Is Occidental Petroleum Stock a Buy Now?

Occidental Petroleum (NYSE: OXY) has the backing of Warren Buffett's Berkshire Hathaway. But that alone isn't a reason to buy a stock, particularly one that operates in an industry known for volatility. All in, Occidental Petroleum (commonly known as Oxy) is an interesting mix of risk and reward. That will likely make it a buy right now for some investors and a stock that's best avoided for others.

Here's what you need to know.

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What does Occidental Petroleum do?

Occidental Petroleum drills for oil and natural gas, which is known as the upstream segment of the broader energy sector. It moves oil and natural gas via energy infrastructure assets like pipelines, which is the midstream. And it processes oil and natural gas into other products in its chemical and refining operations, which is the downstream. Having exposure to all three of the main energy segments makes Oxy an integrated energy company.

Image source: Getty Images.

The largest U.S. integrated energy company is ExxonMobil, which has a roughly $490 billion market capitalization. Next up is Chevron with a market cap of nearly $250 billion. By comparison, Oxy's market cap is a relatively tiny $45 billion. But Occidental Petroleum has big aspirations.

Specifically, Warren Buffett and Berkshire Hathaway helped to fund Oxy's acquisition of Anadarko Petroleum in 2019. The most notable fact about this deal is that Chevron had originally been trying to buy Anadarko. With the help of Buffett, Oxy swooped in to win Anadarko over with a sweeter offer. This is an important event that speaks to the difference between relatively tiny Oxy and its larger U.S. integrated energy peers.

Occidental is focused on getting big

Buying Anadarko, while something of an eye-catching moment, ended up being a pyrrhic victory. The move required Oxy to take on so much leverage that when oil prices fell in 2020 during the economic shutdowns used to slow the spread of the coronavirus, the company's dividend had to be cut. The shares plunged as investors worried about the company's future. By comparison, both Exxon and Chevron supported their dividend through what ended up being a relatively brief economic dislocation.

OXY Dividend data by YCharts

Oxy's dividend cut, meanwhile, has proven to be something of a turning point. It is now fairly openly focused on growth over returning cash to investors via large dividend payments. Chevron's dividend yield is 4.6%. Exxon's yield is nearly 3.5%. Oxy's yield is just 2.1% or so, though it is worth noting that the dividend is growing again.

The oil company isn't making a bad business decision. Quite the contrary. Management correctly realizes that it needs to have more scale in the energy sector if it wants to compete effectively, particularly as the world moves increasingly toward cleaner energy alternatives. Thus, it has decided to prioritize growth. If that interests you, then Oxy could be a solid investment choice for your portfolio.

However, the growth focus has, effectively, increased Oxy's price volatility when it comes to changing energy prices. Chevron and Exxon, with large, diversified businesses and a clear dedication to sustaining their large dividend payments, tend to have more muted price moves. Conservative investors and those looking for income will probably be better off with either of the two U.S. energy giants over Oxy.

Oxy isn't for everyone, but it isn't a bad energy stock

Oxy's growth aspirations went a little too far when it bought Anadarko. But so far it has taken that lesson to heart. After strengthening its balance sheet, it has returned to the acquisition market but with more easily digestible deals. All in, it is a growing company in a volatile business that will probably only be attractive to more aggressive investors.

That's not bad, just go in knowing that energy price swings are very likely to lead to more pronounced swings in Oxy's share price. It is a more aggressive integrated energy investment in an already risky sector.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.