremental earnings from its chemicals and midstream segments, falling capital spending in those areas, and additional interest savings. It expects to get another $500 million boost to its free cash flow in 2027 from these same drivers. These catalysts will help improve the resiliency of its free cash flow during periods of lower oil prices while enhancing its upside potential when prices rise.

An all-weather oil stock

There's a reason Warren Buffett's company has invested so heavily in Occidental Petroleum. The oil company has several significant value-creating catalysts ahead. Continued debt reduction will steadily shift value from creditors to shareholders, while the free-cash-flow growth ahead from its non-oil businesses and interest expense savings will boost its bottom line. These factors should enable Occidental Petroleum to grow value for shareholders (including Berkshire) even in a more volatile oil market.

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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.