Can Debt Decline & Financial Discipline Boost Prospects of Occidental?

Occidental Petroleum OXY holds a strong position in U.S. shale production, particularly in the Permian Basin, where it leverages advanced drilling technologies and scale advantages to maintain cost efficiency and high margins. Its upstream operations generate substantial free cash flow even in moderate oil price environments, providing financial flexibility for shareholder returns and reinvestment in growth.

Debt reduction is a critical element in unlocking Occidental’s full value potential. Following the Anadarko acquisition in 2019, the company faced significant leverage, which constrained capital allocation and pressured its credit profile. However, robust free cash flow generation since 2020 has enabled Occidental to aggressively pay down debt, reducing net debt from nearly $36 billion to $25 billion at 2024-end. 

Occidental lowered debt further by $6.8 billion in the past 10 months, which lowered its annual interest expenses by $370 million, boosting net income. The company has retired all 2025 debt maturities, providing a pathway to the next debt maturity.

Lower debt also strengthens Occidental’s balance sheet, enhancing its credit ratings and lowering cost of capital. This improved financial position gives the company more flexibility to pursue accretive investments, increase shareholder returns through dividends and buybacks, and weather commodity price volatility.

As Occidental continues to deleverage, investor confidence will continue to rise, potentially leading to valuation multiple expansion. This financial discipline, coupled with its strategic initiatives, puts Occidental in a strong position for sustained performance and shareholder value creation.

Oil & Energy Companies Are Utilizing Cash Flow to Trim Debts

Oil and energy companies are utilizing free cash flows to reduce debt and strengthen their balance sheets. 

Devon Energy DVN plans to lower its outstanding debt by $2.5 billion and has already lowered debt level by $500 million. DVN’s debt reduction will reduce its interest expenses. More than 70% of Devon’s outstanding debt mature after 2030, providing it with enough financial flexibility.

TotalEnergies TTE is managing long-term debt quite efficiently and trying to keep this at manageable levels. TTE’s debt-to-capital ratio has been declining for the past few years. TotalEnergies is consistently generating cash flow, which is utilized to lower debts.

Occidental’s ROE Lower Than the Industry

Occidental’s return on equity ("ROE") is lower than the industry average in the trailing 12 months. ROE of OXY was 16.6% compared with the industry average of 16.89%.

OXY Stock’s Price Performance

Occidental’s shares have gained 10.7% in the last two months compared with the Zacks Oil and Gas-Integrated-United States industry’s rise of 9.2%.

Price Performance (Two Months)

OXY Stock’s Earnings Surprise History

With a stable performance, the company’s earnings beat estimates in each of the trailing four quarters, the average surprise being 24.34%.

OXY’s Zacks Rank

Occidental currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

 

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This article originally published on Zacks Investment Research (zacks.com).

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