The upstream energy giant faces some unpredictable challenges.
Occidental Petroleum (OXY -0.47%), commonly known as Oxy, gets a lot of attention because it’s one of Warren Buffett’s favorite energy stocks. Buffett’s Berkshire Hathaway (BRK.A 0.53%) (BRK.B 0.74%) started investing in the oil and gas producer in the first quarter of 2022, and it increased its stake to $10.77 billion — or 28.2% of its outstanding shares — over the following three years. That accounts for 3.9% of Berkshire’s portfolio and represents its seventh-largest investment.
But over the past 12 months, Oxy’s stock has plunged about 40% as oil prices declined and the Trump administration raised its tariffs on the country’s top trading partners. Will the stock bottom out at these levels and head higher over the next year?
Image source: Getty Images.
What happened to Occidental Petroleum over the past year?
Oxy is primarily an upstream company that engages in the exploration, drilling, and extraction of oil and natural gas. When oil and gas prices rise, its revenue growth outpaces its costs and its margins expand. But when those prices decline, its margins shrink. It generates a smaller percentage of its revenue from its midstream and marketing and chemical divisions.
Over the past 12 months, the spot price of crude oil has fallen about 25% as concerns of higher tariffs, trade disruptions, and a global recession caused its supply to outpace its demand. China’s stockpiling of crude oil imports, several OPEC+ nations ramping up their oil production, and potential resolutions to the conflicts in the Middle East and Ukraine could further reduce those prices. The Trump administration has also been promoting the production of more domestic crude oil to counter inflation and spur domestic economic growth.
The price of natural gas rose 62% over the past 12 months as the U.S. experienced colder winter weather, exported more of its liquified natural gas (LNG) reserves overseas, replaced more coal-fired power plants with natural gas plants, and hiked its tariffs on Canadian gas. But for Oxy, the rising price of natural gas didn’t offset the pressure of declining crude oil prices. That’s why its revenue, gross margins, and operating margins all declined in 2024.
Source: YCharts
In 2024, Oxy’s revenue and adjusted earnings per share (EPS) declined 7% and 6%, respectively, as those headwinds throttled its growth. It also ended the year with $24.98 billion in total debt, up from $18.54 billion at the end of 2023, partly due to its acquisition of its competitor CrownRock last August. It plans to cut costs and divest some of its other upstream assets to reduce that debt.
What will happen to Occidental Petroleum over the next year?
For 2025, analysts expect Occidental’s revenue to rise 2% as its EPS declines 18%. That dim outlook assumes crude oil prices will remain low as the global supply outweighs the market’s demand. The intentional overproduction of crude oil to reduce inflation and promote energy independence will exacerbate that pressure. High tariffs and protracted trade wars will further drive up its operating costs. All of those issues make Oxy a tough stock to recommend right now.
Oxy’s stock trades at 18 times forward earnings and pays a forward dividend yield of 2.4%. It isn’t cheap enough to be considered a deep value play yet, and its yield isn’t high enough to make it an attractive income investment. Investors should also remember that Oxy slashed its dividend twice in 2020 as crude oil prices plummeted during the COVID-19 pandemic. Its training payout ratio of 39% looks safe for now, but it could still cut its dividend again if oil prices keep dropping.
Therefore, I believe Oxy’s stock will remain under pressure and possibly sink lower over the next 12 months. Warren Buffett still claims Oxy is a great “forever” investment because it will profit as the U.S. reduces its dependence on foreign oil and ramps up its exploration and drilling of its own vast reserves. That might eventually be true, but Oxy’s stock is now trading about 26% below Berkshire’s average purchase price of $54.20 — and it might drop even further this year.
Leo Sun 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.
