A week ago, Occidental Petroleum Corp. (OXY, Financial) delivered quarterly results just days after its largest shareholder, Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial), had its annual meeting.
The company continues to impress despite a weaker-than expected first quarter. To start, Occidental generated substantial free cash flow of $1.7 billion for the quarter on revenue of $7.26 billion. If maintained throughout the year, it would translate to an annual free cash flow of approximately $6.8 billion, equating to a FCF yield of nearly 15%.
Its daily production of 1.22 million barrels sits at the higher end of its forecasted range as the company continues to raise its barrels of oil equivalents. These good metrics have allowed excess cash to be used for share buybacks. It repurchased approximately $750 million worth of common shares during the quarter, accounting for over 25% of the company’s $3 billion share repurchase program. It looks to be on track to buy back nearly 6% of shares at the current capitalization.
Business continues to improve
Occidental Petroleum is one of the largest oil producers in the world with operations in the U.S., the Middle East and Latin America. The importance of the company lies in its contribution to the energy sector and the global economy. It helps meet the world's demand for energy, especially oil and gas, which are crucial for transportation, heating, electricity generation and the production of a variety of goods.
The company explores for, develops, produces and markets crude oil and natural gas. It is involved in both conventional and unconventional oil and gas operations. It is currently working toward offsetting inflation impacts through various operational efficiencies and supply chain competencies. In the Delaware Basin, the company optimized fracking designs to reduce assets and water utilization for an average savings of around $240,000 per well. Further, Occidental’s Rockies segment has integrated artificial intelligence to maximize base production and reduce operating costs.
Through its subsidiary, OxyChem, the company is a major North American chemical manufacturer. It produces a range of products, such as caustic soda, chlorine and PVC resins, which are used in a variety of industries, including water treatment, pharmaceuticals, plastics and more. Further, it is a leading producer of basic chemicals, vinyls and performance chemicals. The company’s role in chemical manufacturing is significant as these products are used in a wide range of industries and applications, contributing to everyday life and economic activity.
New OxyChem projects are expected to contribute $300 million to $400 million in incremental annual Ebitda starting later this year with full benefits by 2026.
Occidental also remains a leader in carbon capture, utilization and storage technology, which is seen as an important tool in the fight against climate change. Its low-carbon venture, 1PointFive, is partnered with private equity firm Rusheen Capital Management to develop the world's largest direct air capture and sequestration facility. The facility is designed to capture up to one million metric tons of atmospheric CO2 per year, which would be equivalent to the work of 40 million trees.
Buffett keeps buying
Warren Buffett (Trades, Portfolio)’s latest filing with the Securities and Exchange Commission on Monday showed Berkshire Hathaway had bought another 2.2 million shares, equating to $127 million worth of Occidental Petroleum stock over the past week to give it 213.9 million shares.
The insurance conglomerate already owns north of 24% of the company and warrants to buy an additional 84 million shares. However, Buffett said during the annual shareholders meeting that he does not want to own the whole business.
Berkshire also holds preferred shares that are worth about $10.3 billion and carry a hefty dividend. It picked up those preferred shares and warrants when it helped finance Occidental's purchase of Anadarko in 2019, and Occidental has recently redeemed around $650 million worth. The $57 billion deal was a huge undertaking for the company, which already had an enterprise value of about $50 billion at the time and deal arrangements left the company with a huge amount of debt right before the Covid-19 pandemic.
Valuation breakdown
Breaking down the company's valuation as simply as possible, 70% of its business is oil and gas. Occidental Petroleum has around 3.8 billion barrels of oil equivalents with oil at a relatively stable $70 per barrel of West Texas Intermediate. That puts the top line value of its oil resources at $266 billion. The company currently enjoys gross margins of 66%, which puts the value after production costs at around $177 billion.
The current market capitalization is $52 billion with the enterprise value just over $80 billion. What I find interesting is that even through Occidental is extremely profitable and backed by arguably the greatest investor that ever lived, 9.85% of the float is sold short. For a company generating a net profit per employee of $809,400, betting against it long-term seems unwise, even if that company is in the fossil fuels business.
Occidental’s shares are off about 23% from 2022 highs. The company's management is still committed to its share buyback program, stating it would be willing to curtail some capital spending in order to complete the current repurchase authorization. That is a further value add to shareholders, especially at this price point. And while Buffett says he does not want to buy the whole company, Berkshire continues to buy the stock in the open market. It does not want to own all of Coca-Cola (KO, Financial) either; however, that investment is still worth a lot to shareholders of both organizations.
