Why Occidental Petroleum Rallied in March

Shares of Occidental Petroleum (NYSE: OXY) rallied 22.5% in March, according to data from S&P Global Market Intelligence.

Occidental was an obvious beneficiary of higher oil prices, which spiked in March after the war with Iran broke out on the last day of February. As a U.S.-centered oil-and-gas giant, Occidental stands to benefit from those higher prices and unaffected supply. Although Occidental has some assets in the Middle East, they account for only a small share of its overall production.

Occidental's strategic positioning led to analyst upgrades

Although oil prices had already been rising in the lead-up to the war, Iran's subsequent closing of the Strait of Hormuz added fuel to the fire, so to speak. In March, the price of oil rallied by just over 50% to $111 per barrel, leading to outsize profits for oil and gas drillers that are still able to get their barrels to market.

Occidental is one of the largest acreage holders in the U.S., with only about 14% of its total barrels coming from the affected area of the Middle East.

Occidental's prime asset is its deep, low-cost inventory in the Permian Basin in Texas, where the company has been a leader in terms of lowering its cost-per-barrel in this low-cost region. That distinction led sell-side analysts at both Wells Fargo and Piper Sandler to upgrade Occidental shares during March. Both analysts noted that Occidental had lowered its 2026 capital spending in the Permian Basin from $3.9 billion to $3.1 billion, while still maintaining the same output. This ruthless focus on efficiency is driving optimism about higher capital returns and debt paydowns amid the past month's rise in oil prices.

Image source: Getty Images.

Occidental is very sensitive to oil prices

Occidental had taken on significant debt to acquire Anadarko Petroleum in 2019 and CrownRock in 2024. But between the sale of its chemicals business in January and the war-driven surge in oil and gas prices, Occidental should be able to use this time to pay down a large chunk of the $20.4 billion in debt it began the year with.

In fact, if oil stays above $100 for an extended period of time, it's possible that Occidental could pay off a very large portion of that debt. The company generated $4.3 billion in free cash flow last year at an average oil price in the high $60s, and management had already guided to $1.2 billion in free cash flow improvement from operating efficiencies alone. An oil price above $100 could enable double-digit billions in free cash flow, if prices stay there for an extended period.

The big question is, of course, how long oil and gas prices will stay elevated. If high prices persist, Occidental's current share price still looks too low.

Wells Fargo is an advertising partner of Motley Fool Money. Billy Duberstein and/or his clients have position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.