Occidental Petroleum (OXY): Buying for Dividends or Growth?

Occidental Petroleum Corporation (OXY) is positioned in stark contrast to some of its rivals. Although the company operates as one of the largest oil and gas producers in the United States, it is also significantly diversified in its operational structure, providing a revenue base across market segments.

Last year, OXY generated $5.48 billion in free cash flow before working capital, and this year, the energy giant is expecting growth. That, coupled with a long history of dividend payments, compels further insight into the stock. Let’s look into it…

Diversification: Does it work for OXY?

Apart from the core consumer base in its oil and gas segment, OXY’s chemicals segment, “OxyChem,” sells basic elements, operating in stable markets with constant demand. In 2023, the company’s adjusted income from the chemical segment came in at $1.53 billion.

While this figure indicated a 39% reduction from the prior year, this exceeded company guidance and nearly matched its second-highest pre-tax income record. This is notable considering the fact that a total complex outage for maintenance was carried out at OxyChem’s Ingleside, Texas, plant in the fourth quarter.

In 2024, the company expects a midpoint income of $1.10 billion for the segment, which is close to its fourth-best year ever, despite challenging market conditions such as PVC price decline and pressure on export prices from China.

Looking beyond seasonal market pressures, the company might reap benefits from significant investment in its OxyChem Battleground facility and other plant enhancement projects, resulting in $300 million to $400 million per year potential increments to its EBITDA upon completion.

A prowess in a niche market such as chemicals could mean significant expansionary success for this energy sector powerhouse, especially since chemicals play a major role in global net-zero ambition, enjoying demand from their usage in approximately 96% of manufactured goods.

OXY is also developing multiple nascent technologies to find fuel solutions aiming toward net zero. One such development is the large-scale carbon capture, utilization and storage (CCUS), which provides a strong likelihood for near-term emission reduction, aligning with the company’s sustainability aims.

Moreover, notable strides in its Low Carbon Venture (LCV) business were reported last year. Primary among them is the acquisition of Direct Air Capture (DAC) technology innovator Carbon Engineering Ltd. for approximately $1.10 billion and the formation of a joint venture with BlackRock, Inc. (BLK) to develop STRATOS, the world’s largest DAC facility, expected to capture up to 500,000 tonnes of CO2 per year.

Besides sustainability, the company’s diversified operations should prevent OXY’s profitability from being highly subjected to oil price volatility. For instance, last year, OXY reported a total adjusted oil and gas income of $6.26 billion, down about 50% year-over-year, while the company’s worldwide sales were 1,222 thousand barrels of oil equivalent per day (MBOE/D), up 5.4% from 2022. A decline in crude prices and higher lease operating expenses caused the comparative downturn in income.

Should Income Investors Be Interested in OXY?

As a longstanding energy giant, OXY has a history of returning capital to its shareholders through dividends, starting from the 1980s. On February 8, 2024, the company’s Board of Directors declared a regular quarterly dividend of $0.22, payable to shareholders on April 15, compared to the previously declared dividend of $0.18. The annual dividend rate going forward is $0.88, yielding 1.45% at the current price level.

However, the company is not shy about slashing its dividend payouts when it faces a cash crunch. Evidently, when oil prices took a hit during the global pandemic, OXY decreased its quarterly dividend from $0.79 to $0.01 per share. Hence, over the past three years, its dividend payouts have decreased at a 4.2% CAGR.

Contrarily, last year, OXY paid $600 million of common dividends as its robust cash flow supported payouts. Additionally, the company is eyeing a massive $12 billion acquisition of CrownRock L.P., expecting to enhance its Permian portfolio by adding 170 Mboed of high-margin, lower-decline unconventional production in 2024 and increasing its free cash flow per diluted share, with a $1 billion increase in the first year.

The acquisition is anticipated to strengthen OXY’s balance sheet and free cash to support a growing dividend. On the other hand, the deal has come under the scrutiny of the Federal Trade Commission (FTC). However, OXY’s Chief Executive Vicki Hollub hopes that the acquisition will close in the second half of 2024.

Bottom Line

Occidental Petroleum is endeavoring to expand through multiple acquisitions, as well as focus on its sustainability initiatives through diversification of its operations. On the other hand, the company remains embedded in the oil and gas sector, owing the majority of its revenues to conventional energy sources. The broader oil market is prone to its ebbs and flows as geopolitical factors shape the course of the commodity market.

The Middle-Eastern conflict has raised concerns about a supply shortage despite the International Energy Agency (IEA) assessing that in the absence of actual supply losses, the oil market is well-supplied this year. IEA expects oil demand to grow by 1.2 million barrels per day (bpd) in 2024, compared to 2.3 million bpd in 2023, due to a sharp drop in gasoline usage.

On the other hand, the OPEC group shows a lot more optimism, expecting demand to rise by 2.5 million bpd this year. It might be a factor that OPEC can influence global oil supply and, by extension, oil prices.

On top of it, Warren Buffett is increasingly betting on OXY this year. Buffett’s investment firm, Berkshire Hathaway, has shown its support for the energy company since its mega-acquisition of Anadarko Petroleum in 2019. After a recent buy of 4.30 million shares, as of February 5, Berkshire owns 248.02 million shares of OXY.

According to Reuters, OXY is exploring a sale of Western Midstream Partners, which has a market value of about $20 billion. This divestment is expected to help the company reduce its debt accumulated through multiple acquisitions. This strategy might help OXY to bolster its balance sheet.

While near-term weaknesses could affect Occidental’s performance, its long-term goals remain set toward further diversification and growth through expansion of operations. In addition, the company is committed to returning value to shareholders through its growing dividend, debt reduction, and a robust capital allocation program to free up cash flow. Hence, the stock might be a portfolio addition now based on both its growth initiatives and dividend payouts.