Occidental Petroleum Continues to Demonstrate Why Warren Buffett's Company Sees So Much Value in the Oil Stock

Occidental Petroleum (NYSE: OXY) has grabbed the attention of Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). That's abundantly clear in Berkshire's buying binge of Occidental's stock. Buffett's company recently bought another $35.7 million of the oil stock, boosting its stake to 28.8% of its outstanding shares. That makes Occidental its sixth largest holding, at 4.3% of its investment portfolio.

Those who wonder what Buffett's company sees in Occidental need to look no further than the oil stock's recent quarterly report. Here's a closer look at that report and what's ahead for the energy company.

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Drilling down into Occidental's fourth-quarter results

Occidental Petroleum produced an average of nearly 1.5 million barrels of oil equivalent (BOE) per day (BOE/d) in the fourth quarter, exceeding the mid-point of its production guidance by 13,000 BOE/d. The company delivered record U.S. production, led by strong growth in the Permian Basin and Rockies region. That helped offset lower oil prices during the period. Occidental's oil and gas segment posted pretax income of $1.2 billion, flat with the third quarter despite a 7% decline in the average price it realized for the oil it sold in the period.

Occidental also reported $270 million of pre-tax income from its chemicals business, OxyChem, which exceeded its guidance. Its midstream and marketing segment also exceeded the company's guidance.

The energy company's strong operational performance helped fuel robust cash flow of $3.1 billion. Meanwhile, free cash flow was a healthy $1.4 billion after accounting for about $1.8 billion of capital spending.

Occidental Petroleum used that free cash flow to pay its dividend and repay debt following its $12 billion acquisition of CrownRock. The company achieved its near-term debt repayment target of $4.5 billion in the quarter, which was seven months ahead of schedule, thanks to strong cash flow generation and non-core asset sales.

A year of continued execution

Deleveraging its balance sheet remains a key goal for Occidental as it works to reduce the debt it took on to acquire CrownRock. It's already starting on the next phase of its debt reduction plan. The company has agreed to sell $1.2 billion of assets, including some non-operated assets in the Rockies and those in the Permian that weren't part of its near-term development plan. Those sales are a continuation of its goal to divest $4.5 billion to $6 billion of assets following the CrownRock deal to strengthen its balance sheet.

Occidental will use the cash from those sales to repay the remaining $1 billion of debt that's maturing this year. It plans to spend the rest of the year using its excess free cash flow after paying a dividend, which it raised by 9%, to build cash toward debt maturities in 2026 and beyond.

The other focus area for the company is to continue investing to grow its diversified energy businesses. Occidental expects its capital spending to be between $7.4 billion and $7.6 billion this year, slightly higher than last year's level of $7.4 billion. Most of that capital will go toward developing its oil and gas resources, primarily in the Permian and Rockies, to continue modestly growing its oil production.

The company is also investing in some major projects to increase the overall resiliency of its cash flow. A big one is its Stratos carbon capture and storage hub. The company is on track to start up operations this year, aiming to have half its capacity, totaling 250,000 tonnes, online by year's end. It expects to get the remaining capacity online by the middle of next year. The project should help reduce carbon emissions and generate steady cash flow from the sale of carbon credits to a variety of customers and net-zero oil.

Occidental is also working on the OxyChem Battleground modernization and expansion project. It should ramp up toward completion by the middle of next year. The company expects Battleground and other OxyChem plant enhancement projects to boost its annual earnings by about $325 million in 2026 and beyond.

Multiple value-enhancing catalysts

Occidental has a lot going for it. It's operating exceptionally well, which is enabling it to achieve record production and strong free cash flow. That's allowing it to deleverage its balance sheet while also returning cash to shareholders through a growing dividend and investing to expand its business. Its growth investments in chemicals and carbon capture should help make its cash flow more resilient in the future.

The company's multiple value-enhancing catalysts are why Buffett's Berkshire can't seem to get enough of the stock, especially as shares have slumped about 30% from their recent peak. Buffett and company clearly believe Occidental will be worth a lot more in the future as the energy company continues to execute its strategic plan.

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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.