The Energy Rally Has Cooled for Occidental Petroleum. Here's Whether to Buy the Dip.

Occidental Petroleum (NYSE: OXY), the oil and gas giant more commonly known as Oxy, hit a 52-week high of $67.45 on March 31. The Iranian conflict, which started in late February and pushed oil prices higher, was the main catalyst for that year-to-date gain of nearly 60%.

But as of this writing, Oxy's stock trades at about $58. It pulled back as a two-week ceasefire agreement between the U.S. and Iran halted oil's month-long rally. Does that dip represent a good buying opportunity for long-term investors?

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What are Oxy's catalysts and challenges?

Oxy generates most of its revenue from its upstream business, which involves the exploration, drilling, and extraction of oil and natural gas. When oil prices increase, its revenue growth outpaces its expenses, and its margins expand. It generates a smaller percentage of its revenue from its midstream business, which controls the pipelines and infrastructure for transporting those resources. A growing sliver of its revenue from its low-carbon ventures segment.

Oxy's biggest mistake in recent years was its 2019 acquisition of Anadarko, an upstream and midstream company specializing in hydrocarbon exploration technologies, for $55 billion. That acquisition was poorly timed, as it closed just before the COVID-19 pandemic crushed oil prices.

It also caused Oxy's debt levels to skyrocket, making it an unattractive investment as interest rates surged in 2022 and 2023. To stabilize its business, Oxy restructured, reduced its debt, and repurchased additional shares to boost EPS. As the price of West Texas Intermediate (WTI) crude oil nearly doubled year to date, it became much easier for Oxy to achieve those goals.

Should you buy Oxy's stock?

If oil prices stay above $80 per barrel, Oxy should continue to generate cash, and its increased Permian Basin production and new Gulf of Mexico projects should support that growth. It should also continue to streamline spending, repurchase more shares, and reduce its debt.

From 2025 to 2028, analysts expect Oxy's EPS to grow at a 26% CAGR. It trades at just 16 times this year's earnings, and it pays a forward yield of 1.8%. Its insiders have bought more than three times as many shares as they sold over the past 12 months, and Berkshire Hathaway remains its largest institutional investor.

If you believe the Middle East conflict will drag on, then it's smart to invest in Oxy and other oil companies during the current ceasefire. But if you expect the conflict to end and for oil to drop again amid fears of a global recession, then it's probably better to avoid Oxy and stick with less volatile energy stocks.

Leo Sun 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.